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Operator: Good day, and welcome to the Exponent, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Managing Director at Riveron. Please go ahead. Joni Konstantelos: Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine? Catherine Corrigan: Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2025 business performance. Rich will then provide a more detailed review of our financial results and outlook for 2026, and we will then open the call for questions. We delivered a strong finish to 2025, reflecting the strength, diversification and resilience of our portfolio. During the fourth quarter, we saw growth in proactive engagements, driven by increased demand for user research in consumer electronics, along with continued expansion of our risk management work in the utility sector. Growth in our reactive services was driven by failure analysis and dispute-related engagements across a broad range of industries, including energy, construction, transportation and life sciences. Turning to our engagements in more detail. Growth in proactive engagements in the fourth quarter reflected continued diversification across a broader mix of clients and an expanding range of products and technologies. In consumer electronics, we saw increased demand for user research engagements, driven by the need to evaluate product performance and user interaction as artificial intelligence becomes increasingly embedded in both every day and novel devices. We also saw continued growth in risk management and asset integrity services for utilities, supported by rising energy demand and increased focus on grid reliability. In Life Sciences, engagements increased across regulatory compliance, product performance and safety consulting for medical devices as these safety critical technologies continue to become more complex. Turning to our reactive engagements. Demand for Exponent's failure analysis and dispute-related services drove growth in the fourth quarter, reflecting the essential role our engineers and scientists play when systems do not perform as expected. In transportation, we saw increased failure analysis work tied to electrification and battery systems in commercial vehicles as customers address performance, safety and reliability challenges. We expanded our failure investigation work in data center infrastructure, for example, addressing board-level cooling and thermal management issues where multidisciplinary teams are required to determine the root cause of failure. Across the energy sector, we continue to see robust demand in dispute-related engagements spanning hydroelectric facilities, wildfire-related losses, battery energy storage systems and wind and solar projects. Exponent continues to benefit from powerful long-term market drivers. As artificial intelligence and other complex technologies are increasingly incorporated into novel products, infrastructure and safety-critical systems, demand is growing for our science and engineering expertise to support and enhance algorithm performance. Sensor-based systems that demand the highest level of trust are also frequently found in the most challenging, disrupted or intermittent connectivity environments, creating settings where security and safety are inseparable. While AI delivers value by learning and predicting based on historical data, many of the most consequential challenges arise in physical systems where edge cases, novel conditions and complex interactions fall outside of prior experience. Exponent thrives at the edge where AI meets the laws of physics in high-stakes environments where reliability, performance and security cannot be compromised. These dynamics underpin sustained long-term demand for Exponent's multidisciplinary expertise. Our teams apply deep capabilities in engineering, physics, biology, chemistry, material science, cybersecurity, human behavior and more to help clients validate and enhance system performance, identify risk, ensure security at the asset level and apply scientific judgment where complexity and uncertainty exceed the limits of algorithms alone. As AI-enabled systems are deployed more broadly, failures, whether at the algorithm or the physical system level, are becoming more complex, more difficult to diagnose and more consequential. Determining the root cause of these failures demands rigorous investigation that integrates physical sciences, engineering, data science and human factors to reconstruct real-world conditions and system behavior. Exponent's long-standing failure analysis expertise uniquely positions us to support clients as they navigate these situations, delivering independent science-based insight that informs remediation, accountability and innovation. As artificial intelligence and other complex technologies increasingly intersect with performance and safety critical applications, this capability remains a core and differentiating component of the long-term value that we provide. At the same time, we are leveraging artificial intelligence within our operations to add value and support our teams as demand for our expertise continues to grow. These tools enable our experts to work more effectively, focused on the highest value aspects of their work and deploy their capabilities where they matter most. Looking ahead, Exponent continues to benefit from powerful long-term market drivers, including increasing complexity, rapid technological innovation and rising expectations around safety, health and the environment. As artificial intelligence and other advanced technologies become more deeply embedded in novel products and critical systems, clients are facing an expanding set of complex high stakes challenges. This environment is driving increasing demand for independent multidisciplinary expertise and is supporting continued diversifications across technologies, products and clients as reflected in our results. Together, these dynamics position Exponent to deliver rigorous science-based insights across the full product life cycle and support long-term growth. I'll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2025 results as well as discuss our outlook for the first quarter and the full year 2026. Richard Schlenker: Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. I would like to remind everyone that we returned to a 13-week fourth quarter and a 52-week fiscal year in 2025 compared to a fiscal year 2024, which included an extra week that occurs every fifth or sixth year. The extra week poses a headwind to revenues of approximately 7% in the fourth quarter and 1.3% to the year. For the fourth quarter 2025, total revenues increased 8% to $147.4 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 5% to $129.4 million as compared to the same period in 2024. So if you adjust for the 1 week -- 1 less week, net revenues would have grown in the low double digits. Net income for the fourth quarter was $24.8 million or $0.49 per diluted share as compared to $23.6 million or $0.46 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the fourth quarter was $99,000 as compared to $591,000 in the fourth quarter of 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 27.4% in the fourth quarter as compared to 24.7% for the same period in 2024. EBITDA for the quarter was $34.7 million, producing a margin of 26.8% of net revenues as compared to $31.2 million or 25.2% of net revenues in the same period of 2024. Billable hours in the fourth quarter were approximately 357,000, a decrease of 1% year-over-year. If you adjust for the 1 less week, billable hours would have been up approximately 6%. The average number of technical full-time equivalent employees in the fourth quarter was 992, which is an increase of 5% as compared to 1 year ago. This increase was due to our recruiting and retention efforts. Utilization in the fourth quarter was 69%, up from 68% in the same period of 2024. The realized rate increase was approximately 5% for the fourth quarter as compared to the same period a year ago. This is a result of our premium position in the marketplace, unparalleled talent and differentiated interdisciplinary expertise. In the fourth quarter, compensation expense after adjusting for gains and losses and deferred compensation was approximately flat. Included in total compensation expense is a gain in deferred compensation of $2.7 million as compared to a gain of $629,000 in the same period of 2024. As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the fourth quarter was $5 million as compared to $4.9 million in the prior year period. Other operating expenses in the fourth quarter were up 1% to $12.6 million. Included in other operating expenses is depreciation and amortization expense of $2.5 million. G&A expenses increased 17% to $6.7 million for the fourth quarter due to an increase in travel and meals associated with business development, professional development and increased recruiting activity. Interest income decreased to $1.9 million for the fourth quarter, driven by a decrease in cash and lower interest rates. Miscellaneous income, excluding deferred compensation gain was approximately $296,000 for the fourth quarter. During the quarter, capital expenditures were $2.7 million. We distributed $14.9 million to shareholders through dividend payments and repurchased $25.1 million of common stock at an average price of $70.57. Turning to the full year results. Total revenues increased -- total revenues and net revenues grew 4% to $582 million and $536.8 million, respectively, as compared to 2024. Net income for the year decreased 3% to $106 million or $2.07 per diluted share as compared to $109 million or $2.11 per diluted share in 2024. During the year, we realized a negative tax impact associated with accounting for share-based awards of $255,000 as compared to a tax benefit of $2.8 million in 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 28% for the full year as compared to 26% in 2024. For the year, EBITDA increased to $148.1 million as compared to $147.1 million during the prior year producing a margin of 27.6% of net revenues, which is a decrease of 80 basis points as compared to 2024. This year-over-year decrease in margins was expected primarily due to the costs associated with our managers meeting during 2025 and the renewal of our Phoenix land lease in June of 2024. Billable hours for 2025 were approximately $1,468,000, a 2% decrease year-over-year. Utilization for the full year was 72.5%, down from 72.9% in the same period of 2024. Average technical full-time equivalent employees for the year were 973, an increase of 1% as compared to 2024. The realized rate increase was approximately 5% for the year. Compensation expense after adjusting for gains and losses in deferred compensation increased 3%. Included in total compensation expense is a gain in deferred compensation of $17.4 million as compared to a gain of $14.9 million during 2024. Stock-based compensation expense in 2025 was $23.8 million as compared to $23.2 million in the prior year. Other operating expenses were up 7% to $49.5 million, driven primarily by an increased noncash expense of our Phoenix lease renewal. Included in other operating expenses is depreciation and amortization expense of $10.1 million. G&A were up 12% to $25.5 million in 2025. The increase in G&A expenses was primarily due to an increase in travel and meals related to our in-person managers meeting in September, which was postponed in 2024. Interest income decreased approximately $694,000 to $9.3 million for the full year. Lower interest income was driven by a decrease in cash and lower interest rates. Miscellaneous income, excluding the deferred compensation, was approximately $840,000 in 2025. Moving to our cash flows. During 2025, we generated $131.7 million from operations and capital expenditures were $9.4 million. For the full year, we distributed $61.5 million to shareholders through dividend payments and repurchased $97.8 million of common stock at an average price of $72.22. As of year-end, the company had $221.9 million in cash and cash equivalents. Turning to our segments. Exponent's Engineering and other scientific segment represented 85% of net revenues during the fourth quarter and 84% for the year 2025. Net revenues in this segment increased 7% for the fourth quarter and 4% for the full year, driven by proactive services, including risk management work for the utility industry as clients addressed energy infrastructure challenges stemming from rising power demands and extreme weather events, regulatory support services for medical device clients and user research services for clients in the consumer electronics industry. Growth during the quarter was also driven by disputes-related services for the construction, energy and transportation industries as clients rely on Exponent in critical high-stake situations. Exponent's environmental & health segment represented 15% of net revenues during the fourth quarter and 16% of net revenues during fiscal year 2025. Revenues before reimbursements in this segment decreased 5% for the fourth quarter and were approximately flat for the full year. The decline during the fourth quarter was primarily due to having 1 less week during the fourth quarter of fiscal year 2025 as compared to 2024. Turning to the outlook for the first quarter and full year 2026. We expect net revenues for the first quarter and full year 2026 to grow in the high single digits as compared to the same periods in 2025. For the first quarter of 2026, we expect EBITDA margin to be 27.5% to 28.5% of net revenues as compared to 27.3% in the first quarter of 2025. For fiscal year 2026, we expect EBITDA margin to be 27.6% to 28.1% of net revenues as compared to 27.6% in 2025. We expect increased demand and corresponding recruiting to result in our average technical full-time equivalent employees increasing approximately 4% year-over-year in the first quarter of 2026 and 4% to 5% for the full year 2026 as compared to 2025. We expect utilization in the first quarter to be 75% to 76% as compared to 75% in the same quarter in the prior year. And we expect the full year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We still believe our long-term target of sustained mid-70s utilization is achievable as we continue to strategically manage headcount and balance utilization with market demand. We expect the realized rate increase for the first quarter to be 3.5% to 4% and for the full year to be 3% to 3.5%. The lower rate realization for the year is based on a historical trend as hiring rates increase. For the first quarter, we expect stock-based compensation to be $8.6 million to $9 million and each of the remaining quarters to be $5.5 million to $6.3 million. For the full year 2026, we expect stock-based compensation to be $26 million to $26.5 million. We continue to believe that our stock-based compensation program effectively attracts, motivates and retains our top talent. For the first quarter, we expect other operating expenses to be $12.7 million to $13.2 million. For the full year, we expect other operating expenses to be $53.5 million to $54 million. For the first quarter, we expect G&A expenses to be $5.4 million to $5.8 million. For the full year 2026, we expect G&A expenses to be $27.1 million to $28.1 million. We expect interest income to be $1.7 million to $1.9 million per quarter in 2026. In addition, we anticipate miscellaneous income to be approximately $300,000 per quarter in 2026 or $1.2 million for the full year as compared to $840,000 in 2025. We expect our first quarter 2026 tax rate to be approximately 30.4% as compared to 29.4% in the same quarter a year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 27.9% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million. We remain encouraged by the opportunities across our markets and believe we are well positioned to drive improved growth in 2026 while executing against our long-term financial objectives of high single-digit to low double-digit organic growth and margin expansion. I will now turn the call back to Catherine for closing remarks. Catherine Corrigan: Thank you, Rich. Looking ahead, we remain encouraged by the enduring market drivers that support Exponent's long-term opportunities. As the pace of innovation continues to accelerate and systems become more complex, expectations for safety, reliability and performance will only continue to rise. With a differentiated multidisciplinary platform and a proven ability to support clients across both proactive and reactive engagements, Exponent is well positioned to navigate these trends and deliver sustainable growth and long-term value for our shareholders. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question comes from Andrew Nicholas with William Blair. Andrew Nicholas: I guess, first, I was hoping you could hone in a little bit more on the consumer electronics piece of your proactive business. That was something that has been a little bit more challenged the past couple of years. I know last quarter, you spoke to some early signs of improvement there. So any additional commentary on how that business performed in the quarter and maybe what the near-term outlook looks like for that business in particular? Catherine Corrigan: Yes. Thanks, Andrew. That particular part of the business is really primarily two-pronged. We've got a kind of a hardware product development consulting piece of that. And then we've got a user research-oriented piece of that, where we do work around human subject, human interaction with novel devices. And so one of the things we're really seeing is an uptick, particularly on the user research side. A number of these applications and engagements relate to health-related products, for example. They also relate to products that are very novel where artificial intelligence is being delivered via novel form factor. So -- you can think of traditional screen-oriented devices, or you can think of things like glasses or headsets or even things that use primarily audio instead of having a screen or using a visual input. So both the health side as well as the kind of consumer product side is a lot of what was driving that. There's diversification in the product base, and there's also diversification across the client base as more and more -- there are more and more entrants into this arena of trying to deliver artificial intelligence via these novel hardware platforms. Andrew Nicholas: Very helpful. And then maybe a question for Rich on the guidance specifically. I think this quarter, second straight quarter of effectively like double-digit growth if you adjust for the extra week, last year, it looks like your outlook for utilization in the first quarter is as high as it's been, I think, in some time. So just curious on overall visibility and the achievability of guidance, how you think about some conservatism in there to the extent there is any and maybe areas of upside or downside to the outlook? Richard Schlenker: Yes. So our business, I think what we have good visibility into is these broader market demands and trends that Catherine has talked about in her comment. And I think we are actually seeing real work come in that are related to AI and novel technologies and continuing to see that the complexity of these issues is increasing. As we've said before, I mean, we go out to our business units all the way down to the individuals. And as we're getting forecasts, I think our people have good visibility out over 6, 8 weeks, a little bit lighter after that. But the trends of what we're seeing are positive. As we enter 2026, the reason that we've landed on our guidance that we have here of high single-digit growth is really as we entered last year, we had good headcount growth. We had 2% sequential in the first quarter of last year, which is very strong. It came down a little bit in the second quarter, and then we closed out the year strong. But we're feeling good about really where we can be in the headcount. We're feeling that, that demand is there. That's why we said the utilization will be slightly better than it was a year ago. But all those things combined landed us into that range that we have. Is there opportunity for upside? Yes, I think the demand environment is strong out there. But we -- at this time, this is the best estimate that we have, and we're delivering that with good growth and margin improvement, and we'll take it from there. Operator: The next question comes from Tomo Sano with JPMorgan. Tomohiko Sano: From management perspective, how would you characterize 2026 compared to 2025? And especially, what do you see as the most significant changes or drivers for revenue growth and margin improvement internally and externally, please? Catherine Corrigan: Yes. Thanks for that, Tom. Clearly, we are seeing on a year-over-year basis, some acceleration of growth and of the demand environment that we have across a broad swath of the business. I think that the consumer electronics arena is an important one to call out in this regard. We saw strength in the fourth quarter. We do have a good -- pretty good outlook into Q1 that is helping to drive that. It gets a little less clear after that. But again, with the diversification across the products, across clients and form factors and things, we do expect in that electronics arena, both for user research as well as the hardware side to be part of those drivers, especially as AI is being delivered and making decisions in safety-critical applications like health-related wearables, regulated medical devices and things like that. We also see the energy side as a really important driver for 2026. And this was happening in 2025 to some extent, but we believe can continue to strengthen. This is around utility-related work. We mentioned the risk management work that we're doing. That continues to grow and diversify across clients. The regulatory environment continues to grow. The bar continues to go up in terms of that with relationship to grid resilience to extreme weather and things of that nature. We're seeing it on the reactive side in energy, too, as the demand for power is driving the need for new technologies to be utilized in a lot of these capital projects, whether that's wind, whether that's solar, whether that's fuel cells. You've got data center operators building their own gas-powered plants. You have multiyear long waiting list for gas turbines. And so the risk issues and the disputes that arise in the building out of those energy systems are a piece of this as well. And the data center piece, we're doing more and more failure analysis type work, whether it's around the cooling systems, whether it's around the backup battery supply systems, the performance-critical nature of those data centers really means that they need some powerful multidisciplinary expertise to diagnose some of those issues. You can go over to the chemical side of the business, things like PFAS and its effects on human health and the environment are another area where we expect to continue to increase -- increasing demand as the year goes on. So that's a few examples. I think electrification and automation and transportation maybe kind of round out that collection of things that we see in 2026. Tomohiko Sano: And follow-up on AI. You already touched in the prepared remarks, but I wanted to get your thoughts, especially potential risks of commoditization in certain litigation support or investigation services due to automations. But also you talked, I think, is the significant opportunity to leverage AI for new value-added offerings and margin improvement. Could you talk about that more specifically about the litigation support or investigation services, the space, please? Catherine Corrigan: Yes, absolutely. So there are a number of tools clearly with large language models that we have been incorporating into our operations that are allowing our teams to engage with larger and larger data sets in an even more efficient sort of manner. Being able to have an AI application pull the data out of a police report, let's say, if you're reconstructing a vehicle accident, these are the types of things that can be further automated, and we're seeing more efficiency in that regard and really welcome that. But what we're also seeing is, as you alluded to in your question, the higher value coming out at the other end. The ability to put a large language model application against an increasingly large data set of complex material, which is what we've seen happen over time. When I first started doing litigation work a couple of decades ago, you could fit everything in a black 3-ring binder that was a couple of inches thick. And now 20 or 25 years later, you've got gigabytes and terabytes of data. If you think about that vehicle that's in that accident, the data coming off of all of those sensors create a very complex and large data environment that needs to be analyzed, right? So while we're gaining efficiencies at that sort of lower level, we're also unlocking the ability to differentiate ourselves even further because of the complexity and our ability with our PhD level talent to be able to break that down and understand in a hypothetical situation, if the design were changed, would the product have performed better. So, so far, our reactive business continues to grow. The litigation support piece of the business continues to grow. Automotive is the place where we're seeing the most directly AI relevant work in our reactive business and the complexity there with the testing and those sorts of systems is continuing to grow. So -- and with our population of PhD entry-level talent, this is different than all of our competitors. Many of our competitors have lower-level talent. They've invested perhaps in those lower-level commodity tasks as an important part of their value proposition. That hasn't been the direction that Exponent has taken. That's why we hire PhDs as our entry-level folks, people who know how to solve that unstructured problem, that edge case. So I really do believe that the use of these sorts of tools will make us more efficient, and it will unlock even greater value. Operator: The next question comes from Tobey Sommer with Truist. Tobey Sommer: What are your expectations for net headcount growth in '26? And could you maybe highlight the areas where you expect to add the most and any areas that you may expect to have fewer heads throughout the year? Richard Schlenker: Yes. So our expectation is that in line with that guidance, we would expect that the headcount growth would be somewhere in the net 40 to 50 growth in what we're doing. You're going to acquire those over the year that we'd be in that range. It could get up as high as 60, but it's somewhere in that range. Look, the areas of focus and the areas that are getting -- seeing the most net growth are really in these growth areas that Catherine highlighted earlier. Every one of our practices is actually recruiting and bringing people in just as part of our natural part of a consulting firm, we do have turnover that occurs. And as such, we're always looking to bring in new talent, those PhDs that have just done their once never solved before issue that they did their PhD thesis in and integrating them into every single one of our practices every year. But the areas that we'll see the growth are in that higher growth will be in that transportation area, the energy area, battery storage, automation, cybersecurity and actually into that chemicals area that Catherine mentioned around PFAS. Tobey Sommer: And associated with that headcount, that pace of headcount growth, is it so much so as to have accompanying margin -- negative margin implications? Or since you revived growth in the not-too-distant past, is that behind us and not necessarily reflective of any requisite margin compression? Richard Schlenker: Yes. Our expectation is that we are going to have margins be flat or up, and that is because we expect to be able to do this level of hiring into the organization based on demand while seeing our utilization be maintained or improved in 2026. Tobey Sommer: Appreciate that. If I could, I appreciated your prepared remarks, Catherine, on AI with the discussion there. So clearly, it's topical. I want to just ask another simple question. Near term and recent actual results, do you think AI is a net benefit or drag to the total company's growth? Catherine Corrigan: Yes. I think it is a net benefit. If you think about the failure analysis work around advanced driver assistance technologies and automated vehicles, that's directly driven by artificial intelligence making safety critical decisions. The work that I highlighted early in the Q&A around the user research in the electronics industry, this is all about the data collection and benchmarking and validation for devices that are utilizing AI algorithms to make some kind of decision or have some kind of signal, whether it's to tell you your heart isn't beating properly or lots of other -- what your blood pressure is or so forth. And the same on the hardware side and the data center side, right? AI is directly driving those increases in energy demand, which we believe is part of what's driving our energy sector in its growth and especially on the dispute side, but also on the proactive side with the risk management work in utilities. So it's not directly in the project perhaps, but it's a fundamental driver that need for energy in the setting of a crumbling infrastructure. Richard Schlenker: I mean just on that area, again, we're seeing it drive through if it is thermal management at the board level or it's heavy -- the change in demands that the amount of infrastructure on these racks have, they're all things that fit into Exponent's expertise that will -- that we are getting business related to. So we're not seeing a change in demand for the amount of time or something that we're putting into, again, processing data or doing it. The datasets are growing so much that the clients just want to do more and learn more from it, and it's harder to understand why something made a decision that they are chasing. So that's what we've been seeing over 2025 and continued into the fourth quarter. Tobey Sommer: And I have one follow-up based on that. At what point in recent history do you think AI started becoming a net contributor to growth? And I might be asking an impossible second part of this. But of the low double-digit year-over-year growth in the quarter ex the extra week, is there a way to get a sense for how impactful AI factors are in that year-over-year growth? Richard Schlenker: Well, I think it's important to recognize that Exponent has been talking and working on systems that were leveraging the early parts of AI and machine learning and what we've been doing over the last decade or so when we were working with the automotive industry and its early days of steering control or braking or whatever may be coming into it to where we are today, we're all seeing the actual robotaxis on the road in doing it. So it's definitely growing. It is driving growth in our transportation area, and we expect that to continue going forward. The same goes around user research. Back in the day, we had clients that were really trying to understand how to make sure that they were developing inclusive products around facial recognition and technology like that and then driving that into other technologies that is where we got into doing user research and such and then much more into its performance in other health or other applications. But again, been at that for nearly 10 years that we've been doing it, but it's been growing. Same goes around what I would say in the utilities industry, is we've been developing in the risk model area, what's actually playing into why is that somewhat AI related now of our risk is actually that our clients have choices. And some of them have chosen a, let's say, at times, a less expensive AI type model that isn't giving them a refined or accurate enough answer for them to rely upon or justify the actions they took or did not take in situations and are now asking our help in refining those and bringing physics and bringing that higher level of engineering so that we can move AI models to a level of reliability that can be in safety-critical environment. So all those things are going on today, I think we've got a long way, a lot of upward ramp to go. Probably today, somewhere in the mid-teens as a percentage of our business is related to AI, probably either directly or one step removed, not saying all energy stuff or any of that, but really things that we can target in that close -- immediate or near vicinity that relates to that. Operator: The next question comes from Josh Chan with UBS. Joshua Chan: I guess following up on Rich's comment just now, I guess, have you seen any evidence of clients potentially trying to use AI themselves to solve problems? I know in some situations, it's completely impossible, but have you seen any evidence of that kind of occurring at your customer base? Catherine Corrigan: Certainly, our -- look, I mean, our customers are absolutely looking to incorporate AI into their operations. There are situations, I mean, Rich just mentioned one where they've -- on the utility side, incorporated those into risk models and have found that AI alone simply is not good enough and so -- but we see that in the medical device environment with sort of software as a medical device. There are -- we get pulled in on the regulatory side of that, right, where they're trying to get their -- develop their plan of attack for getting through the FDA in terms of approval on that. So, yes, I mean, our electronics clients are putting artificial intelligence into all kinds of different form factor devices, and they're asking us for our help in benchmarking and user research. So it's really everywhere we turn. There are different levels of confidence that clients have in it. Some are more sort of skeptical. Others want to dive right in, but they're coming to us for advice and sort of reality checking, if you will, in a lot of these applications. Joshua Chan: Okay. And then maybe just a quick follow-up on next year on 2026. Is there anything different about how free cash flow will work in '26 than it worked in '25? Anything to kind of flag there? Or is that a pretty normal conversion? Richard Schlenker: Our expectation is that we may be able to improve upon that conversion. The area -- we had sort of a heavy amount of reimbursables there at the end of the year tied in with the studies, which made DSOs a little bit higher than the average of where we would want to end the year. So I would expect that, that would naturally and through some efforts we're making come into more balance, so they might be able to bring down DSOs by a few days, and that will help us move to a steady state and improve -- area to improve cash flows going forward. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to CleanSpark's Fiscal First Quarter 2026 Financial Results Call. [Operator Instructions]. Thank you. Harry, you may begin your conference. Harry Sudock: Thanks, Jeannie, and thank you for joining us today to review the first quarter to 2026 financial results for Queen Spark. We encourage you to review our earnings results press release, which was issued today and is available on our website. Our 10-Q will be filed shortly. A webcast replay and transcript of today's call will be added to our website once available. On the call today, I am joined by Matt Schultz, our Chairman and Chief Executive Officer; and Gary Vecchiarelli, our President and Chief Financial Officer. Some of the statements we make today will be forward looking based on our best view of the world and our business as we see them today. The statements and information provided remain subject to the risk factors disclosed in our 10-K. We will also discuss certain non-GAAP financial measures concerning our performance during today's call. You can find the reconciliation of non-GAAP financial measures in our press release, which is available on our website. And with that, it's my pleasure to turn it over to Matt. Matthew Schultz: Good afternoon, and thank you all for joining us. This quarter represents a meaningful step forward in CleanSpark's evolution into a digital infrastructure and data center development company. One that builds on the strengths of our mining operations while expanding the set of opportunities our assets can support. We continue to operate a large-scale fundamentally sound Bitcoin mining business that generates durable cash flows and balance sheet strength. What is different today is what those cash flows now enable? CleanSpark is no longer a single track business. We are building an infrastructure platform with multiple independently valuable earning streams, all anchored by scarce utility grade power. Bitcoin mining funds the platform. AI monetizes it and digital asset management optimizes it across all cycles. To frame how we think about AI development, we see 3 phases. First, securing scarce power and land; second, tenant-driven technical and commercial alignment; and third, structured long-term monetization. We are now firmly in the second phase across multiple assets. As a result, when we look forward, we increasingly see a company defined not just by hashrate. but by the quality, scale and flexibility of its infrastructure and by its ability to allocate capital into the highest return opportunities available at any point in the cycle. As we evaluate the opportunities for expansion into AI, we are seeing improving economics per megawatt, driven by scale, power quality and contracting structures even as capital intensity increases. Despite this evolution, Bitcoin mining remains foundational to our business. We are fully operational, passing every day and generating strong cash flows from a scaled mining footprint of more than 50 exahash per second. During the quarter, despite challenging Bitcoin price action and rising network difficulty, we generated more than $180 million in revenue at a gross margin exceeding 47%. Those cash flows allow us to fund growth deliberately. They give us the flexibility to hold assets in a fully monetized state while we complete diligence and commercial alignment rather than being pressured into a speculative development. We've built this strategy to perform across a range of market conditions, including lower Bitcoin prices, slower AI deployment or tighter capital markets without forcing reactive decisions. In November 2025, we completed a $1.15 billion convertible offering as part of our strategic evolution. Part of the use of proceeds was used to repurchase $460 million worth of shares, bringing total share repurchases to over $600 million since December 2024. We resulting in approximately 20% of our shares outstanding being repurchased because we believe dilution is not a strategy, discipline is. Turning to our power and land strategy. Historically, we built CleanSpark by acquiring and optimizing a large number of sub-100 megawatt sites. Those assets continue to perform well and have appreciated meaningfully as energized land has become increasingly scarce and valuable. As we evaluated the AI market, we recognized an opportunity to capitalize on the demand for larger sites. Until recently, Sandersville with approximately 250 megawatts of already live power was our only large-scale asset capable of supporting hyperscale workloads. That has changed. In October 2025, we acquired 271 acres in Austin County, Texas, along with 285 megawatts of contracted power fully approved by ERCOT with certainty on energization and the potential gas capacity for significant behind-the-meter optionality. In January, we followed with a second development initiative in Brazoria County, Texas, supported by a transmission facilities extension agreement enabling an initial 300-megawatt demand load expandable to 600 megawatts. Together, these assets establish a Houston area infrastructure hub with almost 900 megawatts of aggregate potential utility capacity, assembled intentionally to support multiphase AI campus deployments. As we look ahead, we expect to move from portfolio formation into commercialization milestones. Those milestones will take different forms, site-specific announcements, development partnerships and structured long-term offtake agreements, but they all reflect the same underlying reality. Our assets are being pulled into the AI market not pushed. We believe that over time, as those options convert into contracted visible cash flows, the market will increasingly recognize the embedded option value in our power and land portfolio. At Sandersville, we further strengthened our position with the acquisition of a 122-acre parcel in direct proximity to our substation and power infrastructure. These additions were made in close consultation with a select group of potential counterparties. Importantly, these discussions are no longer theoretical. We are operating from tenant-driven specifications, not internal assumptions. We are now past initial screening and into advanced diligence across multiple sites, including power studies, cooling validation and commercial structuring. The decisions we are making today around substation design, cooling architecture and campus layout are not reversible, and they reflect confidence in where demand is heading. What excites us about AI monetization is not just scale, but the duration, predictability and capital alignment of those cash flows relative to traditional compute. Throughout this process, we are expanding responsibly. That means being infrastructure-first aligned with customer requirements and disciplined in capital deployment. In this market, moving too fast is often riskier than moving deliberately, and we are intentionally optimizing for durability rather than velocity. As we plan this evolution, we have established an optimized operating model that allows us to continue running our mining infrastructure right up until load transition. When that transition occurs, we expect to redeploy miners elsewhere in our portfolio where they can continue to operate profitably. Earlier, I said that Bitcoin mining will always be core to our business. And that's because it continues to provide us with a strategic advantage and power acquisition. That advantage is now translating directly into differentiated positioning in AI infrastructure. We have seen this movie before. The discipline that allowed us to scale mining profitably across multiple cycles is the same discipline we are playing here. Only now with larger contracts, stronger counterparties and materially longer duration cash flows. Before turning to digital asset management, I want to briefly comment on the AI lease market. We believe there are meaningful second mover advantages in AI infrastructure, similar to what we experienced in Bitcoin mining. Lease economics have continued to improve across multiple dimensions. Rates have risen, risk-sharing terms have become more balanced and credit markets supporting these projects remain deep and constructive. When negotiating large-scale contracts, we are balancing lease rates delay provisions, capital structures and counterparty quality to optimize the holistic return profile. Our goal is not to win a single deal, but to build durable scalable relationships that monetize our growing portfolio over time. I also want to briefly touch on digital asset management. DAM is not a trading function. It is a capital allocation and liquidity management capability with defined mandates and risk limits. During the quarter, DAM generated over $13 million in premiums and cash. That represents about 24% of normalized adjusted EBITDA and improving capital efficiency across our business. These results are process driven and fully integrated into our broader financial framework. As we look forward, we see multiple paths to value creation unfolding in parallel, continued strength in our operations, increasing visibility into AI monetization and disciplined balance sheet management that preserves strategic flexibility. With that, I'll turn the call over to Gary. Gary Vecchiarelli: Thank you, Matt. The side right into the numbers for our fiscal first quarter 2026. For the quarter, our revenue grew year-over-year by approximately $19 million, an increase of almost 12%. Our Bitcoin production was relatively flat where we saw revenues of almost $100,000 per Bitcoin in the quarter compared to $84,000 in the same quarter last year. Our gross margins declined slightly from approximately 57% a year ago to 47% this quarter. This decline was mainly driven by the year-over-year increase in network difficulty. Power prices also increased marginally to. $0.056 per kilowatt hour, up from $0.049 a year ago. However, this reflects our decision to continue hashing to higher cost higher revenue periods may be curtailing based solely on an arbitrary power price threshold. This quarter, we recognized a net loss of approximately $379 million compared to net income of approximately $247 million a year ago. This change was driven primarily by mark-to-market adjustments to Bitcoin's fair value at the end of each respective period. Our adjusted EBITDA was negative $295 million compared to positive $322 million a year ago, also driven primarily by mark-to-market adjustments. Turning our attention to the performance of the first quarter versus the immediately preceding fourth quarter, revenues declined approximately $43 million or 19% to $181 million. This drop was primarily due to a combination of 2 external headwinds, rising network difficulty and softer Bitcoin prices. Because of these pressures, we experienced some of the lowest cash prices in history during the quarter, underscoring the importance of having a fleet with high uptime and efficiency. Quarter-over-quarter, our cost per kilowatt hour decreased marginally from $0.059 in Q4 to $0.056 in Q1, partially offsetting our 19% revenue decline. As a result, our gross margins remained healthy at 47%. With respect to our overhead expenses, it is important to note that the prior quarter includes approximately $25 million of expense related to separation from our prior CEO. As mentioned on last quarter's call, we do expect that our professional fees payroll and G&A line items will increase as we execute on our AI strategy. Additionally, I want to underscore that the AI data center business comes with stable cash flows and high margins. both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our adjusted EBITDA was negative $295 million for this quarter compared to positive $182 million for the fourth quarter. It is important to note again that the difference relates to noncash mark-to-market adjustments, for which the current quarter includes approximately $350 million of these charges. On a normalized basis, taking the mark-to-market adjustments into account, our normalized EBITDA would be $55 million or approximately 30% normalized margin for this quarter. This represents cash generated from our operations. Bitcoin value as of our September 30 balance sheet date was approximately $1.5 billion. And as of December 31, it was $1.15 billion which the difference is the noncash mark-to-market adjustment of $350 million, which I mentioned earlier. Turning our attention to the balance sheet. You'll see our cash balance increased over $400 million compared to Q4. This is due to the $1.15 billion 0% convertible transaction we closed in November. As you know, we used a portion of the proceeds to pay off the outstanding balances on our Bitcoin back lines of credit and also repurchased $463 million of stock. This left approximately $420 million of net cash proceeds, the majority of which we will still have on our balance sheet. In addition to our cash balance, we had approximately $1.15 billion of Bitcoin value as of the end of Q1. Our total debt is approximately $1.8 billion, which on a net debt basis is approximately a 1.1 debt to liquidity ratio. Most importantly, the converts do not come due until 2030 and 2032, and numerous options remain available to us for capital. Also important to note is that our outstanding share count has decreased almost 20% in the last 15 months as we have not issued a single share of equity on the ATM or other offerings to Ecomat, dilution is not a strategy, discipline is. Turning our attention to our balance of over 13,000 Bitcoin. I want to point out that we are one of the first, if not the only company, which has scaled operations that is also using Bitcoin as a productive capital asset. On the last call, we discussed in detail our DAM strategy in its first full quarter. You may have also heard us previously talk about our crawl-walk-run approach, which I'm happy to say we're now fully in the walk phase. We're at full utilization of the portion of our Bitcoin balance we expect to use for yield generation, which is 40% or approximately 5,200 Bitcoin. Our DAM strategy generated $13 million in cash returns on the Bitcoin model during the quarter where bicorn price was down mark-to-market. I want to highlight several key members who speak to our core DAM strategies. We overlay a covered call derivative program on our monthly production and sales of Bitcoin, which resulted in an uptick of $7,700 or 8% per Bitcoin over the average sales price of approximately 97,200. Overall, the $13 million in total premiums also represents an annualized return of 4.2% on our average total balance, which surpasses our target of 4%. We accomplished this all within 6 months of our first trade. Importantly, this is all achieved by monetizing elevated volatility, especially in October, while keeping the average delta below 20. I also want to point out that we have added an additional tool to our treasury management to belt. The Basis Trade is a market-neutral strategy that captures the difference between the forward price of Bitcoin and the spot price. Importantly, this strategy takes no price risk and generates returns from the same types of market structure dynamics that we noted in our thesis in the first place. This basis trade allowed us to put our cash balances to work and exceed the risk-free rate by almost 200 basis points as we saw an annualized yield of over 5.5% on the cash allocated to the basis trade. While these opportunities are cyclical, we will continue to be opportunistic based on market dynamics, filling out the flywheel we initially envisioned when we launched our DAM team. On a final note, I'd like to take some time discussing our capital strategy going forward, especially in light of our expansion into AI data centers. From a capital perspective, I'm confident the capacity and appetite for financing an AI data center with a grade A tenant is strong. We saw a high-yield deal from our friends at Cipher, which priced at an attractive [ 6% and 8% ] which is indicative of the quality of recent leases being signed and the capital available in this market. The recent $2 billion bond had approximately $13 billion in demand an oversubscription of 6x while we have not committed to 1 specific means of financing our AI data center builds, we are focused on building a capital stack, which minimizes dilution. This continues with the sale of monthly Bitcoin production to cover our OpEx. Between our current cash balance and capacity on the Bitcoin backed lines of credit, we have over $800 million of liquidity available without selling any of our Bitcoin hurdle. This liquidity provides us optionality, and we will continue to use the lines of credit opportunistically in the marketplace for accretive purposes. Matt spoke about our current efforts and where we are going and we are excited to share on future calls to relationships and ecosystem we are building, one that is a more fulsome approach than exists in the market. While we are early in the innings of our AI data center journey, the market is moving quickly and CleanSpark is responding decisively. Our conversations with grade A credit quality tenants are ongoing, and it is not a matter of if, but when. With that, I will hand it back to Harry to lead us into Q&A. Harry Sudock: Thanks, Gary. We will now open the floor to questions from the analyst community. Operator, please provide instructions and manage the queue for the Q&A session.[Operator Instructions]. Your first question comes from the line of Mike Grondahl with Northland Securities. Mike Grondahl: I was wondering if you could talk a little bit about the demand environment you're seeing for HPC? And maybe how that's changed in the last 90 or 100 days? And kind of what attributes are you looking for most in a lease partner? Unknown Executive: Mike, thanks for the question, and thank you for the recent initiation. We're glad to see Northland covering us. I can tell you that 6 months ago, when I reassumed the role of CEO. We entered a market where there was a lot of enthusiasm around signing a deal. And what we're now seeing is some of the punitive components of the early leases such as losing a significant amount of revenue for a day late delay on an RFS date. And differing terms that are backstopped only at the site level rather than at the top co level. It has given us an opportunity to really sit back and evaluate what's out there. And I can tell you that We, Gary, Harry and myself and some of our team attended the Pacific Telecom Conference in Hawaii. And the feedback that we received by presenting an end-to-end solution was very overwhelmingly positive. We've been very pragmatic about the assets that we've accumulated, the location, the distance away from fiber networks, the access to behind-the-meter generation. And as a result, we've now been entertaining multiple trillion balance sheet companies that are interested in long-term leases on some of these assets. So we're seeing the demand continuing to escalate. And I might add, we saw Amazon earlier today talk about their commitment to invest $200 billion in AI infrastructure in 2026. exceeding the $140 billion estimated by the Street. So looking at the demand behind that, we feel very solid about it. And if the inbound inquiries and conversations we're having with hyperscalers or any indication, the fear of a bubble is highly overstated. Mike Grondahl: Got it. And then maybe just as a follow-up, your 3 sites, Sealy, Sandersville and Brazil, would you say it's equal demand for all 3? Or is there one that sticks out amongst those? How would you handicap that? Unknown Executive: I think probably the highest demand right now is Sandersville. Quite frankly, because it's 250 megawatts, we already built a substation. It's already energized. The Sealy site energization is Q1 '27 for the first 207 megawatts, so we're seeing strong demand there. And obviously, the next site has also been very appealing. But I would say that the data center environment in Georgia and the energized site are very compelling to the offtake clients. Operator: Your next question comes from the line of Brian Dobson with Clear Street. Brian Dobson: So just as a quick follow-up. You mentioned there have been some really positive CapEx comments from companies like Amazon. To me, that signals rising demand for AI data centers. Would you say that that's indicative of demand, call it, across the sector from various hyperscalers that you're speaking with? Or are people getting more cautious at all? Unknown Executive: Yes. I would say it's an emphatic yes. Just as a quick aside, Jeff Thomas, who leads our AI venture has been in the office with us this entire week, and more often than not, he's excusing himself to go into his office and close the door to field an inbound inquiry. So I would say demand is escalating rapidly. Brian Dobson: That's certainly good news. And I know you guys mentioned that you're looking for a mix of quality and scalability among clients, given construction commitments that you've already made, how confident are you that you'll be able to, call it, sign a contract in the relatively near future? Unknown Executive: We're very confident, Brian. I'll be honest with you the delay in -- I wouldn't even call it a delay. I mean when we did this 6 months ago and then we had our earnings call 7 or 8 weeks ago, we said that we would expect to sign a quality lease in less than a year. And I would say that, that's highly accelerated. But the discipline that we're taking, you look at some of the leases that other Bitcoin miners have put up and they're very highly redacted in the public filings. And that's a result of the punitive nature of some of the delay provisions. So as we contemplate this, we're actually working on a basis of design with the offtake customer. We're designing it in advance and then assuring that we can meet the delivery time lines to remove that potential overhang of failure to deliver risk. So being disciplined about this and building specific to the basis of design for the offtaker, including the implementation of the approved reference architecture from the chip manufacturers will allow us to have that certainty to secure the supply chain before we enter into these commitments to ensure that we don't have that fail to deliver. Brian Dobson: Excellent. Excellent. And then just one final one on Bitcoin mining, if I may. Given your efficiency you're better positioned than those heading into the next having, I guess, has your thought process changed at all as far as operating Bitcoin lines, call it, in tandem with your expansion into HPC. Unknown Executive: That's a great question, Brian. And what we found is that as new energy sources are energized, some of these communities, especially the smaller communities, are incentivized to monetize those metal lots very rapidly. The challenge is to build a data center for a hyperscaler with the approved basis of design and incorporating that reference architecture is a 12-month best case 18- to 24-month kind of average case delivery time line, we can use the infrastructure that we have for Bitcoin mining, like we did in Cheyenne, Wyoming, where we secured a 100-megawatt lease over a hyperscaler. We did that simply because we committed to start paying power bills inside of 6 months, not inside of 1.5 years, and that makes a difference to these communities. So we'll continue to use Bitcoin mining as that tool. You heard us talk about on the call, something that we haven't published it yet because it wasn't material, and that is we have 122-acre parcel adjacent to Sandersville. What does that mean? That means I can operate 11 exahash to a profitable Bitcoin mining up until the day we cut the power over to support the data center for our end-use clients. We also on the map of our projects, something that we haven't talked about is a 15-megawatt site in South Dakota. The utility there had introduced a blockchain specific tariff that with an interruptible load it gives us the lowest cost per kilowatt hour of almost any site in our portfolio. So that flexibility allows us to migrate that mining to a profitable location once we've spun up a data center behind us. So we see it kind of as a loss leader, but it makes money. Operator: Your next question comes from the line of Mike Colonnese with H.C. Wainwright. Michael Colonnese: Matt, first one maybe for you. I appreciate your comments on the HPC business with start being advanced discussions or diligence stages rather potential tenants here. And that you're currently looking on a basis of design. Curious what milestones should we be on the lookout for next and some of the expected time lines you see as we come across the next couple of quarters here? Matthew Schultz: So I think the process when you're dealing with a hyperscaler is we could rush in and sign a lease, so we could get a headline. And then we're facing potential losses for a failure to deliver. So as I mentioned in my prior comments, we're working towards that basis of design. And one of the things I think that is a key differentiator that's maybe gone a little bit under the radar. And that is we put out a press release announcing an MOU with Subaru. Mike, you've been around our company long enough that we don't ever make a material disclosure unless we've got a firm contract. And we felt that, that was important as we head into some of these discussions because summer has been very successful in building a modular MEP. So mechanical, electrical and plumbing, all the fiber runs everything according to the reference architecture required by the chipset manufacturers. So our solution will be to build the gray space to build a tilt up shell and then slot in the reference architecture. That also gives us flexibility. So if you have a hyperscaler that wants to modify from one particular type of chip to another, we have that modular approach. It also shortens the time line because we've all heard the horror stories about some of our peers that have a couple of thousand tradesmen all working at the same sites in West Texas, and they're struggling to provide housing and food and bathroom facilities. We look at this differently. We build instead of a one-off data center that's stick built. We build the shell according to the specifics required by the end customer. and then we build the MEP portion in a factory. So it's consistent and duplicatable and scalable, which is differentiated from anything else in the space. So it's important to us to establish all of those build parameters ahead of time. So when we put pen to paper, there's absolute certainty that we can deliver the product as expected on time. Michael Colonnese: Helpful color. Matt, I appreciate that. And Gary, maybe one for you. Does this recent downturn in Bitcoin prices change or huddled approach at all? I know from covering the name for a while here, you guys have historically had a very dynamic high approach, one that tended to adjust based on prevailing market conditions. So curious how you guys are thinking about the huddles back here? Gary Vecchiarelli: Thanks, Mike. Since you've been around a while, you know we've built this business on optionality. So that option is still on the table if we wanted to dip into the hotel and part with some of those Bitcoin, I'll tell you that's not something we're planning on doing even at these levels. We think that the strategy is still intact and part of the hedge is for us really selling nearly 100% of our monthly operating production. So as of right now, there's really been no change in that strategy. I'd also conversely say that we're not expecting to hold 100% of the operating Bitcoin production either because that would mean that we'd run through our cash a whole lot quicker and as we had mentioned, when we were raising the convert funds, we expect to use the majority of those funds to expand in AI data centers because we think that's the future of the company. Unknown Executive: Mike, maybe that just a little -- another layer to the Bitcoin mining side. At our last disclosure, we were at 16.07 jewels per terahash and Taylor and his team are actively deploying the 13.5 jewel per terahash machines in the immersion cooled containers in 5 different locations. So we expect our fleet efficiency to continue to improve. In the last cycles, I mean we've been through this a few times, we see the kind of wash out of the sorting process and the less efficient fleets tend to unplug. So we also believe that there is a very strong opportunity for us to organically grow a share of the network hash rate just by default as other less efficient miners or for unplug. Operator: Your next question comes from the line of Greg Lewis with BTIG. Gregory Lewis: Just thinking about the move forward in the HPC, I know Jeff joined the team a few months ago now. Gary, you alluded to potentially higher SG&A over time as we kind of build out the team and get ready to pivot into this new business. Like how should we think about costs and processes? And where are we in terms of -- we've seen other companies go out and build teams. What we're realizing we have a lot of capable talented people already inside the company. How should we think about growth at the employee level here? Gary Vecchiarelli: Greg. Thanks for the question. It's a great question. We get it quite often from investors. I'll tell you, it's hard to give guidance on that because while we have a plan to bring on a certain number of FTEs, the timing of when those hit is really what's going to drive what the numbers are going to be for the fiscal year. Additionally, we have optionality to where we can rent services. So if we need services from someone we could bring in outside consultant -- contractors to help fill that void while we're waiting to bring on full-time talent. And there's -- that could be different than what it would be to bring on a burden employee. So we're not prepared to give out numbers about right now. I don't think it's anything that's material that's putting us at risk or anything. I think we've been pretty measured about bringing on people right around the time we will need them. So I think you'll see that slowly uptick throughout the remainder of the year. Gregory Lewis: Okay. Great. And then I think it's been understood that we were going to acquire more land at Sanders ville for at least a few months. How does now owning that additional land at Sandersville. Does that go at all in changing the kind of conversation that it seems like we're focusing -- it seems like part of this call is you focusing on potential terms of some of these HPC contracts. Does -- I would think earning the land matters a lot. I guess my question is, was not earning some of the land and potentially leasing it kind of a nonstarter? Harry Sudock: Greg, it's Harry. I think you're exactly right. So we view the closing of the land expansion at Sandersville, a very orderly process in progressing the AI data center project there. It allows us to move into a very specific basis of design alignment exercise, which is underway. And it also brings a level of specificity to the compute and power ramp for the data center deployment as well because there's complexity to these projects that extend beyond standing up the data center for our state. There's a lengthy commissioning process that the tenants typically take on in the context of the overall project life cycle and being able to map out those time lines and those work streams in detail, is critical as we move through the full commercial scope of the discussions, they are, in many cases, governed by some of those technical pieces in the ramp process. Operator: Your next question comes from the line of Stephen Glagola with KBW. Stephen Glagola: Thanks for the question. Can you maybe provide some insight in how ERCOT's proposed large load bag study process may the energization time line for the Sealy side as well as the approval and development schedule associated with your Brazoria County, Texas project? Harry Sudock: Stephen, yes, Harry, again. Happy to do that. So I think the first piece of it is that the study process that ERCOT is proposing to roll out has not gone final yet. They're still in a comment period where they're taking member requests for how they want to influence that process and how it's going to be brought to market. So we're waiting to see kind of the final form of that. But given the early news there, we've had a lot of detailed discussions with a number of counterparties that we're working with there. That includes the substation developer. It includes the utility. It includes some of the political folks and obviously, some of the teams that are caught as well. And I think the assets that we have in the state are in very favorable position relative to this new piece of the process for a handful of reasons. The first is that the large load studies that have been done. Its Sealy, it's complete. And at the second location, it's in a deeply progressed state. And we've received the notice to proceed language at both of them. So that's kind of .1 and 2. The next is that the interconnect and the FDA pieces are executed. And the third at Brazoria is that the CAIC has been funded. And at the Sealy location substation is already under construction. So these are significantly progressed projects. And what we've seen is that the view of the batching and the study rollout is largely being informed by project maturity as well as location. And what we've gotten feedback from the utility of both of those locations of -- is that the location that we selected is that a point in the overall ERCOT transmission system that's going to be the least impacted by this type of reevaluation process. So we feel very, very positively about where these 2 assets sit within the system and how they're going to be treated. But until ERCOT comes out with final language, we can't have 100% visibility into that yet. Operator: Your next question comes from the line of John Todaro with Needham & Company. John Todaro: Two here, I guess, we'll start with the one that kind of comes off the ERCOT question. Are there -- as you think about just kind of longer-term pipeline, adding more power, are there other power markets that are now starting to look maybe a little bit more attractive relative to Texas and where could we see that? And then I have a follow-up on the HPC tenant side. Unknown Executive: Thanks, John. I think that we have always had a strong heritage of diverse portfolio construction. We see it in the way that we enter into power agreements today. We've got a significant footprint deployed and operating in Georgia. We've got significant presence in Tennessee. Wyoming and Mississippi as well are the smallest 2, but they're by no means small. So I think that what we're going to be able to accomplish is a continued expansion in those markets because of the relationship and community quality that we've engaged in to date. But additionally, I think that the other side of the question that you're asking is do large-scale data centers skew towards in front of the meter power or behind the meter power. And we're asking these questions internally along both vectors. So we think that there's a huge amount of opportunity inside of Texas and outside on the in front of the meter profile. We have a team that's become exceedingly expert in sourcing, negotiating and closing on that power. And then we are also strongly evaluating the capacity for behind-the-meter power as well in places where we're either able to get a smaller in front of the meter load or there's a particularly rich commodity environment by which we could power behind-the-meter generation and then the associated data center. So we're people for its business fundamentally, and our power and land teams are prepared to expand the portfolio very, very broadly in a diversified way, but also add that potential for behind the meter to the repertoire as well. John Todaro: Great. And then just on the HPC 10 discussion. I guess just trying to gauge kind of how far advanced we are in the positioning. Is it -- are we kind of down to 1 potential tenant that seems much further along? Or is there kind of 3 that are in final competition stages? Just a little bit more color there? Unknown Executive: Ask me a question that I can answer. What I would say, John, to be honest with you, is there are multiple potential offtake tenants for Sandersville to begin with. I would say there is a specific front runner by an order of magnitude to the extent that our team is collaborating with their team on the site placement. You may have seen a slide in our deck that had a mockup of the layout of the data center. So we've advanced it significantly with a particular offtake, but by no means is it committed elsewhere. I mean there -- the competition for megawatts and land right now is stronger than it was when we announced this strategy to expand into AI. So we're not closing any doors, but I would say there's a clear frontrunner there. Operator: Your next question comes from the line of Brent Noble with Cantor Fitzgerald. Unknown Analyst: This is Gareth on for Brett. I was just hoping you could go into detail on the 2 new sites in Texas. When are you guys expecting to have power available on those sites. And what do you think the time lines are kind of going forward there? Unknown Executive: Yes, absolutely. So let's tackle the Sealy project first. The land secured is 271 acres. The gross power is 285 megawatts. The first 207 to 209 is coming first half of '27. And then it's about 40 in '28 and 40 in '29. And that's driven by the transmission agreement by which we secure the power. The second project is in Brazoria County. Larger footprint with up to 477 acres at that location. And the way that it's structured is that we've signed for that agreement, but we're not closed yet, and there's some closing conditions associated with it, that we expect to wrap up here. The time line for the energization is a function of some of those closing conditions. And so we don't have the type of line in the sand clarity that we have at Sealy. But I think that Q4 '27, Q1 '28 is a range that is all reasonable and everybody internally is working to bring that energization date as close to the inside as possible. Operator: Your next question comes from the line of Paul Golding with Macquarie. Paul Golding: Congrats on all the progress. Gary, you referenced a peers recent capital raise. And I just wanted to ask, as we think about the liquidity you have, but also you have substantial capacity going forward that you'll hopefully be growing into with leases. Should we take that to be -- that comment to be indicative at all of how you hope to essentially face a counterparty in terms of counterparty type face-to-face with hyperscaler able to do high yield raises where the counterparty credit quality could yield that, I guess, how should we think about how you're selecting your counterparties given the context given around capital raising and cost of capital. Unknown Executive: Thanks, Paul. I'll tell you that it's very important to us to have that grade A credit quality tenants because we think that's the most financeable and the best cost of capital. So that's what we're focused on. In terms of the vehicle, I quote the recent Cipher deal because the high yield seems to be a playbook that a number of our peers have started to go down that path. We're open to that. We're happy to see that the terms are getting better both with that and the contracts and leases that are backed by that bond. There's some other options as well. obviously, a little higher cost of capital. But at the end of the day, what's great about this is, and you've heard this word from us for quarters or years now is optionality, right? We have a lot of options on the table. But I think it's safe to say we're going to follow a playbook right now that's probably proven in the capital markets, and it all starts with a grade A tenant. Paul Golding: And then maybe a follow-up. I believe, Matt, you mentioned when speaking about the Sandersville work and the 122 acres with tenant-driven specs in mind. How should we think about what that means for terms? You also noted that terms in discussion were seemingly more positive across the conversations you're having. Is there any kind of prepayment or deposit discussion involved in the conversations you're having, given that you are proactively using tenant-driven specs to set up the sites for HPC? Matthew Schultz: It's -- thanks for the question, Paul. It's a bit -- it's a little early in the discussions to comment on that. directly. But I can tell you that we're -- obviously, there are a number of different leases that have been put up. You've seen modified gross. You've seen triple net. You've seen posted agreements. You've seen miners that have committed to buy the chips themselves. So I can tell you that our focus initially, and I'm not -- I don't mean to downplay the quality of any other transaction. But as we look at the financing options, I think it's important to us to have a significantly better deal than I think the market would have otherwise expected. I think we're interested in putting a deal together directly with the hyperscaler, not necessarily with the Neo cloud backed by a hyperscaler. And we believe that we'll set the standard for the quality of the agreement and the, I guess, win-win is a term we use in the company a lot. There will certainly be expectations our feet will be held to the fire, so to speak, to deliver, but it's not at the risk of an existential threat on a fail to deliver. So we're negotiating all those terms. And I think what you'll see when we announced the first lease is a basis or a model for what you can expect going forward. Operator: Your next question comes from the line of Jim Milre with Chardan. Unknown Analyst: At the current Bitcoin prices, let's call it, $63,000 or so. How much of your minor fleet is economic to operate? Or another way to ask it is how much of the minor fleet is -- meets the hurdle rate in order to operate. Unknown Executive: Great question, Jim. Thank you for that. So our fleet efficiency improved and then it got a bit worse. And it got worse by design, because as mining economics improved, we actually started to scale up some less efficient equipment in our fleet. What I can tell you is that Taylor and his team are constantly running real-time analysis based on utility prices, network difficulty and the price of Bitcoin. And they brought me in to Gary and myself this morning as we were working on this presentation today. They brought us in a list. And I would say less than 10% of our fleet at the current half price is not profitable. So the vast majority of it is and the small portion that is at or below the breakeven threshold our machines that we brought on to take advantage of $125,000 Bitcoin 1.5 quarters ago. So it's not punitive to us to unplug those. Having said that, as we unplug those less efficient machines or scale them down or under clock them, it increases the overall efficiency of our fleet. Unknown Analyst: Got it. That's helpful. And can you discuss CapEx plans for this year and next, both in from a dollar basis as well as an allocation between Bitcoin and HPC. Gary Vecchiarelli: Jim, it's Gary. I'll tell you that our focus is going to be on deploying capital towards AI. That's in the range of $9 million to $11 million a megawatt which, as you probably know, has been reported by most of our peers in the space right now, and that's the range that we're seeing. So what is deployed is really going to depend on -- that amount is going to depend on the design to build and the customers and when we sign those respective leases. But I'll tell you that the overwhelming percentage majority percentage of that is related to HPC. With respect to Bitcoin mining, I think that the investment, particularly at these levels doesn't make a whole lot of sense from the sticker prices that we're seeing from the major manufacturers. If you look at our balance sheet as of 12/31, we had about $130 million of prepaid deposits on Bitcoin mining equipment and miners. And about $112 million of that was through September. So we're still deploying some infrastructure, mainly emerging cooling and miners that will help drive down that efficiency. But we don't plan on spending a significant portion of our cash on mining, unless economics change. We need to keep in mind that we are about 2 years off to the next having. And in any cycle, as you get closer to having that ROI window closes rapidly. And right now, it doesn't make sense. So we want to be redirecting every dollar possible towards CapEx. Operator: Your next question comes from the line of Matthew Capitalo with Maxim Group. Unknown Analyst: I'm filling for Mac right now. I was just wondering if you guys have any insight or I guess, predictions on how we should be thinking about network difficulty in response to the current Bitcoin prices. Unknown Executive: Yes, absolutely. So I think that what we've seen over the last weeks and the difficulty adjustment that's coming on Saturday is important to know is the largest difficulty adjustment to the downside since the China mining ban in 2020. And that's a combination of 2 factors. The first is that there have been significant weather events across the entire country during that period of time. where you're seeing either the demand response programs get engaged or you're seeing power prices move past the breakeven point of economics. And so that's certainly a contributor to this difficulty adjustment. The second piece is clearly Bitcoin price is off considerably. And so that next coming difficulty adjustment is going to be a significant one. And then I think given the price action that we've seen in the latter part of the difficulty adjustment period that we're in the middle of right now, we could see additional downward pressure on difficulty in addition to that. So I think that ultimately, this is the self-healing nature of the proof-of-work and Bitcoin mining system. And as you see these types of market forces, the network adjusts to be able to create that security model that's supposed to keep producing blocks and processing transactions. Unknown Executive: I just want to add one thing because if you look at this historically, when Bitcoin runs and hash price gets better, the global hash rate laps right? You'll have a period of time, usually weeks, maybe a month or whatever, for miners to find a way to get plugged in because miners just don't sit around waiting for hash price to sit typically, they're just not on racks just waiting for Bitcoin price at a certain price. It's the opposite on the way down because most miners, not all, but most miners know what their breakeven is because that's a real punitive cash penalty because they have to pay their power deals. And so as Bitcoin mining economics go down, what we've seen at least historically, is that cash rate comes off pretty quickly, pretty close to that. And that's because miners say, well, hey, why am I going to take a lot of X amount of dollars when I could just go buy Bitcoin, and I have more Bitcoin than if I actually mined it. So I think that given that routed in the fact that we have a decreasing a fleet with decreasing jewels per terahash, meaning our efficiency is going up. and we're more efficient and we're producing more Bitcoin for every watt that we're putting through these machines. We will be one of the last ones theoretically to turn off, and we'll mine more Bitcoin in terms of quantity as that global half decreases. Unknown Analyst: And I guess as a follow-up on the Texas opportunities. Do you guys have a time line on executing behind the meter opportunity into your portfolio? Unknown Executive: Yes, I appreciate the question. I think it's too early to have a view on the exact timing for that type of opportunity. What I can say is that we're evaluating a number of different behind-the-meter deployment types. Some of those energization schedules are longer. Some of them are much faster to market. And so ultimately, those types of decisions will be made in concert with the tenant community, and we're really looking to be able to meet their need and satisfy impute demand, whether that's through one form or behind the meter generation or another. Operator: There are no further questions currently. Harry, I turn the call back over to you. Harry Sudock: Thank you, and thank you, everyone, again, for joining today's earnings call. We look forward to staying in touch and sharing future results with you in the coming quarters. Stay tuned for more progress and exciting achievements ahead from us at CleanSpark. Operator: This concludes today's conference. You may now disconnect.
Operator: Good afternoon. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to CleanSpark's Fiscal First Quarter 2026 Financial Results Call. [Operator Instructions]. Thank you. Harry, you may begin your conference. Harry Sudock: Thanks, Jeannie, and thank you for joining us today to review the first quarter to 2026 financial results for Queen Spark. We encourage you to review our earnings results press release, which was issued today and is available on our website. Our 10-Q will be filed shortly. A webcast replay and transcript of today's call will be added to our website once available. On the call today, I am joined by Matt Schultz, our Chairman and Chief Executive Officer; and Gary Vecchiarelli, our President and Chief Financial Officer. Some of the statements we make today will be forward looking based on our best view of the world and our business as we see them today. The statements and information provided remain subject to the risk factors disclosed in our 10-K. We will also discuss certain non-GAAP financial measures concerning our performance during today's call. You can find the reconciliation of non-GAAP financial measures in our press release, which is available on our website. And with that, it's my pleasure to turn it over to Matt. Matthew Schultz: Good afternoon, and thank you all for joining us. This quarter represents a meaningful step forward in CleanSpark's evolution into a digital infrastructure and data center development company. One that builds on the strengths of our mining operations while expanding the set of opportunities our assets can support. We continue to operate a large-scale fundamentally sound Bitcoin mining business that generates durable cash flows and balance sheet strength. What is different today is what those cash flows now enable? CleanSpark is no longer a single track business. We are building an infrastructure platform with multiple independently valuable earning streams, all anchored by scarce utility grade power. Bitcoin mining funds the platform. AI monetizes it and digital asset management optimizes it across all cycles. To frame how we think about AI development, we see 3 phases. First, securing scarce power and land; second, tenant-driven technical and commercial alignment; and third, structured long-term monetization. We are now firmly in the second phase across multiple assets. As a result, when we look forward, we increasingly see a company defined not just by hashrate. but by the quality, scale and flexibility of its infrastructure and by its ability to allocate capital into the highest return opportunities available at any point in the cycle. As we evaluate the opportunities for expansion into AI, we are seeing improving economics per megawatt, driven by scale, power quality and contracting structures even as capital intensity increases. Despite this evolution, Bitcoin mining remains foundational to our business. We are fully operational, passing every day and generating strong cash flows from a scaled mining footprint of more than 50 exahash per second. During the quarter, despite challenging Bitcoin price action and rising network difficulty, we generated more than $180 million in revenue at a gross margin exceeding 47%. Those cash flows allow us to fund growth deliberately. They give us the flexibility to hold assets in a fully monetized state while we complete diligence and commercial alignment rather than being pressured into a speculative development. We've built this strategy to perform across a range of market conditions, including lower Bitcoin prices, slower AI deployment or tighter capital markets without forcing reactive decisions. In November 2025, we completed a $1.15 billion convertible offering as part of our strategic evolution. Part of the use of proceeds was used to repurchase $460 million worth of shares, bringing total share repurchases to over $600 million since December 2024. We resulting in approximately 20% of our shares outstanding being repurchased because we believe dilution is not a strategy, discipline is. Turning to our power and land strategy. Historically, we built CleanSpark by acquiring and optimizing a large number of sub-100 megawatt sites. Those assets continue to perform well and have appreciated meaningfully as energized land has become increasingly scarce and valuable. As we evaluated the AI market, we recognized an opportunity to capitalize on the demand for larger sites. Until recently, Sandersville with approximately 250 megawatts of already live power was our only large-scale asset capable of supporting hyperscale workloads. That has changed. In October 2025, we acquired 271 acres in Austin County, Texas, along with 285 megawatts of contracted power fully approved by ERCOT with certainty on energization and the potential gas capacity for significant behind-the-meter optionality. In January, we followed with a second development initiative in Brazoria County, Texas, supported by a transmission facilities extension agreement enabling an initial 300-megawatt demand load expandable to 600 megawatts. Together, these assets establish a Houston area infrastructure hub with almost 900 megawatts of aggregate potential utility capacity, assembled intentionally to support multiphase AI campus deployments. As we look ahead, we expect to move from portfolio formation into commercialization milestones. Those milestones will take different forms, site-specific announcements, development partnerships and structured long-term offtake agreements, but they all reflect the same underlying reality. Our assets are being pulled into the AI market not pushed. We believe that over time, as those options convert into contracted visible cash flows, the market will increasingly recognize the embedded option value in our power and land portfolio. At Sandersville, we further strengthened our position with the acquisition of a 122-acre parcel in direct proximity to our substation and power infrastructure. These additions were made in close consultation with a select group of potential counterparties. Importantly, these discussions are no longer theoretical. We are operating from tenant-driven specifications, not internal assumptions. We are now past initial screening and into advanced diligence across multiple sites, including power studies, cooling validation and commercial structuring. The decisions we are making today around substation design, cooling architecture and campus layout are not reversible, and they reflect confidence in where demand is heading. What excites us about AI monetization is not just scale, but the duration, predictability and capital alignment of those cash flows relative to traditional compute. Throughout this process, we are expanding responsibly. That means being infrastructure-first aligned with customer requirements and disciplined in capital deployment. In this market, moving too fast is often riskier than moving deliberately, and we are intentionally optimizing for durability rather than velocity. As we plan this evolution, we have established an optimized operating model that allows us to continue running our mining infrastructure right up until load transition. When that transition occurs, we expect to redeploy miners elsewhere in our portfolio where they can continue to operate profitably. Earlier, I said that Bitcoin mining will always be core to our business. And that's because it continues to provide us with a strategic advantage and power acquisition. That advantage is now translating directly into differentiated positioning in AI infrastructure. We have seen this movie before. The discipline that allowed us to scale mining profitably across multiple cycles is the same discipline we are playing here. Only now with larger contracts, stronger counterparties and materially longer duration cash flows. Before turning to digital asset management, I want to briefly comment on the AI lease market. We believe there are meaningful second mover advantages in AI infrastructure, similar to what we experienced in Bitcoin mining. Lease economics have continued to improve across multiple dimensions. Rates have risen, risk-sharing terms have become more balanced and credit markets supporting these projects remain deep and constructive. When negotiating large-scale contracts, we are balancing lease rates delay provisions, capital structures and counterparty quality to optimize the holistic return profile. Our goal is not to win a single deal, but to build durable scalable relationships that monetize our growing portfolio over time. I also want to briefly touch on digital asset management. DAM is not a trading function. It is a capital allocation and liquidity management capability with defined mandates and risk limits. During the quarter, DAM generated over $13 million in premiums and cash. That represents about 24% of normalized adjusted EBITDA and improving capital efficiency across our business. These results are process driven and fully integrated into our broader financial framework. As we look forward, we see multiple paths to value creation unfolding in parallel, continued strength in our operations, increasing visibility into AI monetization and disciplined balance sheet management that preserves strategic flexibility. With that, I'll turn the call over to Gary. Gary Vecchiarelli: Thank you, Matt. The side right into the numbers for our fiscal first quarter 2026. For the quarter, our revenue grew year-over-year by approximately $19 million, an increase of almost 12%. Our Bitcoin production was relatively flat where we saw revenues of almost $100,000 per Bitcoin in the quarter compared to $84,000 in the same quarter last year. Our gross margins declined slightly from approximately 57% a year ago to 47% this quarter. This decline was mainly driven by the year-over-year increase in network difficulty. Power prices also increased marginally to. $0.056 per kilowatt hour, up from $0.049 a year ago. However, this reflects our decision to continue hashing to higher cost higher revenue periods may be curtailing based solely on an arbitrary power price threshold. This quarter, we recognized a net loss of approximately $379 million compared to net income of approximately $247 million a year ago. This change was driven primarily by mark-to-market adjustments to Bitcoin's fair value at the end of each respective period. Our adjusted EBITDA was negative $295 million compared to positive $322 million a year ago, also driven primarily by mark-to-market adjustments. Turning our attention to the performance of the first quarter versus the immediately preceding fourth quarter, revenues declined approximately $43 million or 19% to $181 million. This drop was primarily due to a combination of 2 external headwinds, rising network difficulty and softer Bitcoin prices. Because of these pressures, we experienced some of the lowest cash prices in history during the quarter, underscoring the importance of having a fleet with high uptime and efficiency. Quarter-over-quarter, our cost per kilowatt hour decreased marginally from $0.059 in Q4 to $0.056 in Q1, partially offsetting our 19% revenue decline. As a result, our gross margins remained healthy at 47%. With respect to our overhead expenses, it is important to note that the prior quarter includes approximately $25 million of expense related to separation from our prior CEO. As mentioned on last quarter's call, we do expect that our professional fees payroll and G&A line items will increase as we execute on our AI strategy. Additionally, I want to underscore that the AI data center business comes with stable cash flows and high margins. both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our adjusted EBITDA was negative $295 million for this quarter compared to positive $182 million for the fourth quarter. It is important to note again that the difference relates to noncash mark-to-market adjustments, for which the current quarter includes approximately $350 million of these charges. On a normalized basis, taking the mark-to-market adjustments into account, our normalized EBITDA would be $55 million or approximately 30% normalized margin for this quarter. This represents cash generated from our operations. Bitcoin value as of our September 30 balance sheet date was approximately $1.5 billion. And as of December 31, it was $1.15 billion which the difference is the noncash mark-to-market adjustment of $350 million, which I mentioned earlier. Turning our attention to the balance sheet. You'll see our cash balance increased over $400 million compared to Q4. This is due to the $1.15 billion 0% convertible transaction we closed in November. As you know, we used a portion of the proceeds to pay off the outstanding balances on our Bitcoin back lines of credit and also repurchased $463 million of stock. This left approximately $420 million of net cash proceeds, the majority of which we will still have on our balance sheet. In addition to our cash balance, we had approximately $1.15 billion of Bitcoin value as of the end of Q1. Our total debt is approximately $1.8 billion, which on a net debt basis is approximately a 1.1 debt to liquidity ratio. Most importantly, the converts do not come due until 2030 and 2032, and numerous options remain available to us for capital. Also important to note is that our outstanding share count has decreased almost 20% in the last 15 months as we have not issued a single share of equity on the ATM or other offerings to Ecomat, dilution is not a strategy, discipline is. Turning our attention to our balance of over 13,000 Bitcoin. I want to point out that we are one of the first, if not the only company, which has scaled operations that is also using Bitcoin as a productive capital asset. On the last call, we discussed in detail our DAM strategy in its first full quarter. You may have also heard us previously talk about our crawl-walk-run approach, which I'm happy to say we're now fully in the walk phase. We're at full utilization of the portion of our Bitcoin balance we expect to use for yield generation, which is 40% or approximately 5,200 Bitcoin. Our DAM strategy generated $13 million in cash returns on the Bitcoin model during the quarter where bicorn price was down mark-to-market. I want to highlight several key members who speak to our core DAM strategies. We overlay a covered call derivative program on our monthly production and sales of Bitcoin, which resulted in an uptick of $7,700 or 8% per Bitcoin over the average sales price of approximately 97,200. Overall, the $13 million in total premiums also represents an annualized return of 4.2% on our average total balance, which surpasses our target of 4%. We accomplished this all within 6 months of our first trade. Importantly, this is all achieved by monetizing elevated volatility, especially in October, while keeping the average delta below 20. I also want to point out that we have added an additional tool to our treasury management to belt. The Basis Trade is a market-neutral strategy that captures the difference between the forward price of Bitcoin and the spot price. Importantly, this strategy takes no price risk and generates returns from the same types of market structure dynamics that we noted in our thesis in the first place. This basis trade allowed us to put our cash balances to work and exceed the risk-free rate by almost 200 basis points as we saw an annualized yield of over 5.5% on the cash allocated to the basis trade. While these opportunities are cyclical, we will continue to be opportunistic based on market dynamics, filling out the flywheel we initially envisioned when we launched our DAM team. On a final note, I'd like to take some time discussing our capital strategy going forward, especially in light of our expansion into AI data centers. From a capital perspective, I'm confident the capacity and appetite for financing an AI data center with a grade A tenant is strong. We saw a high-yield deal from our friends at Cipher, which priced at an attractive [ 6% and 8% ] which is indicative of the quality of recent leases being signed and the capital available in this market. The recent $2 billion bond had approximately $13 billion in demand an oversubscription of 6x while we have not committed to 1 specific means of financing our AI data center builds, we are focused on building a capital stack, which minimizes dilution. This continues with the sale of monthly Bitcoin production to cover our OpEx. Between our current cash balance and capacity on the Bitcoin backed lines of credit, we have over $800 million of liquidity available without selling any of our Bitcoin hurdle. This liquidity provides us optionality, and we will continue to use the lines of credit opportunistically in the marketplace for accretive purposes. Matt spoke about our current efforts and where we are going and we are excited to share on future calls to relationships and ecosystem we are building, one that is a more fulsome approach than exists in the market. While we are early in the innings of our AI data center journey, the market is moving quickly and CleanSpark is responding decisively. Our conversations with grade A credit quality tenants are ongoing, and it is not a matter of if, but when. With that, I will hand it back to Harry to lead us into Q&A. Harry Sudock: Thanks, Gary. We will now open the floor to questions from the analyst community. Operator, please provide instructions and manage the queue for the Q&A session.[Operator Instructions]. Your first question comes from the line of Mike Grondahl with Northland Securities. Mike Grondahl: I was wondering if you could talk a little bit about the demand environment you're seeing for HPC? And maybe how that's changed in the last 90 or 100 days? And kind of what attributes are you looking for most in a lease partner? Unknown Executive: Mike, thanks for the question, and thank you for the recent initiation. We're glad to see Northland covering us. I can tell you that 6 months ago, when I reassumed the role of CEO. We entered a market where there was a lot of enthusiasm around signing a deal. And what we're now seeing is some of the punitive components of the early leases such as losing a significant amount of revenue for a day late delay on an RFS date. And differing terms that are backstopped only at the site level rather than at the top co level. It has given us an opportunity to really sit back and evaluate what's out there. And I can tell you that We, Gary, Harry and myself and some of our team attended the Pacific Telecom Conference in Hawaii. And the feedback that we received by presenting an end-to-end solution was very overwhelmingly positive. We've been very pragmatic about the assets that we've accumulated, the location, the distance away from fiber networks, the access to behind-the-meter generation. And as a result, we've now been entertaining multiple trillion balance sheet companies that are interested in long-term leases on some of these assets. So we're seeing the demand continuing to escalate. And I might add, we saw Amazon earlier today talk about their commitment to invest $200 billion in AI infrastructure in 2026. exceeding the $140 billion estimated by the Street. So looking at the demand behind that, we feel very solid about it. And if the inbound inquiries and conversations we're having with hyperscalers or any indication, the fear of a bubble is highly overstated. Mike Grondahl: Got it. And then maybe just as a follow-up, your 3 sites, Sealy, Sandersville and Brazil, would you say it's equal demand for all 3? Or is there one that sticks out amongst those? How would you handicap that? Unknown Executive: I think probably the highest demand right now is Sandersville. Quite frankly, because it's 250 megawatts, we already built a substation. It's already energized. The Sealy site energization is Q1 '27 for the first 207 megawatts, so we're seeing strong demand there. And obviously, the next site has also been very appealing. But I would say that the data center environment in Georgia and the energized site are very compelling to the offtake clients. Operator: Your next question comes from the line of Brian Dobson with Clear Street. Brian Dobson: So just as a quick follow-up. You mentioned there have been some really positive CapEx comments from companies like Amazon. To me, that signals rising demand for AI data centers. Would you say that that's indicative of demand, call it, across the sector from various hyperscalers that you're speaking with? Or are people getting more cautious at all? Unknown Executive: Yes. I would say it's an emphatic yes. Just as a quick aside, Jeff Thomas, who leads our AI venture has been in the office with us this entire week, and more often than not, he's excusing himself to go into his office and close the door to field an inbound inquiry. So I would say demand is escalating rapidly. Brian Dobson: That's certainly good news. And I know you guys mentioned that you're looking for a mix of quality and scalability among clients, given construction commitments that you've already made, how confident are you that you'll be able to, call it, sign a contract in the relatively near future? Unknown Executive: We're very confident, Brian. I'll be honest with you the delay in -- I wouldn't even call it a delay. I mean when we did this 6 months ago and then we had our earnings call 7 or 8 weeks ago, we said that we would expect to sign a quality lease in less than a year. And I would say that, that's highly accelerated. But the discipline that we're taking, you look at some of the leases that other Bitcoin miners have put up and they're very highly redacted in the public filings. And that's a result of the punitive nature of some of the delay provisions. So as we contemplate this, we're actually working on a basis of design with the offtake customer. We're designing it in advance and then assuring that we can meet the delivery time lines to remove that potential overhang of failure to deliver risk. So being disciplined about this and building specific to the basis of design for the offtaker, including the implementation of the approved reference architecture from the chip manufacturers will allow us to have that certainty to secure the supply chain before we enter into these commitments to ensure that we don't have that fail to deliver. Brian Dobson: Excellent. Excellent. And then just one final one on Bitcoin mining, if I may. Given your efficiency you're better positioned than those heading into the next having, I guess, has your thought process changed at all as far as operating Bitcoin lines, call it, in tandem with your expansion into HPC. Unknown Executive: That's a great question, Brian. And what we found is that as new energy sources are energized, some of these communities, especially the smaller communities, are incentivized to monetize those metal lots very rapidly. The challenge is to build a data center for a hyperscaler with the approved basis of design and incorporating that reference architecture is a 12-month best case 18- to 24-month kind of average case delivery time line, we can use the infrastructure that we have for Bitcoin mining, like we did in Cheyenne, Wyoming, where we secured a 100-megawatt lease over a hyperscaler. We did that simply because we committed to start paying power bills inside of 6 months, not inside of 1.5 years, and that makes a difference to these communities. So we'll continue to use Bitcoin mining as that tool. You heard us talk about on the call, something that we haven't published it yet because it wasn't material, and that is we have 122-acre parcel adjacent to Sandersville. What does that mean? That means I can operate 11 exahash to a profitable Bitcoin mining up until the day we cut the power over to support the data center for our end-use clients. We also on the map of our projects, something that we haven't talked about is a 15-megawatt site in South Dakota. The utility there had introduced a blockchain specific tariff that with an interruptible load it gives us the lowest cost per kilowatt hour of almost any site in our portfolio. So that flexibility allows us to migrate that mining to a profitable location once we've spun up a data center behind us. So we see it kind of as a loss leader, but it makes money. Operator: Your next question comes from the line of Mike Colonnese with H.C. Wainwright. Michael Colonnese: Matt, first one maybe for you. I appreciate your comments on the HPC business with start being advanced discussions or diligence stages rather potential tenants here. And that you're currently looking on a basis of design. Curious what milestones should we be on the lookout for next and some of the expected time lines you see as we come across the next couple of quarters here? Matthew Schultz: So I think the process when you're dealing with a hyperscaler is we could rush in and sign a lease, so we could get a headline. And then we're facing potential losses for a failure to deliver. So as I mentioned in my prior comments, we're working towards that basis of design. And one of the things I think that is a key differentiator that's maybe gone a little bit under the radar. And that is we put out a press release announcing an MOU with Subaru. Mike, you've been around our company long enough that we don't ever make a material disclosure unless we've got a firm contract. And we felt that, that was important as we head into some of these discussions because summer has been very successful in building a modular MEP. So mechanical, electrical and plumbing, all the fiber runs everything according to the reference architecture required by the chipset manufacturers. So our solution will be to build the gray space to build a tilt up shell and then slot in the reference architecture. That also gives us flexibility. So if you have a hyperscaler that wants to modify from one particular type of chip to another, we have that modular approach. It also shortens the time line because we've all heard the horror stories about some of our peers that have a couple of thousand tradesmen all working at the same sites in West Texas, and they're struggling to provide housing and food and bathroom facilities. We look at this differently. We build instead of a one-off data center that's stick built. We build the shell according to the specifics required by the end customer. and then we build the MEP portion in a factory. So it's consistent and duplicatable and scalable, which is differentiated from anything else in the space. So it's important to us to establish all of those build parameters ahead of time. So when we put pen to paper, there's absolute certainty that we can deliver the product as expected on time. Michael Colonnese: Helpful color. Matt, I appreciate that. And Gary, maybe one for you. Does this recent downturn in Bitcoin prices change or huddled approach at all? I know from covering the name for a while here, you guys have historically had a very dynamic high approach, one that tended to adjust based on prevailing market conditions. So curious how you guys are thinking about the huddles back here? Gary Vecchiarelli: Thanks, Mike. Since you've been around a while, you know we've built this business on optionality. So that option is still on the table if we wanted to dip into the hotel and part with some of those Bitcoin, I'll tell you that's not something we're planning on doing even at these levels. We think that the strategy is still intact and part of the hedge is for us really selling nearly 100% of our monthly operating production. So as of right now, there's really been no change in that strategy. I'd also conversely say that we're not expecting to hold 100% of the operating Bitcoin production either because that would mean that we'd run through our cash a whole lot quicker and as we had mentioned, when we were raising the convert funds, we expect to use the majority of those funds to expand in AI data centers because we think that's the future of the company. Unknown Executive: Mike, maybe that just a little -- another layer to the Bitcoin mining side. At our last disclosure, we were at 16.07 jewels per terahash and Taylor and his team are actively deploying the 13.5 jewel per terahash machines in the immersion cooled containers in 5 different locations. So we expect our fleet efficiency to continue to improve. In the last cycles, I mean we've been through this a few times, we see the kind of wash out of the sorting process and the less efficient fleets tend to unplug. So we also believe that there is a very strong opportunity for us to organically grow a share of the network hash rate just by default as other less efficient miners or for unplug. Operator: Your next question comes from the line of Greg Lewis with BTIG. Gregory Lewis: Just thinking about the move forward in the HPC, I know Jeff joined the team a few months ago now. Gary, you alluded to potentially higher SG&A over time as we kind of build out the team and get ready to pivot into this new business. Like how should we think about costs and processes? And where are we in terms of -- we've seen other companies go out and build teams. What we're realizing we have a lot of capable talented people already inside the company. How should we think about growth at the employee level here? Gary Vecchiarelli: Greg. Thanks for the question. It's a great question. We get it quite often from investors. I'll tell you, it's hard to give guidance on that because while we have a plan to bring on a certain number of FTEs, the timing of when those hit is really what's going to drive what the numbers are going to be for the fiscal year. Additionally, we have optionality to where we can rent services. So if we need services from someone we could bring in outside consultant -- contractors to help fill that void while we're waiting to bring on full-time talent. And there's -- that could be different than what it would be to bring on a burden employee. So we're not prepared to give out numbers about right now. I don't think it's anything that's material that's putting us at risk or anything. I think we've been pretty measured about bringing on people right around the time we will need them. So I think you'll see that slowly uptick throughout the remainder of the year. Gregory Lewis: Okay. Great. And then I think it's been understood that we were going to acquire more land at Sanders ville for at least a few months. How does now owning that additional land at Sandersville. Does that go at all in changing the kind of conversation that it seems like we're focusing -- it seems like part of this call is you focusing on potential terms of some of these HPC contracts. Does -- I would think earning the land matters a lot. I guess my question is, was not earning some of the land and potentially leasing it kind of a nonstarter? Harry Sudock: Greg, it's Harry. I think you're exactly right. So we view the closing of the land expansion at Sandersville, a very orderly process in progressing the AI data center project there. It allows us to move into a very specific basis of design alignment exercise, which is underway. And it also brings a level of specificity to the compute and power ramp for the data center deployment as well because there's complexity to these projects that extend beyond standing up the data center for our state. There's a lengthy commissioning process that the tenants typically take on in the context of the overall project life cycle and being able to map out those time lines and those work streams in detail, is critical as we move through the full commercial scope of the discussions, they are, in many cases, governed by some of those technical pieces in the ramp process. Operator: Your next question comes from the line of Stephen Glagola with KBW. Stephen Glagola: Thanks for the question. Can you maybe provide some insight in how ERCOT's proposed large load bag study process may the energization time line for the Sealy side as well as the approval and development schedule associated with your Brazoria County, Texas project? Harry Sudock: Stephen, yes, Harry, again. Happy to do that. So I think the first piece of it is that the study process that ERCOT is proposing to roll out has not gone final yet. They're still in a comment period where they're taking member requests for how they want to influence that process and how it's going to be brought to market. So we're waiting to see kind of the final form of that. But given the early news there, we've had a lot of detailed discussions with a number of counterparties that we're working with there. That includes the substation developer. It includes the utility. It includes some of the political folks and obviously, some of the teams that are caught as well. And I think the assets that we have in the state are in very favorable position relative to this new piece of the process for a handful of reasons. The first is that the large load studies that have been done. Its Sealy, it's complete. And at the second location, it's in a deeply progressed state. And we've received the notice to proceed language at both of them. So that's kind of .1 and 2. The next is that the interconnect and the FDA pieces are executed. And the third at Brazoria is that the CAIC has been funded. And at the Sealy location substation is already under construction. So these are significantly progressed projects. And what we've seen is that the view of the batching and the study rollout is largely being informed by project maturity as well as location. And what we've gotten feedback from the utility of both of those locations of -- is that the location that we selected is that a point in the overall ERCOT transmission system that's going to be the least impacted by this type of reevaluation process. So we feel very, very positively about where these 2 assets sit within the system and how they're going to be treated. But until ERCOT comes out with final language, we can't have 100% visibility into that yet. Operator: Your next question comes from the line of John Todaro with Needham & Company. John Todaro: Two here, I guess, we'll start with the one that kind of comes off the ERCOT question. Are there -- as you think about just kind of longer-term pipeline, adding more power, are there other power markets that are now starting to look maybe a little bit more attractive relative to Texas and where could we see that? And then I have a follow-up on the HPC tenant side. Unknown Executive: Thanks, John. I think that we have always had a strong heritage of diverse portfolio construction. We see it in the way that we enter into power agreements today. We've got a significant footprint deployed and operating in Georgia. We've got significant presence in Tennessee. Wyoming and Mississippi as well are the smallest 2, but they're by no means small. So I think that what we're going to be able to accomplish is a continued expansion in those markets because of the relationship and community quality that we've engaged in to date. But additionally, I think that the other side of the question that you're asking is do large-scale data centers skew towards in front of the meter power or behind the meter power. And we're asking these questions internally along both vectors. So we think that there's a huge amount of opportunity inside of Texas and outside on the in front of the meter profile. We have a team that's become exceedingly expert in sourcing, negotiating and closing on that power. And then we are also strongly evaluating the capacity for behind-the-meter power as well in places where we're either able to get a smaller in front of the meter load or there's a particularly rich commodity environment by which we could power behind-the-meter generation and then the associated data center. So we're people for its business fundamentally, and our power and land teams are prepared to expand the portfolio very, very broadly in a diversified way, but also add that potential for behind the meter to the repertoire as well. John Todaro: Great. And then just on the HPC 10 discussion. I guess just trying to gauge kind of how far advanced we are in the positioning. Is it -- are we kind of down to 1 potential tenant that seems much further along? Or is there kind of 3 that are in final competition stages? Just a little bit more color there? Unknown Executive: Ask me a question that I can answer. What I would say, John, to be honest with you, is there are multiple potential offtake tenants for Sandersville to begin with. I would say there is a specific front runner by an order of magnitude to the extent that our team is collaborating with their team on the site placement. You may have seen a slide in our deck that had a mockup of the layout of the data center. So we've advanced it significantly with a particular offtake, but by no means is it committed elsewhere. I mean there -- the competition for megawatts and land right now is stronger than it was when we announced this strategy to expand into AI. So we're not closing any doors, but I would say there's a clear frontrunner there. Operator: Your next question comes from the line of Brent Noble with Cantor Fitzgerald. Unknown Analyst: This is Gareth on for Brett. I was just hoping you could go into detail on the 2 new sites in Texas. When are you guys expecting to have power available on those sites. And what do you think the time lines are kind of going forward there? Unknown Executive: Yes, absolutely. So let's tackle the Sealy project first. The land secured is 271 acres. The gross power is 285 megawatts. The first 207 to 209 is coming first half of '27. And then it's about 40 in '28 and 40 in '29. And that's driven by the transmission agreement by which we secure the power. The second project is in Brazoria County. Larger footprint with up to 477 acres at that location. And the way that it's structured is that we've signed for that agreement, but we're not closed yet, and there's some closing conditions associated with it, that we expect to wrap up here. The time line for the energization is a function of some of those closing conditions. And so we don't have the type of line in the sand clarity that we have at Sealy. But I think that Q4 '27, Q1 '28 is a range that is all reasonable and everybody internally is working to bring that energization date as close to the inside as possible. Operator: Your next question comes from the line of Paul Golding with Macquarie. Paul Golding: Congrats on all the progress. Gary, you referenced a peers recent capital raise. And I just wanted to ask, as we think about the liquidity you have, but also you have substantial capacity going forward that you'll hopefully be growing into with leases. Should we take that to be -- that comment to be indicative at all of how you hope to essentially face a counterparty in terms of counterparty type face-to-face with hyperscaler able to do high yield raises where the counterparty credit quality could yield that, I guess, how should we think about how you're selecting your counterparties given the context given around capital raising and cost of capital. Unknown Executive: Thanks, Paul. I'll tell you that it's very important to us to have that grade A credit quality tenants because we think that's the most financeable and the best cost of capital. So that's what we're focused on. In terms of the vehicle, I quote the recent Cipher deal because the high yield seems to be a playbook that a number of our peers have started to go down that path. We're open to that. We're happy to see that the terms are getting better both with that and the contracts and leases that are backed by that bond. There's some other options as well. obviously, a little higher cost of capital. But at the end of the day, what's great about this is, and you've heard this word from us for quarters or years now is optionality, right? We have a lot of options on the table. But I think it's safe to say we're going to follow a playbook right now that's probably proven in the capital markets, and it all starts with a grade A tenant. Paul Golding: And then maybe a follow-up. I believe, Matt, you mentioned when speaking about the Sandersville work and the 122 acres with tenant-driven specs in mind. How should we think about what that means for terms? You also noted that terms in discussion were seemingly more positive across the conversations you're having. Is there any kind of prepayment or deposit discussion involved in the conversations you're having, given that you are proactively using tenant-driven specs to set up the sites for HPC? Matthew Schultz: It's -- thanks for the question, Paul. It's a bit -- it's a little early in the discussions to comment on that. directly. But I can tell you that we're -- obviously, there are a number of different leases that have been put up. You've seen modified gross. You've seen triple net. You've seen posted agreements. You've seen miners that have committed to buy the chips themselves. So I can tell you that our focus initially, and I'm not -- I don't mean to downplay the quality of any other transaction. But as we look at the financing options, I think it's important to us to have a significantly better deal than I think the market would have otherwise expected. I think we're interested in putting a deal together directly with the hyperscaler, not necessarily with the Neo cloud backed by a hyperscaler. And we believe that we'll set the standard for the quality of the agreement and the, I guess, win-win is a term we use in the company a lot. There will certainly be expectations our feet will be held to the fire, so to speak, to deliver, but it's not at the risk of an existential threat on a fail to deliver. So we're negotiating all those terms. And I think what you'll see when we announced the first lease is a basis or a model for what you can expect going forward. Operator: Your next question comes from the line of Jim Milre with Chardan. Unknown Analyst: At the current Bitcoin prices, let's call it, $63,000 or so. How much of your minor fleet is economic to operate? Or another way to ask it is how much of the minor fleet is -- meets the hurdle rate in order to operate. Unknown Executive: Great question, Jim. Thank you for that. So our fleet efficiency improved and then it got a bit worse. And it got worse by design, because as mining economics improved, we actually started to scale up some less efficient equipment in our fleet. What I can tell you is that Taylor and his team are constantly running real-time analysis based on utility prices, network difficulty and the price of Bitcoin. And they brought me in to Gary and myself this morning as we were working on this presentation today. They brought us in a list. And I would say less than 10% of our fleet at the current half price is not profitable. So the vast majority of it is and the small portion that is at or below the breakeven threshold our machines that we brought on to take advantage of $125,000 Bitcoin 1.5 quarters ago. So it's not punitive to us to unplug those. Having said that, as we unplug those less efficient machines or scale them down or under clock them, it increases the overall efficiency of our fleet. Unknown Analyst: Got it. That's helpful. And can you discuss CapEx plans for this year and next, both in from a dollar basis as well as an allocation between Bitcoin and HPC. Gary Vecchiarelli: Jim, it's Gary. I'll tell you that our focus is going to be on deploying capital towards AI. That's in the range of $9 million to $11 million a megawatt which, as you probably know, has been reported by most of our peers in the space right now, and that's the range that we're seeing. So what is deployed is really going to depend on -- that amount is going to depend on the design to build and the customers and when we sign those respective leases. But I'll tell you that the overwhelming percentage majority percentage of that is related to HPC. With respect to Bitcoin mining, I think that the investment, particularly at these levels doesn't make a whole lot of sense from the sticker prices that we're seeing from the major manufacturers. If you look at our balance sheet as of 12/31, we had about $130 million of prepaid deposits on Bitcoin mining equipment and miners. And about $112 million of that was through September. So we're still deploying some infrastructure, mainly emerging cooling and miners that will help drive down that efficiency. But we don't plan on spending a significant portion of our cash on mining, unless economics change. We need to keep in mind that we are about 2 years off to the next having. And in any cycle, as you get closer to having that ROI window closes rapidly. And right now, it doesn't make sense. So we want to be redirecting every dollar possible towards CapEx. Operator: Your next question comes from the line of Matthew Capitalo with Maxim Group. Unknown Analyst: I'm filling for Mac right now. I was just wondering if you guys have any insight or I guess, predictions on how we should be thinking about network difficulty in response to the current Bitcoin prices. Unknown Executive: Yes, absolutely. So I think that what we've seen over the last weeks and the difficulty adjustment that's coming on Saturday is important to know is the largest difficulty adjustment to the downside since the China mining ban in 2020. And that's a combination of 2 factors. The first is that there have been significant weather events across the entire country during that period of time. where you're seeing either the demand response programs get engaged or you're seeing power prices move past the breakeven point of economics. And so that's certainly a contributor to this difficulty adjustment. The second piece is clearly Bitcoin price is off considerably. And so that next coming difficulty adjustment is going to be a significant one. And then I think given the price action that we've seen in the latter part of the difficulty adjustment period that we're in the middle of right now, we could see additional downward pressure on difficulty in addition to that. So I think that ultimately, this is the self-healing nature of the proof-of-work and Bitcoin mining system. And as you see these types of market forces, the network adjusts to be able to create that security model that's supposed to keep producing blocks and processing transactions. Unknown Executive: I just want to add one thing because if you look at this historically, when Bitcoin runs and hash price gets better, the global hash rate laps right? You'll have a period of time, usually weeks, maybe a month or whatever, for miners to find a way to get plugged in because miners just don't sit around waiting for hash price to sit typically, they're just not on racks just waiting for Bitcoin price at a certain price. It's the opposite on the way down because most miners, not all, but most miners know what their breakeven is because that's a real punitive cash penalty because they have to pay their power deals. And so as Bitcoin mining economics go down, what we've seen at least historically, is that cash rate comes off pretty quickly, pretty close to that. And that's because miners say, well, hey, why am I going to take a lot of X amount of dollars when I could just go buy Bitcoin, and I have more Bitcoin than if I actually mined it. So I think that given that routed in the fact that we have a decreasing a fleet with decreasing jewels per terahash, meaning our efficiency is going up. and we're more efficient and we're producing more Bitcoin for every watt that we're putting through these machines. We will be one of the last ones theoretically to turn off, and we'll mine more Bitcoin in terms of quantity as that global half decreases. Unknown Analyst: And I guess as a follow-up on the Texas opportunities. Do you guys have a time line on executing behind the meter opportunity into your portfolio? Unknown Executive: Yes, I appreciate the question. I think it's too early to have a view on the exact timing for that type of opportunity. What I can say is that we're evaluating a number of different behind-the-meter deployment types. Some of those energization schedules are longer. Some of them are much faster to market. And so ultimately, those types of decisions will be made in concert with the tenant community, and we're really looking to be able to meet their need and satisfy impute demand, whether that's through one form or behind the meter generation or another. Operator: There are no further questions currently. Harry, I turn the call back over to you. Harry Sudock: Thank you, and thank you, everyone, again, for joining today's earnings call. We look forward to staying in touch and sharing future results with you in the coming quarters. Stay tuned for more progress and exciting achievements ahead from us at CleanSpark. Operator: This concludes today's conference. You may now disconnect.
Operator: Welcome to Warner Music Group's First Quarter Earnings Call for the period ended December 31, 2025. At the request of Warner Music Group, today's call is being recorded for replay purposes. And if you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin. Kareem Chin: Good afternoon, and welcome to Warner Music Group's Fiscal First Quarter Earnings Call. Please note that our earnings press release and snapshot are available on our website, and we plan to file our Form 10-Q on February 9. On today's call, we have our CEO, Robert Kyncl; and our CFO, Armin Zerza, who will take you through our results and then answer your questions. Before our prepared remarks, I would like to remind you that this communication involves forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results, including metrics that are adjusted for notable items during this conference call and in our earnings materials, and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith, and we believe that there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements as they are subject to a variety of risks, uncertainties and other factors that can cause actual results that materially differ from our expectations. Information concerning these risk factors is contained in our filings with the SEC. And with that, I'll turn it over to Robert. Robert Kyncl: Thanks, Kareem, and hello, everyone. Greetings from Los Angeles, where we celebrated the successes of our artists and songwriters at the Grammys this past weekend. In fact, you just heard songs from our winners, Kalani, FKA Twigs, Turnstile as well as Bruno Mars, who gave two incredible performances at the show. Our momentum continues as we delivered a third consecutive quarter of strong profitable growth. Total revenue increased 7%, led by 9% growth in recorded music subscription streaming on an adjusted basis. Total adjusted OIBDA increased 22% and margin increased 310 basis points. It's clear that our strategy is working as we continue to deliver on the three key components of our plan: growing our share, growing the value of music and driving efficiency. I'll talk about our progress on each front and then I'll explain how we plan to leverage AI to further accelerate progress towards each of these three goals. Our strong Q1 results reflect a steady market share improvement we've been delivering. We saw approximately 1 percentage point of U.S. streaming market share growth over the prior year quarter, with strength across new releases and catalog, and our market share on Spotify's top 200 chart is up 3 percentage points fiscal year-to-date. We started the year with a bang as we released Zach Bryan's new album With Heaven on Top, sending it to #1 on Billboard 200. Meanwhile, just after his collaboration with ROSE on APT, finished at #1 on the Billboard year-end global chart, Bruno Mars released his new single, I Just Might. It quickly jumped to #1 on the Billboard Hot 100 and on both the Spotify U.S. and global charts. Bruno's long awaited first new solo album in a decade, The Romantic drops on February 27. Both Zach and Bruno are signed to us for recorded music and music publishing which is a true testament to our One Warner approach. Outside the U.S., our focused approach is also paying off with talent resonating across markets, languages and cultures. We scored #1 in France, Italy, Spain, the Netherlands, Finland, Korea and China and also on the Billboard Latin Airplay chart. Turning to our global catalog division, we've taken a new strategic approach that's also driving our share, including an always-on marketing philosophy that ensures we keep artist brands alive and fresh with new generations across all forms of media. And we continue to find powerful sync placements to fuel consumption of our catalog and introduce our iconic catalog to new fans. An example is this season's Stranger Things on Netflix, where syncs resulted in major streaming upticks on -- and chart movement for classic songs from legends like Prince, David Bowie and Fleetwood Mac. Momentum from a placement in the show's finale drove a more than 600% year-over-year increase in weekly streams following the premier of the finale on Prince's 1984 hit, Purple Rain, which led to reentering the billboard Hot 100 for the first time in over a decade. Importantly, we've seen baseline weekly streams of Purple Rain settle to a new baseline that's 6x higher than before the sync. And for David Bowie's Anthem Heroes, we saw more than 300% year-over-year increase in weekly streams and a new baseline that's 2.5x higher than before the sync. Amazing results, as you can see. In Publishing, we focused on accelerating our proven A&R strategy by building and acquiring high-margin IP, executing admin and sub publishing deals and growing revenue through AI partnerships. Warner Chappell songwriters contributed to half of the top 10 most streamed songs of 2025 in the U.S. and a huge congrats to Amy Allen, who won Songwriter of the Year at the Grammys for the second year in a row. Turning to growing the value of music. We're now seeing the impact of the deals we've reshaped with the DSPs last year. These agreements are finally shifting the industry toward price-driven growth that better reflects the ever-increasing value of music to users and providing us with greater economic certainty. I'm also pleased to announce we renewed our deal with TikTok, resulting in an improved deal economics. Moving to our third priority of improving efficiency. Through our investments in technology over the past few years, such as overhauling our supply chain, building new tools for artist songwriters and employees and rolling out our financial transformation program, combined with our reorganization, we have impressively been able to accelerate growth while cutting cost. This strategic overhaul of our foundational technology infrastructure has not only enabled us to increase efficiency but has positioned us favorably to leverage AI across our three strategic priorities: growing share, growing the value of music and efficiency. That, combined with our management team's deep tech and transformation experience, uniquely positions us to capitalize on this tremendous opportunity. Starting with growing share, we're quickly deploying AI to accelerate new artist discovery and enhance and automate our marketing. This enables us to scale our marketing efforts beyond what's humanly possible, a transformational step for a large rights holder like us. We have an attractive opportunity to better monetize one of our most cherished assets: our extensive music catalog of over 1 million recordings that includes some of the most iconic songs ever recorded. With the use of AI, we can quickly and inexpensively generate assets like motion art and music videos and others that stimulate greater exposure and engagement with our catalog at scale. At the same time, we're developing tools to amplify the creativity of our artists. And we've been hosting workshops and songwriting camps to help our creators leverage the latest technologies to hone their work, cut through the noise and build fandom in today's fast-moving world. We also see a clear and tangible opportunity to leverage AI against our second priority, which is to increase the value of music by leaning into partnerships with new entrants such as Suno and Udio as well as our digital service providers that provides fans with the opportunity for deeper engagement at higher-priced tiers, and we're already in discussions with some of them. By taking an early and aggressive approach to embracing new technologies, we are authoring ethical guidelines that will enable us to protect and super serve artists and songwriters, while creating incremental opportunities for the entire ecosystem. To reiterate on my blog post from November, WMG is harnessing AI as fuel for music industry growth guided by several nonnegotiable principles. One, our partners must commit to license models; two, the economic terms must properly reflect the value of music; and three, artist and songwriters must have a choice to opt in to any use of their name, image, likeness and voice in new AI-generated recordings. The latest example of these principles in action is our recently signed deal with Suno, the leader in AI music. And when it comes to our third pillar, efficiency, as I mentioned earlier, over the last three years, we laid the infrastructure foundation for us to effectively deploy AI across many different departments across the company. This includes departments such as legal, finance and HR to further increase our efficiency and effectiveness. AI is leading to an explosion in creative and commercial possibilities that will create even greater demand for original talent. Shifts in culture and tastes have and will always be defined by real artistry, identity and vision that define the strongest creative brands. In adhering to our principles, we are protecting and supporting our artists and songwriter's original creativity, increasing fan engagement and unlocking even greater value for the entire industry. We are well positioned to capitalize on a healthy and growing industry. Momentum is strong, and we're seeing creative success that is translating to steady market share improvement, progress in economic terms with major DSPs and deals with existing and new innovative platforms that will leverage the use of AI to drive a step change in the value creation for the industry. And finally, we have a steady stream of releases from new and established stars dropping every week for the rest of Q2. Be sure to look out for new music from Bruno Mars, Charli XCX, Kalani, Hilary Duff, Sombr, Alex Warren, Fred Again, Charlie Puth, Tiesto and many more. And now I'll pass it over to Armin. Armin Zerza: Thank you, Robert, and good afternoon, everyone. I'd like to thank our teams for a very strong start to the year. It's rare to see a company undergo such significant transformation in such a short time frame while delivering accelerated growth and profitability. Yet, we've accomplished just that and it's a testament to the incredible work of our employees. It's an exciting time at the company with lots of momentum and opportunities ahead of us. When I arrived, we're committed to delivering against three key metrics, which we view as essential to creating shareholder value. First, accelerating revenue and share growth; second, driving margin expansion; and third, improving cash flow. This is now our third consecutive quarter of profitable growth, underpinned by healthy margin expansion and cash flow generation. Encouragingly, our performance was broad-based, demonstrating strength across divisions and market share gains in key regions and by consistently delivering on a sustainable growth model, which is anchored in high single-digit total revenue growth, double-digit adjusted OIBDA growth and 50% to 60% operating cash flow conversion, we have established a solid baseline for how we expect our business to perform. In short, we're doing exactly what we promised and are just getting started. I will provide details on how we will accelerate on the solid foundation in a moment. But first, I want to talk about the key drivers of our performance in Q1. Total revenue growth of 7% reflects solid performance across Recorded Music and Music Publishing. This was highlighted by sequential improvement in Recorded Music streaming led by subscription streaming growth of 11% or 9% when adjusted for notable items. Ad-supported streaming grew 4%, driven by strong performance from traditional DSPs. Physical declined 11% due to a difficult comparison in the prior year quarter, which saw releases from Linkin Park as well as in Japan and Korea. Artist Services and Expanded rates revenue increased 13%, driven by concert promotion revenue primarily in France. Music Publishing revenue grew 9%, which reflects the impact of [ MLC ] historical match royalties in the prior year quarter. Adjusting for this notable item, Publishing grew 15% and saw double-digit growth across performance, mechanical, sync and streaming. Adjusted OIBDA rose by 22%, and our margin increased by over 300 basis points, reflecting the operating leverage that is inherent in our business as well as the benefit of our cost savings program and favorable movements in FX rates. These factors also drove robust operating cash flow growth of 33% for a conversion ratio of nearly 100% of adjusted OIBDA. Accordingly, we saw a significant increase in our cash balance, which grew by more than $200 million since last quarter to $751 million. These results are just the beginning and our focus is on accelerating growth by our strategic priorities and initiatives, which include: first, investing into our core organically and inorganically; second, expanding opportunities for music monetization by continuing to work with traditional streaming partners, and building their capabilities, forging the partnerships and making investments necessary to win with AI; and third, driving margin and cash flow through a combination of top line growth, operating leverage and cost efficiencies. First, on investments in our core. Our refined approach to capital allocation and investment is clearly working as we are seeing more consistent, broad-based results driven by resilient and growing market share. As we have said in the past, we are using M&A as an accelerant with a focus on high-quality, accretive catalog acquisitions. We have a robust and growing pipeline of opportunities, which has led us to increase the capacity of our joint venture with Bain as detailed in the 8-k we filed earlier today. WMG and Bain have increased our equity commitment by $100 million each and expect to maintain the existing equity to debt ratio, which will increase the JV's total capacity from $1.2 billion to approximately $1.65 billion. You can expect some exciting announcements coming in the near future as we plan to deploy a significant portion of the JV's total capacity by the end of this fiscal year. This combination of organic and inorganic investments will fortify our core, giving us greater scale to capitalize on favorable industry trends as well as emerging opportunities like AI that will lean heavily on iconic content. Which leads me to expanding opportunities for monetization. Now that we have fortified our core business through more favorable terms with traditional streaming partners, we are focused on leveraging AI to drive significant incremental top and bottom line growth to benefits of our artists, songwriters and shareholders. Understandably, this topic has been a focus of investor attention with the right range of views. Robert and I believe that AI is a tremendous opportunity for the music industry when executed ethically and responsibly. Our priorities have been to, first, invest into and forge partnerships to establish terms early and in a way that artists, songwriters, labels and publishers are protected and fairly compensated; second, design business models with our partners that are consumption-based and accretive to current ones; and third, with the capabilities to drive increased engagement with our treasure trove of recordings and compositions. Our recently completed AI deals with Suno, Stability, [indiscernible] and Udio are based on its principles and have the potential to unlock significant incremental revenue at accretive economics. Importantly, in all of our deals will be compensated on a consumption basis, ensuring that our economic scale as our partners business grow. Also, our partners' offerings will result in higher ARPUs, reflecting the interactive nature of the platforms. We were the first major label to sign a deal with Suno, the market leader in generative AI music content. Suno is already earning several hundred million dollars of annual revenue and is empowering music fans to create and play with music in groundbreaking ways. Through an innovative partnership we entered into last fall, we, Suno and most importantly, our artists and songwriters will begin to reap the benefits of our music in fiscal year '26 while also showing what the future of music looks like. We expect this partnership to be a material top and bottom line growth driver starting in fiscal 2027. Our goal is to maximize fan's ability to engage more deeply with the music they love. So of course, we are also exploring opportunities with our large DSP partners to incorporate the AI tools that will enhance their consumer offerings. Doing so in ways that are consistent with our principles for ethical and responsible use of AI represents the potential for significant industry value creation. And as Robert mentioned, the impact from AI-generated assets that spike engagement by catalog can be a significant one. Using AI to quickly and cost effectively create motion art, which can boost attractive push on DSPs and marketing and other assets that are derived from our catalog, such as remixes and music videos will enable us to drive incremental revenue much more effectively. Finally, AI will be an advantage for us on the cost side as well, aligning with our initiatives to operate more efficiently to accelerate margin and cash flow growth. The use cases will range from music production, where many of our artists and songwriters are already leveraging these tools to more analytically driven, precise deployment of marketing dollars as well as more real-time forecasting and analytics. Further, on driving efficiency, I'm pleased that our cost savings plan is delivering on schedule and is on track to contribute 150 to 200 basis points to margin in fiscal '26 as we work to drive even greater efficiency through the use of AI and improving the operating leverage in our business, we believe that the margin in the mid-20s is achievable in the short term and have a longer-term goal to deliver margins in the high 20s. We will provide you with an update on our path to meaningful margin expansion as our brands evolve in the upcoming quarters. One housekeeping item, I'd like to note, with the roll-off of BMG, digital distribution revenue now largely completed, we intend to provide year-over-year adjustment for the remainder of the fiscal 2026. As disclosed in our notable items table in the earnings press release, the impact in Q1 is $6 million, and we estimate the impact for the remainder of the fiscal year to be approximately $10 million each in quarter 2, 3 and 4. All the other notable items in fiscal year '26 have been disclosed previously, and as usual, you can find these items in our press release. In summary, we are very optimistic about the road ahead. With greater certainty around DSP deal terms, more consistent market share performance and our refined approach to capital allocation, our path to accelerating growth in 2026 and beyond is clear. The key components of this will include a strong release slate, anchored by big new releases from Bruno Mars, Zach Bryan and many others. Contractual PSM increases starting in Q2 and laying in throughout the balance of fiscal 2026. Acquisitions of high-quality accretive catalogs as well as of bolt-on capabilities that will accelerate our distribution and e-commerce businesses and AI partnerships and initiatives resulting in a material contribution to revenue and margin in fiscal 2027. We look forward to providing regular updates as we continue to achieve our goals. With that, we'll take your questions. Operator: [Operator Instructions] Your first question comes from Michael Morris with Guggenheim. Michael Morris: I'd like to ask each of you for some more detail about your AI comments. Robert, first, can you expand a bit on your philosophy as it relates to the deals that you have made with those AI partners you referenced? I'm particularly interested in how your approach differs from the approaches of some of your peers and why you've chosen that path. And for Armin, can you provide some more detail about the financial impact that you're expecting to see from the deals? Regarding the economic terms, can you clarify, are these per stream payments similar to DSPs? Or will Warner Music participate in the subscription revenue of the AI platforms themselves? It would be great to get some clarity on that. Robert Kyncl: All right. Thanks, Mike. So I'm not going to comment on what our competitors are doing, but I'll explain what we do. And let me take one step back, which is everything we do in AI is not just about deals. It's actually going against all three of our priorities of growing share, growing the value of music and growing our efficiency. And I highlighted some of that in the monologue earlier on, but there's a lot of work that we are doing to grow our share using AI around assets and discovery catalog monetization and creativity. In terms of increasing the value of music, we clearly see a path to audience segmentation because creation is the ultimate expression of fandom. So for us to superfan tiers over the future will all include AI functionality to create. And our partnerships with the four companies that we mentioned are key to establishing how we would like to see this market to evolve and what it is that we do with our existing partners with whom we obviously have to take our holistic relationship into consideration as well to make sure the business grows healthily for all of us. And the third party is efficiency that we touched on earlier as well. We are -- we have deployed AI across finance, legal, marketing, HR and more. There's a lot more to do, but we're humming across the company and against all three of our priorities. As it relates to double clicking on the deals, very clearly, we've outlined our principles, which is, I think, a model that companies have to license -- have licensed models. They have to reflect properly the value of music, which means we have to be really happy with the commercial terms, which we are. And three, artists have to have the right to opt in for the use of their name, image, likeness and voice and derivative content. And that is what drives us. The important thing here is that if you want this market to grow and evolve healthily, it is important to strike the right balance. And what I mean by that is not being black and white in how we see the world, but actually finding the shades of gray of the right equilibrium between what the user wants and what we, the rights holders and artists and songwriters want. And if you get that right, then you actually build a very large business and create a lot of value. And if you are black and white about it, then likely you won't. And there are past attempts in the space of media that kind of prove that. One of those examples is the TV Everywhere initiative, roughly 20, 25 years ago, where all the media companies had a very -- sort of rigid and pragmatic approach to how their content would show up on the Internet. And that obviously didn't work. And in the meantime, and it allowed companies like Netflix where I worked at that time to run faster and gain market share basically online. And two, DRM music basically slow down the adoption of streaming services. So the decline post-Napster era could have been shorter have we been a little bit more flexible about it. So we at Warner have learned from the past, where we believe we found the right equilibrium in our deals, and we're very much focused on making sure that we're protecting our artists and songwriter's rights and that we're creating tremendous value for our shareholders. So this is the opportunity that we're seizing and we do believe that we have it right. Armin Zerza: Thanks, Robert. I'm going to start with where you closed. We believe this is one of the biggest opportunities for value creation. It allows us to provide better experiences to our friends who will now be able to interact with our content. It actually allows us to deliver better services to our artists and songwriters as Robert mentioned. And it allows us to actually deliver better economics. You all know that Music is one of the most undermonetized industries in the world. And this is a tremendous opportunity now that fans engage more with our content to increase ARPU. And I've worked in gaming for about a decade and we have a similar experience in gaming when gaming moved from physical to a digital experience, and gamers started to interact with games more and communicate more with each other. Then we had an opportunity not only to engage our players more. But we also had the opportunity to introduce multiple different business models. And that's what we -- that's what our partners are intending to do here. And you see that the services that have been launched or about to launch, they will all will happen at multiple subscription tiers. They will all introduce digital items services over time. As a consequence, ARPU on the industry will dramatically increase. And in fact, as Robert mentioned, we don't think that growth only happen just with our new innovative AI partners, we also believe that our current partners will start to introduce higher tiers. In fact, when you think about engagement with content, that's the best opportunity to engage a super fan. And superfan typically spend more time engage more and spend more on our content. So in that, we believe, is a tremendous opportunity. And then there is a question, Mike, on the deals. First, we believe the impact next fiscal year will be material for us. Why? We have signed a deal with the largest partner. Their revenue are is already multiple hundred million dollars. They continue to grow, and our revenue share is strong. So we will see a material impact next fiscal year. Second, the deals have been designed on a variable and accretive basis, as I mentioned, were because we will grow as those platforms grow and accretive because we'll grow ARPU. And last, but not least, we have designed this in a way to protect our artists and songwriters who all will benefit from all the increase in the revenue and the accretive nature of that revenue. So that's how we think about it. Operator: The next question comes from Peter Supino with Wolfe Research. Peter Supino: A couple of related questions on your financial outlook. I wondered if you could talk in greater detail about the coming year from two perspectives. First, about your paid streaming growth and how that outlook corresponds to your DSP deals inked in 2025? And then parallel on the financial outlook, if you could talk about potential growth accelerants that may be in your plan and how much incremental growth those could contribute to the outlook. Armin Zerza: Yes. Thanks, Peter. I'll answer that question. First, as we discussed in our prepared remarks, we're very happy with the progress that we're making. And I want to thank our teams, again, for the excellent work they have been doing despite the major reorganization. We now delivered three quarters of consistent high single-digit growth in revenue and streaming and obviously, we [indiscernible], which means we're winning in the marketplace. Now at the same time, we have improved margin and cash flow. And why is that important for us because I committed to you that we're going to improve shareholder value creation. And we do that by accelerating revenue growth, improving margin and improving our cash flow productivity. Now looking forward, as you know, we're not providing guidance, but we have many opportunities to accelerate growth from here. First, we know now with the PSM increase is that we are starting to see that volume-led subscription streaming growth will evolve to volume and value-led growth. And on top of that, we believe this is the best opportunity now with AI to introduce super premium tiers. Secondly, we're making strong progress with our investments in our organic business, but we're also making strong progress with M&A. As we announced today, we are increasing the capacity of our joint venture with Bain from $1.2 billion to about $1.7 billion. And we are doing that because we have developed a very, very strong pipeline, which will start to announce in the remainder of this calendar year. Thirdly, we have an opportunity to grow in areas that we haven't grown fast frankly in the past. One is distribution and the other one is DTC, is a direct-to-consumer, both in physical and merchandising. We have talked to this in the last call, so I'm not going to beat the [ horse ] this time. And then last but not least, we have a tremendous opportunity to step change growth in this industry with AI, as I mentioned before. So net, we are very, very confident about our momentum and the growth that we can deliver for our shareholders, but also for artists and songwriters and our employees. Operator: The next question comes from Ian Moore with Bernstein. Ian Moore: Robert, you've been delivering market share improvement for several consecutive quarters now. Can you maybe talk to us a little about what you're doing differently to drive that consistent growth and how sustainable you believe that performance is? Robert Kyncl: Sure. Thanks, Ian. So first, I want to repeat that it's actually -- the positive thing here is that it's broad-based. It's happening across regions and business units. The place where we have the most amount of work to do still is Asia. And obviously, there, we've changed leadership both in Japan as well as across the entire region. So we know what to do. We've got the right people there, but it takes some time, but we're working on that hard. But other than that, all of our business units are growing at a very, very healthy clip, and it's showing up in the results. If you go back to 2024, we've done a significant restructuring back then. And at that time, we told you that we would reinvest the proceeds of that restructuring into growth through technology and investments into A&R. And those materialize through fiscal '25. And so you're starting to see the results of that. Then when you layer on top of it the much, much sharper capital allocation that Armin mentioned earlier, our strong pipeline of initiatives that we're managing across the company. Our leadership overhaul in many business divisions, it is -- it does start paying dividends, and that's where we are. That's why we're very pleased to see our consistent performance. We -- we're really firing on more cylinders that there are. And all of it is underpinned by our incredible ability of artist development that is showing up through the fact that we consistently are finding new amazing artists that break through the clutter in a very noisy world on a global stage, Alex Warren, The Marias, Sombr, et cetera. And on top of it, we have an incredible slate just even if you look at Q2, right, with Bruno Mars, Zach Bryan, Charlie XCX, Kalani, Hilary Duff, Don Toliver, Charlie Puth, et cetera. So across the company, we're going for it. Operator: The next question comes from Cameron Mansson-Perrone with Morgan Stanley. Cameron Mansson-Perrone: Two, if I could. First, trying to maybe approach some of what you've discussed already from a different angle. Both of you have kind of talked about AI tools and a premium or a super fan offering as being potentially tied together or related. I'm curious, when you think about your traditional DSP partners, whether you're having conversations with those partners to that effect already or how those conversations might be evolving? And then separately, there's been some pricing announcements recently from Spotify and from Amazon. Maybe if we take Spotify as an example, given their scale. How do you expect to benefit from that pricing this year? And then I think they left the basic tier pricing unchanged, whether there's any consideration in terms of impact to Warner from that dynamic, I'd appreciate it. Robert Kyncl: Sure. So on the first part of the question, yes, we're in discussions with our partners. As we mentioned before, AI provides a tremendous opportunity for engagement of users who are listening to music to now create. And basically audience segmentation strategy and premium tiers. Again, it was very important for us to establish our terms with independent players in the market, which we've done with four of them. There was a very clear strategic move on our part. And so we are ready to engage, and we are talking to our partners, our DSP partners. As it relates to the second part of it, our strategy is always to -- sorry, when I started, I was always saying, "Music is undervalued. We need to increase prices." and its value that half the rate of video. It's -- so whenever we see a price increase, obviously, we're happy, obviously, or grateful. However, our job is to create certainty, the certainty of our rates, and that's what we told you last year that we would do, and that's exactly what we did. And we now did it with 4 of our top 5 DSPs. And if a year ago, I also told you, it was actually on this earnings call, if I also told you that a year later, we would consistently be growing at high single digits before any of those PSM increases kick in, you would probably put a massive premium on our valuation because it's an incredible feat that's -- that we've accomplished that. So we're really excited about our relationship with our partners, both existing as well as new. We're excited about the direction of the industry, both in terms of volume as well as price with the audience segmentation strategy. And we just think we can create a lot of value together. Operator: The next question comes from Benjamin Black with Deutsche Bank. Benjamin Black: Maybe a two-parter for Armin. So the recent results demonstrate that your investment philosophy is working. So how are you approaching capital allocation differently when evaluating deals? And secondly, can you provide an update on your M&A plans? Why did you increase the capacity of your Bain and JV? and how much do you expect to deploy this fiscal year? It seems like a lot of the major labels have announced financing partnerships on UMG, for instance. So what does all this capital flowing into the space actually signal? Armin Zerza: I guess it shows the opportunity, Ben. On the investment philosophy, you and I have talked this before, but for the audience here, we have moved from basically looking at individual deals to looking at our entire deal portfolio. And why is that important? If you're an investor, we want to understand the landscape of opportunities out there, and that's exactly what we do with our deal portfolio. We do thousands of deals a year. So it's really important for us to understand what deals are the best ones for us to put our money behind. But we also bought these more promising ones to put our money behind. We have now created a deals office that has a view of all those deals over multiple years, which not only allows us to prioritize the best deals but also gives us much better visibility of what the impact of those deals are on future revenue, some future growth and share growth and future margin and future cash flow which, in turn, allows us to optimize our investment flow over time. That's why you see the results, you're seeing growth, share growth, margin expansion and cash flow productivity. Now obviously, we are doing all of this in collaboration with our creative teams and operators. This is not just a financial exercise, and we'll review bi-weekly now with our creative teams and our operators and our leaders in the regions and our entire deal portfolio and ensure that the creative and operating voices are heard. And number two, obviously, this is behind our strategy to invest into the core business. We're really focused on making and ensuring that all of our investments are focused either organically or inorganically to our core business. Now on M&A, which is the inorganic part of that, we are seeing tremendous opportunities around the world to invest into highly attractive and margin-accretive catalog businesses, both on the [indiscernible] side. Because of the pipeline that we have been developing, which is very attractive for us, we've expanded basically the scope of the JV from $1.2 billion to $1.7 billion, as I said. Also, I have to say that we have a great partner with Bain. The leader who is working with us has experience in the industry to identify opportunities and working them together, which gives us really a competitive edge relative to some of the other partners that are out there. So net-net, we're very, very happy with the progress, and you see it in our results. Operator: The next question comes from Kutgun Maral with Evercore ISI. Kutgun Maral: Armin, I wanted to follow up on the margin color you provided. I think it would be helpful if you could provide a bridge on how you get to your longer-term margin target? What are the building blocks? And how do you expect them to contribute? And then given this outlook, why is 50% to 60% operating cash flow conversion, the right target? Is it possible that you could deliver more? Armin Zerza: Well, thank you, Kutgun. First, I want to reiterate that our focus is on driving total shareholder return. So while we are improving margin and cash flow, obviously, one of our key priorities also accelerate revenue growth and delivering against that, too. And I don't want to lose the fact that we're really making sure that we want to be balanced across all of those three priorities. Now on the margin progress, we are very, very happy with the progress. In fact, we're making progress faster than I expected. You saw our first quarter results, where our margin is up more than 300 basis points to 25%. And it's really driven by three key items. One is the reorganization and cost savings related to that. Two is the acceleration of high-margin streaming growth. And three is the operating leverage we get behind that. Now as we look forward, we'll work on the same drivers, but there also new drivers that we can leverage. The first one is the DSP pricing and tiering that Robert just mentioned. The second one is the high-margin catalog M&A that I've just talked about. And the third one is, and in my view, it's going to be one of the most discontinuous one is accretive AI revenue that will continue to accelerate over the next few years. So we're really, really bullish about our margin, and I think a margin target in the mid- to high 20s is very realistic for our industry. And by the way, it's important for us, why? Because this will give us and gives us today more flexibility to invest into the business. On your M&A question, I alluded to that when I talked about Bain, we are really excited about the opportunities around the world -- as it travel around the world, there are opportunities everywhere in every corner of the market. And that -- we'll do that both in terms of working with our partner, Bain. But we're also looking at other opportunities, including opportunities where we acquire capabilities to accelerate some of our business. So net, we feel very, very good in that area, too. Kutgun Maral: That's great. And I just wanted to make sure to follow up -- and sorry if I missed it. Anything in more detail around the 50% to 60% operating cash flow conversion as we look out further and if you could out deliver on that possibly? Armin Zerza: On cash flow, it's interesting. We delivered almost 100% cash flow conversion in the first quarter which shows you how strong our capital allocation model works. And there's also some benefit from lower capital spending as we normalize some of the tech spending we did in the past that Robert alluded to, to get ready for this AI push that we are doing now. Looking forward, we will continue to work on those drivers, but also continue to improve margin, which will improve cash flow. Now is there an opportunity that on a quarterly basis, we'll see higher conversion than the 50% to 60% target that we declared? For sure, and you've seen it just last quarter. But at the same time, we want to retain some flexibility to invest into the business to accelerate growth. We have so many opportunities to invest into, as I mentioned before. And while we are very disciplined, we want to maintain the flexibility. So at this point, we're not changing that target. It may change over time, possibly, but at this point, we're not ready to do that. Operator: The next question comes from Batya Levi with UBS. Batya Levi: Great. Can you talk about the underlying performance that you're seeing at music publishing. I think you mentioned the One Warner approach and how we should think about longer-term growth for this business? And second one, maybe a follow-up. Can you give us a sense on the response from artists and their willingness to update opportunities with AI platforms? And maybe some thoughts on how you get comparable with an open studio approach that you have with the Suno deal versus a walled garden to protect attribution and to [indiscernible] measurement. Armin Zerza: Well, thank you, Batya. I'll take the first part of your question, and Robert will take the second part. On Publishing, we are very, very happy with the performance. In fact, we just did a strategic review of the business and if you look at the business over the long term for the past 5 years, we have doubled the business top and bottom line. And I want to take the opportunity to thank the entire team, but also leadership at publishing [indiscernible], who are leading this business for the tremendous achievements they've had over the past 5 years. Now looking at the more recent past, that we have seen double-digit growth in publishing for the past three quarters. And as you see last quarter, we take out a onetime at them from last year, we delivered 15% growth. So again, an amazing performance. Looking forward, we reviewed the plan as part of this strategic review with the team, and they have many, many opportunities to continue that growth profile, but also accelerate it. The first one is we will double down like we do in other parts of our business on the proven A&R strategy that the team has. And by the way, we have enough more firepower to do that than in the past. Secondly, we'll double down in region, specifically developing regions, where we have seen strong traction behind investments that we're doing, specifically in Latin America. Thirdly, we'll also obviously leverage our Bain joint venture and the increased capacity we have also in our publishing business as highly attractive catalog in that area, too. And last, but not least, that business will also benefit from acceleration in growth by the AI partnerships we are doing. So in summary, we're really confident that we can continue to deliver double-digit growth in that business. And by the way, also continue to improve margins. So we're very, very confident about the business and the leadership we have there. Robert Kyncl: All right. I'll take the second part. I guess two questions there. One, on the artist and songwriter engagement, it's been surprisingly high. It's a -- if you think about it, a lot of artists and songwriters are curious about the future. They hear and read about these things, and many of them want to get involved early on. So just the other day, I had two of them, two separate when they visit in the office and talk about how they can get involved and kind of be, sort of, in the detail of it with us. We are talking to many of our artists, their attorneys, their managers, et cetera, to make sure that they understand everything as they have questions. So our outreach has been quite extensive. And we think that underpins what we do, right? We need to be in constant communication, make sure that we're clear, that we're making sense of things, and they were offering tools to those who want to use them. So we've been pleasantly surprised with the engagement. In terms of your question on walled gardens, I think this issue is getting painted too much in black and white, which is what I mentioned before. From my experience, both working at Netflix and YouTube over 20 years, having gone through a bunch of changes and lots of difficult decisions and understanding the industry is beyond music, black and white is never the answer. If you're building lots of value, strong consumer offerings, you have to find the right point, the right equilibrium point in the shades of gray. And that is the art. That is what we do. And in our company, we obviously have the benefit of that experience. But it is -- we're focused on value creation for artists, songwriters, us, our shareholders, and we're focused on protection of our artists and songwriters and we're focused on making sure that users can engage with them in ways that they want. And it's never easy, but it is worth it to do the hard work of finding the equilibrium that creates this value, and we think we got it right. So -- and again, I will just repeat what I said before, which is there are plenty of examples from the past where the black and white solutions fail. And so we're focused on getting it right. Operator: The next question comes from Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Robert, you mentioned the renewal of the deal with TikTok in your prepared remarks. I was curious if you'll be willing to speak maybe more about some of the priorities that you feel like you advanced in the new deal. And then as you look out ahead here, I was curious if there was any other deals of this kind where you feel like you might be able to meaningfully advance the narrative in favor of your artists? Robert Kyncl: Thank you. So first I want to say that we're very happy with our partnership with TikTok in general. There's a lot of collaboration between us around our artist releases. Many of our artists are extremely popular on TikTok, and we utilized it quite a lot as we're launching new records, and we're very happy with our new deal. Obviously, I cannot disclose the deal terms of it, but it contains structural changes that better reflect the value of music, which we're happy about. And also, our deals are never just about money. They're also about data promotion, insights and all the things that can help advance our business overall. But having said all that, as a percentage of revenue, it's in a lower single digits for the company. So it's not like material to our fortunes every day. Stephen Laszczyk: And then any deals on the horizon of similar kind that you feel like you might be able to have advanced on the back of TikTok? Robert Kyncl: Nothing immediately on the horizon. We're very focused on advancing our AI initiatives across the board. As I said, the -- we see it as a great value creation tool and making sure that we get things right with our current DSP partners, taking our holistic relationship with them into consideration, making sure we deliver on, obviously, our second priority with them, which is increasing the value of music on a consistent basis. And as part of that, adding AI into the mix to further accelerate that. Operator: That is all the time we have for questions. I'll turn the call to Robert Kyncl for closing remarks. Robert Kyncl: Okay. Well, I want to thank you for spending time with us today. I want to reiterate our happiness with the company being in steady state, consistent delivery, three quarters in a row with strong outlook, strong initiative pipeline and that through many of the things that are happening, you realize that we do what we say. Whether it's PSM increases, whether it's margin expansion, whether it's consistent growth, we said what we would do, and we did it. And we continue to do it, and we'll continue to do that. So it's a pleasure to be able to say that and have the confidence to say that. And the reason I have it is Armin and I went through it on the call. There are so many things that we have improved in the company. All the work that we've done over the past few years is starting to pay off, and we're incredibly excited about the future. So thank you for your time, and have a great day. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Santiago Donato: Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the Second Quarter of Fiscal Year 2026 Results Conference Call. First of all, I would like to remind you that both audio and a slide show may be accessed through company's Investor Relations website at www.irsa.com.ar by clicking on the banner webcast link. The following presentation and the earnings release are also available for download on the company website. After management remarks there will be a question-and-answer session for analysts and investors. If you want to make a question, please use the chat. Before we begin, I would like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's earnings release regarding forward-looking statements. I will now turn the call over to Mr. Matias Gaivironski, CFO. Matias Gaivironsky: Good morning, everybody. So we are finishing this semester with a net gain of ARS 248.8 billion compared with a loss during the same period last year that was mainly driven by a gain in fair value of our investment properties. About the operational side, we have good numbers in Malls, in Offices, and Hotels. Malls have grown in terms of revenues and EBITDA. Offices also remain fully occupied with an increase in the EBITDA. And we have a recovery in the Hotels rates and margins. At Ramblas del Plata, we will see later with deeper analysis, and we have very good progress in development and in commercialization. We signed during the period 2 additional swaps agreements with different developers. So Eduardo will enter in more details later. Also during the quarter, we issued an additional $180 million in the existing notes maturing 2035. So the company today has a strong cash position to take advantage of opportunities and also to finance our growth. Finally, during the quarter, also, we finished the payment of our dividends of the year. We paid a dividend yield of 10% during 2025. So with this, let me introduce Santiago Donato, our IRO, to follow the presentation. Santiago Donato: Thank you, Matias. Moving to Page 3 to the Shopping Malls segment. Here, we can see our GLA slightly increased during this quarter. We have done some small expansion in [indiscernible]. Last year, we bought Terrazas de Mayo. So we did a big increase. And we are also working in some -- in the new development in La Plata, and we are also working in Oeste Shopping, doing some development there. We're going to have the mall closed. So we are growing in Shopping Malls in recent years. Occupancy have reached almost 98%, so very, very strong occupancy. Regarding consumption, over the last 2 quarters, we have seen a decline in our tenants' real sales, minus 7% last quarter, it's minus 9% this quarter. What we are seeing -- there was some impact of all the electoral context during October -- September, October, but we are also seeing now currently some pressure on prices. Prices are going a little bit down, while volumes continue to grow. And also, we are seeing a strong consumer traffic in our malls. So we hope we can increase at the level of the economic activity. Our sales are in general -- shopping sales follows inflation plus GDP, and the economy is expected to grow in this 2026 in Argentina. Despite these lower sales in real terms, our revenues and our EBITDA are growing plus 4% revenues in the 6 months compare period and plus 2% EBITDA -- the adjusted EBITDA in the compare 6 months period. And this is basically because of our inflation-linked fixed lease structure. As you can see on the right, almost 84% of our components of revenues in the malls are fixed or -- well, you have the monthly base rent and then some other concepts like key money, parking, generally adjusted by inflation. And the variable today is just 16% of the total structure. In the next page, we can see Office evolution. This segment, we have maintained a small portfolio today. We currently manage 58,000 square meters. This is mostly A and A+. We have just 1 building that is B category that is Philips, today is transforming in a coworking in the workplace by IRSA. In occupancy, we are in 100% of our portfolio and rents are stable in levels of $25, $26 per square meter per month. Hotels, we have seen this quarter a gradual recovery, mainly improvements in occupancy that reached 69% in the 3 hotels in the total portfolio, average rates at $227 per room and slight increase also in margins. And this has mainly been explained by good performance in our hotels in Buenos Aires, which benefits from stronger activity in sports and corporate-related events. In the case of the [ Llao Llao ], the occupancy was a little bit affected by renovation works in 1 section of the hotel. If you exclude the rooms that are currently under construction, occupancy shows a more stable trend. So this is the rental portfolio of the 3 segments that have shown strong results. I will introduce Jorge Cruces, our CIO, for all the CapEx and the development projects. Jorge Cruces: Thank you, Santiago. Good morning. Distrito Diagonal; in the city of La Plata, construction works are gaining momentum. Overall progress currently stands at around 23% and close to 78% of the contracts have already been awarded. We remain on track to open in May 2027, and it will become a milestone for beginning -- for being La Plata's first and only shopping mall. This new project will add 22,000 square meters of GLA to our shopping portfolio. Including the acquisitions of additional shopping centers and expansion projects we have mentioned lately, our GLA is expected to reach 458,000 square meters over the next years. Ramblas del Plata; recently, we added several new plots to our commercialization pipeline. So now we have a total of 26 plots, representing almost 207,000 sellable square meters. We signed swaps for plots L-1 and J-1 for a total amount of $11.7 million. These 2 transactions represent almost 4,000 sellable square meters for IRSA. To date, we've sold 2 lots and swapped another 13 and the combined value of these deals stands at $93 million, covering over 124,000 sellable square meters to be developed. Looking ahead, we are planning to implement early activation programs in the future development of area of Phase 3. These initiatives may include a golf driving range and practice areas, paddle courts, a gym, driving test circuits, as well as food trucks. To support these [ temporary ] uses up to 20 parcels scheduled for development in the final phase may be leased in a short-term basis. This approach will allow us to create an on-site destination, encouraging the public to discover Ramblas del Plata. Construction is progressing in line with schedule currently at 20%. The consolidation works of the Central Bay and the riverfront along the future [ access to ] boulevard have been completed totally. We have nearly finished the planting of the buffer forest of Phase 1, along with its irrigation system. To date, more than 1,900 trees have been planted. At the same time, construction of road works, sewers, and drainage infrastructure for Phase 1 is progressing well and has now reached 60%. Through a public auction, we acquired the former Israelita Hospital on the property located in Flores neighborhood of the city of Buenos Aires. Our plan is to transform this iconic asset into a mixed-use development. The property sits on a land of approximately 8,850 square meters and includes an existing developed area of about 17,000 square meters. The acquisition was completed for a total purchase price of $6.8 million, which has been fully paid. In Uruguay, Distrito Calcagno, is a unique urban development located along the shores of Lake Calcagno. Another swap agreement was signed in October at $9.3 million. Back in Argentina, in the province of C�rdoba last week, we signed a new swap for Tower 3 at C�rdoba Shopping. IRSA will receive around 1,000 square meters of GLA, the whole third floor and 146 parking spaces. The agreement also includes an option for fourth floor at a cost price plus a 12.5% of development fee. Well, now I'll give the floor back to our CFO, Mr. Matias Gaivironski. Thank you. Matias Gaivironsky: Thank you. Thank you, Jorge. So about the results of the semester, we have to understand what happened on the variables of FX and inflation. During this semester, we have a real devaluation of the peso compared with an appreciation of the peso last year. That generated -- but during the last year, we have losses in our investment properties since the value are mostly related to dollars. And this semester, we have significant gains. Also, when we express our debt in pesos term, the devaluation this year generate a negative result compared with a positive result last year. So we will see it in the next pages. So about the operational side first, on Page 12, we have good results in the Rental segment with a 4.9% increase in pesos -- in real pesos terms compared with the previous year, 2% increase in Shopping Malls, 15% increase in Offices, and 44.8% increase in Hotels. When we see margins, we see a slight decrease in Shopping Malls, most related to [ 1 short ] event during the quarter. So we expect the recovery in the coming quarters. And in Offices, in line with this with the previous year and hotels an increase, as [indiscernible] mentioned. About the fair value of the investment properties, that was the most important change. As I said, last year, we posted a significant loss, ARS 306 billion compared with ARS 185 billion gain this year. If we analyze numbers in dollar terms, we will see that during this year, prices or value of our properties remained stable. This is only the effect of the devaluation of the pesos that when we express the dollars into pesos generate a higher gain than the inflation effect. About the net financial results. As I said, you can see in the table below the first line, the net FX results that during this year, we are generating a loss of ARS 15.9 billion compared with a gain last year of ARS 28 billion. That is basically the main important effect. About the net interest remained stable compared with the previous year, but probably for the rest of the year will increase a little since we increased our debt as we can see later. So we expect that to pay higher interest compared with the previous year. The income tax, here, we are giving effect on the deferred tax on the investment properties. You know that every time that we generate a gain in the investment properties, we have to post a deferred tax in this line. So last year, we generated losses. And because of that, we generated gains in the income tax, and this year is the opposite. Although the company started to pay income tax again, last year, we started to pay, so that has a cash effect on the current tax. So we expect that, going forward, the company will keep paying income tax again after consuming all the credits -- the tax credit that we used to have. So finally, we finished the quarter or the semester with a net income of ARS 248 billion compared with the loss last year. About the evolution of the rental segment, the EBITDA and the adjusted EBITDA in dollar terms, we can see that the progress has remained positive. We are finishing the semester with $102 million. So if we continue with this trend, we anticipate very good numbers compared with the previous year. So the company remains strong in the cash generation. About the debt, the news is that the company tapped the international market again during December. So we closed -- we did the reopening of the existing bond that we issued in March 2025. So we issued an additional $180 million at a yield of 8.25%. Remember that the bond has a coupon of 8%. So you can see on the bottom right that the debt amortization schedule, we almost don't have any debt in the short term. So with the proceeds and the cash position that we have, we will cancel the $226 million amortizations, and most of the debt today [ outstanding ] will expire during 2023 (sic) [ 2033 ], 2034, and 2035. With this, we -- the ratios remain very conservative with a net debt to rental EBITDA of 1.6x, LTV of only 13%, and coverage ratio of almost 7x. And remember that only 60% of our assets today are generating EBITDA. The other 40% are land reserves or other assets that are not generating EBITDA. So we believe that we have a very conservative debt structure. Finally, we saw that during the last quarter, but we finished the payment of the dividend of the year. We paid a dividend yield of 10%, so $116 million that were paid during November and October. So that was the [ arrears ]. So with this, we finish the formal presentation. Now we open the line to receive your questions. Santiago Donato: Well, now is the time for the Q&A session. If you have a question, please click the button labeled Raise Hand or use the chat. We'll take the questions in the order we receive them. Okay, here, we have the first question regarding tenant sales that impacted by -- were impacted by softer consumptions in the second half of the year. What are your expectations for consumption trends this year? Matias Gaivironsky: There is a big debate these days in Argentina about the prices of clothing. What we saw, and probably if you visit Argentina, for the locals, price of clothes were expensive in dollar terms compared with other countries. What happened in the last, I would say, year that if you compare prices of cloth compared with the CPI, the clothes increased much lower than inflation. So when we show our tenant sales, we are doing the [indiscernible]. So if we see the quantity, the tickets that we are generating in the malls, this remain in good levels. So when we compare with the previous year are at very good levels. And also in terms of traffic, the public that are entering the malls remain stable compared with the previous year. So only when -- probably what is happening, the price of the clothes start to reduce compared with the previous year. So when you do the equation, then that result in lower consumption or lower pesos compared with the previous year. Going forward, as I always said, the company will be tied to the evolution of the economy. So if we see Argentina growing, probably we will grow in terms of consumption, and we will have the volatility according to what happened in the economy of Argentina. But this trend of reducing prices is something that is happening. So probably it's a new trend in Argentina. Santiago Donato: There is a question here from [ Lorena Reich ] that is in that direction. Given the impact on consumption and crisis in the textile sector in Argentina, do you expect this to impact the rental income? Do you expect more tenants to base rents instead of percentage of sales? Matias Gaivironsky: Well, this also was new for the company in the last years. You know that in the past, we were not allowed to adjust rents by CPI. So we always include a step-up clause in our agreements, putting some estimation of the inflation, but we always misestimate inflation. Unfortunately, inflation were much higher than what we expected. That means that the base rent was lower than we expected, and then we compensated our revenues by the variable part. After the change in the law, we started to adjust all the agreements by CPI. So today, all the agreements are adjusted on a monthly basis by CPI. So we captured that part. So that means that in terms of percentage, today, the base rent is much higher or it is more important than what was in the last years. That is a protection for the company [indiscernible] you have a slowdown in consumption. But also, what we see is that if that is sustainable or not. So of course, we can't charge in the long term an occupancy cost to our tenants that are not sustainable for them, so that is the equation. So -- and we will see that in renovations and in negotiation with tenants every time that the agreements expire. Santiago Donato: I will give the word to Gordon Lee from BTG. He probably want to ask. Gordon, are you there? Gordon Lee: Yes. Can you hear me? Matias Gaivironsky: Yes. Gordon Lee: A couple of questions. The first, I guess, is a follow-up to the previous one, which is more specifically whether you've had requests from tenants to rebalance the structure of the contracts or whether your new contracts are seeing a different balance between base and variable overage? And then just a question on the lease up of the Philips building, which was significant during the quarter. The workspace that you're referring to, just to confirm, that's being leased to a third-party provider of these services. You're not doing the workspace management yourself. And then the second question, if you are leasing it to third parties, does IRSA underwrite any of their re-leasing risk? Or is that completely absorbed by the tenant? Matias Gaivironsky: Thank you, Gordon. So the first part of the question. Sorry, I... Santiago Donato: Given the weakness in [indiscernible] existing tenants. Matias Gaivironsky: Sorry, the balance -- no, typically, Gordon, what you have to analyze to see the shape of the industry is some drivers: first of all, occupancy; second, delinquency; third, consumption; and fourth, the prices that you are able to sign with the tenants. All the variables are okay today. So we see good levels of occupancy, good levels of traffic, good levels of renovations, delinquency remain very low. So we haven't seen yet any [ signal ] that force us or make us to think that we should change some of our drivers in commercialization. So far, all the renegotiations were good. Something else that is happening is that is a new trend that we have more demand for international brands coming to Argentina. So that probably gives us a sustainability in demand for new spaces. So no, today, all the signals are good. And regarding the second part about the workplace, if I understood well the question, no, IRSA is managing everything. So it's a property that is under the control of IRSA, and we have the operations. So we operate directly. So we are in charge of the services and everything. And it's a new segment for offices that is performing very, very well. What is happening there is amazing and the community that we are building there is great. So it's a new business for IRSA. So far, the performance we compare with what happened if we just rent to a traditional tenant and the results so far are good. So we are happy on this new business line. Gordon Lee: And is that -- if I could follow up, is that a business line that is, let's say, uniquely intended to address the vacancy of Philips? Or is this something that you could see reproducing by maybe looking at B-class properties? Matias Gaivironsky: Yes, it's something that we will try to replicate in other locations. So we are thinking probably to launch the second workplace soon. So yes, it's something that we will try to replicate. Santiago Donato: There is a question related to the sector in general. How do you see the sector? I imagine, in general, real estate sectors going forward from sales, well, the experience across shopping malls, you have talked about retail. So perhaps Jorge can give some color on the real estate sector, how do you see it going forward? Jorge Cruces: Well, actually, going forward, we're very optimistic. It's about the time. It's about when actually the things that are happening to the country is people are going to be able to get a credit to buy an apartment, the middle class. So that's going to -- that sooner or later is going to happen. The demand is fantastic. It should be incredible. It's going to be a thing of pricing, and we have a lot of land reserve. We have a lot of products. So I'm very optimistic. The thing is just about time. It should take some time, but we're going to get there. And that's residential. And we talked about the Retail -- well, office buildings. We're optimistic regarding mixed uses, close to our shopping malls, residential office buildings. So we've been selling office buildings in these late years. So we're looking at office buildings to develop and to have some more spaces in office buildings in good locations. So generally, we're optimistic. We're even -- I think we told this before, we're looking at maybe logistics or maybe warehouses. So we've been shopping around and sooner or later, we're going to get there with warehouses also. So we're very optimistic with real estate in general and especially here in Argentina. Matias Gaivironsky: There is a question here regarding Ramblas, Jorge. How much is already sold of the total project? I think it's around 20% approximately. Jorge Cruces: We had that in the presentation. Matias Gaivironsky: Yes. I think it's approximately 20% that is the big part of the Stage 1 over the total project. And if prices are ahead of expectation compared to your initial plans, prices of the land and what the prices of the residential apartments that you could sell if are ahead of the first [ plans ]. Jorge Cruces: Our balance sheet is very, very conservative. We talked about that before that we have to be conservative. So in our balance sheet, you're going to see and Ramblas everything that we -- all... Matias Gaivironsky: It is at $600 the square meter of the land... Jorge Cruces: All the swaps, the price of the swaps are $3,000 for each square meter. And well, that's -- I believe that's very, very cheap. I believe the residential is going to be over -- I think it should be already $4,500, but it should be -- it's going to be more than $5,000 for each square meter of residential. And when the buildings are finished, it will be more than $5,000. And well, we have a lot of commercial area. Commercial area is going to be a little bit cheaper, but it should be more than $4,000 anyway. So I think the prices in residential is going to be higher than $5,000 average when the buildings are finished. Santiago Donato: I have 2 questions on the financial front. With the deterioration of the net leverage from 1.2x to 1.6x, what is the maximum level of net leverage that you feel confident? Any targets? Matias Gaivironsky: Well, I don't see this as a deterioration of the leverage [ broadly ]. As we increased a little, the debt was [ ridiculous ] low during the last year. Remember that the company were not executing any CapEx during the last year. So we feel very, very comfortable with the cash position before. And now that the company is entering a more aggressive expansion plan, we decided to increase a little the debt. But remember that this company with an EBITDA margin of around 80% is a cash machine. So after you open the properties that we are developing, then the leverage will go very fast down if we don't execute new CapEx or pay dividends. So with the plans that we have going forward, we believe that we have enough cash to finance all the expansions and acquisitions. So the company is not expecting to raise more debt. Probably the net debt will increase because we will use the cash. So we will use part of the cash. Today, the company has more than $300 million in cash. So part of that, definitely, we will use it in the expansion. So for that reason, the leverage will go up. But I would say that, I don't know, 2x EBITDA is probably the possible outcome during the year. But I feel comfortable with probably less than 3x EBITDA, I feel very comfortable. But it will be tough to see the company with that leverage because we should increase significantly the acquisitions or the development. So take into consideration that any development for real estate will take like 3 years. So if we, I don't know, launch $100 million projects, the cash that we will need per year is $30 million per year. And the free cash flow of the company today is more than $100 million. So we have enough cash generation to finance in the future the expansion. So we don't expect to see much more leverage going forward. Unknown Executive: And also all those projects that we are putting into production will bring additional EBITDA, of course, in the next years. Matias Gaivironsky: Of course. And a question regarding the dividend that we paid to ADR holders in December, if it was net of the 7% Argentine tax retention? Yes, it was. I think we covered all the questions. I give some minutes more. There is one related to, if you could give some details on Golden Juniors Segregated Portfolio. Yes, that is a fund that we created last year to put some of our liquidity with the diversification. Most of our liquidity was -- is in dollars or dollar-related instruments. And that was a way to diversify the liquidity. The company has a strong liquidity, as I said, $300 million, and we invested $6.5 million in that fund that basically invest in companies or in gold and silver. So the performance of that fund was very good during the last 6 months, but it's a small part of the liquidity of the company. Santiago Donato: Thank you, Matias. Well, if there are no more questions, we conclude the session and the presentation. We thank you all. I would like to turn back to Matias for his ending or final remarks. Matias Gaivironsky: Thank you, Santi. So finally, what we see at IRSA is that we are entering -- we have entered in a new expansion phase for the company. We were very conservative during the last years about growth, but we changed that during the probably last years, and the company is trying to execute a lot of projects [ broadly ]. We will launch new projects in the coming quarter or in the coming -- the rest of the year. We will announce new developments that the company is planning to execute. Also, we are working in different M&A transactions. So hopefully, we will announce some acquisitions also going forward. So the company is very concentrated trying to speed up the process of growth. So we hope to see that happening during the rest of the year. And the rest of the operational segments remain in good shape with very good levels of cash generation and good drivers. So we are very confident for the rest of the year. So thank you very much, and see you next quarter.
Operator: My name is Jordan, and I'll be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to Viasat's Third Quarter Fiscal Year 2026 Earning Results Conference Call. [Operator Instructions] I'd now like to turn the call over to Ms. Lisa Curran, SVP of Investor Relations. Ms. Curran, you may begin the conference. Lisa Curran: Thank you, Jordan. We will present certain non-GAAP financial measures on today's call. Information required by the SEC relating to these non-GAAP financial measures is available in our Q3 Fiscal year 2016 (sic) [ 2026 ] shareholder letter on the Investor Relations section of our website. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and Annual Report on Form 10-K. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'll turn it over to Mark Dankberg, Chairman and CEO. Mark Dankberg: That, and thanks for joining us today. I'm Mark Dankberg, CEO and Chairman of Viasat. With me, along with Lisa, we have Gary Chase, our Chief Financial Officer. As always, we encourage reading the shareholder letter and referencing the slides we posted on our website earlier this afternoon for more details. I'm going to cover 3 areas. First, an update on some of our recent results and accomplishments. Secondly, the impacts of those accomplishments and near-term operational objectives on our outlook; and third, an overview of macro market factors and our strategy that helps illuminate our mid- and longer-term approach to continuing to enhance shareholder value. FY '26 revenue and EBITDA performance is consistent with our expectations and plans entering the year. Cash generation has been better than planned, driven by efficient cash conversion, targeted strategic transactions and capital and operational spending efficiencies while still investing for our future. And that yielded corresponding improvements in our leverage ratio, showing substantial progress toward our target leverage ratio of below 3.0. We have 3 key focus areas to drive revenue growth in FY '27 and into FY '28: ViaSat-3, multi-orbit and what some refer to as new frontier defense tech. For ViaSat-3, Flight 2 launched in early November has completed initial deployments and is about 34 days away from being on station. Final deployments commence quickly after that, and we anticipate services commencing by May. Despite delays, we believe it still represents the state-of-the-art in space spot beam technology, which is the foundation of our broadband satellites. Flight 3 is undergoing final integration and is anticipated to launch on a Falcon Heavy shortly after Flight 2 final deployments are complete, pending a specific launch date from SpaceX with estimated service entry by late summer. As a reminder, each of Flight 2 and Flight 3 is expected to support more bandwidth capacity than our entire existing fleet and support key growth initiatives in aviation, maritime and government SATCOM businesses. That is for all our mobility users. They also introduce important new functional capabilities, including new forms of resilience for our U.S. and international government customers as well as for commercial mobility users, particularly in and around geopolitical or other hotspots. Flight 2 and Flight 3 are also anticipated to support material improvements in our fixed services businesses. On multi-orbit, we continue to make good progress on demonstrating the customer benefits of multi-orbit broadband networks as compared to either geosynchronous or non-geosynchronous only systems through rapid growth of our maritime NexusWave service. Favorable customer perception of multi-orbit networks, including by those who are comparing them to LEO only networks is a key competitive factor for mobile broadband customers. We are investing in next-generation multi-orbit user terminals and additional sources of LEO bandwidth for our aero and government customers and expect those terminals to be available as new Ka-band LEO systems enter service. Most of our existing in-flight connectivity, aeronautical terminals are also capable of operating with Ka-band LEOs. On the new defense tech front, there's significant changes in modern warfare trends that are behind the growth in our DAT segment and government SATCOM business. Many of those are in very early stages of development and deployment. Key themes where we have very strong competitive positions include the role of space in collecting, evaluating and distributing targeting information in real time, the role of space, cybersecurity and multimedia transmission networks for highly distributed autonomous vehicles, updates to information in cybersecurity required by AI-enabled adversaries with access to quantum computing resources, routine targeting of commercial telecom infrastructure networks on land, undersea and in space and the consequent effects on both military and commercial traffic, and the role of dual-use space systems in augmenting sovereign systems and extending resilience to critical commercial platforms. All those themes, combined with our assets, technology and commercial and government customer base are helping us compete very effectively in these rapidly evolving critical markets. So moving to the strategic theme, we can frame our ongoing strategic initiatives into 2 pillars that are intended to be mutually reinforcing. First, ongoing capital allocation and strategic initiatives that are aimed squarely at unlocking shareholder value and then second, positioning ourselves to deliver clearly differentiated value to targeted segments of the fastest-growing space and defense markets with a sharp focus on capital efficiency. So I'll start with capital structure. We have consistently identified cash generation and reducing leverage as top financial objectives. This year via positive cash from operations plus proceeds from the Ligado transaction and smaller divestitures, we have reduced net leverage substantially. In the very near term, additional Ligado proceeds plus another divestiture will drive further progress toward our target of under 3.0 net leverage. We are free cash flow positive for the trailing 12 months and are taking actions to continue to reduce capital spending and growing EBITDA to further improve positive free cash flow in fiscal '27. We've also committed to sustained reductions in capital intensity in the business while simultaneously enhancing our reputation for reliable cutting-edge innovation and customer value. Here, there's 2 elements to that. Defining a common small, multi-orbit and multi-band individual satellite architecture that can be adapted to either broadband, KA or mobile L and S frequencies and either LEO or GEO orbits. It's enabled by a very innovative, extremely flexible and powerful space-based phased array payload architecture with little to no mechanical deployments. The point is to add network capacity and capability in small dollar increments and in the right places at the right time. We're also working closely with ecosystem partners as cofounders of a developing new shared space infrastructure entity that enables us to reduce capital costs for targeted business segments. The objective is to acquire our portion of that capacity at very attractive unit costs while delivering industry-leading performance at sustained or enhanced financial margins. This Equatys mobile satellite services partnership with Space42 is expected to leverage technical innovation, application of the terrestrial shared tower business model to space and emerging 3GPP interoperable nonterrestrial network standards. Importantly, the shared tower model allows us to deploy and retain our scarce licensed spectrum resources even more cost effectively while continuing to serve vital public interest missions like maritime and aeronautical safety. A high-power L-band network, combined with 3GPP NTN capable 5G modem chips makes literally billions of phones, wearables, IoT devices, autos and autonomous land, sea and air vehicles able to use our network whenever and wherever terrestrial 5G service is even momentarily unavailable and they can see the sky. That's the enormous attraction of updating our L-band to support those standards. Stay tuned for further updates on Equatys in the near future. We've previously referenced our Board's strategic review committee that with the help of independent financial advisers is guiding our capital allocation and portfolio priorities. We continue to evaluate a range of strategic options up to and including separating our government and commercial businesses, intended to build shareholder value and ensure competitive positioning in attractive target markets. That includes assessing the value of our portfolio of assets and resources, key dependencies, including the entry into service of ViaSat-3 Flight 2 and 3, macro secular trends in our target markets, and the effects of achieving delevering targets and ongoing free cash flow generation. Second pillar is to position ViaSat to compete effectively in the most attractive, fastest-growing sectors of the space economy. The recently issued 12th edition of NovaSpace's Space Economy Report shows the global space economy significant growth trajectory, expanding from $626 billion in 2025 to $1 trillion by 2034. Recent events and transactions underscore that macro geopolitical, economic and technology forces are being driven by sovereign control of critical space and ground infrastructure assets, including communications, sensing and compute, dual commercial and national security uses, cooperative and coalition capabilities, the nonterrestrial network D2D augmentation of terrestrial networks for national security and commercial applications, vulnerabilities of terrestrial telecom infrastructure in contested geographies and resilience to space and ground cyber and physical threats. While many companies are scrambling to vertically integrate, ViaSat is arguably one of an extremely short list of companies that has the ingredients needed to offer state-of-the-art technology, broadband and mobility applications and resilience, along with the business model supporting national and regional sovereign interests and the security credentials needed to even have access to the products. That theme underpins much of our rapid growth in our DAT and government SATCOM businesses as well as creating new commercial growth opportunities. We also have the detailed understanding needed to help craft policy and technology solutions to warrant continued access to the spectrum and orbital resources needed for the world to participate in the rapidly evolving and emerging space economy. We note that many of the issues governing access to both orbits and spectrum are emerging as linchpins to doing so, and all of that implies for national security interests, whether economic, physical or digital security. The pending European Space Act and European Digital Network Acts reflect rising awareness of these factors and the policy responses. The U.S. government is also investing substantially in multiple orbits to enhance resilience for critical strategic and tactical national security communications. So in summary, our financial results are evidence of our ability to execute with cash flow and net leverage improvements as key proof points. Near-term operational targets for bringing ViaSat-3 Flight 2 and 3 into service, along with multi-orbit and new defense technology and additional cash collections from strategic transactions can help us reach our target for ongoing free cash flow and net leverage ratios. We have specific and actionable longer-term plans intended to reduce capital intensity and improve return on invested capital while simultaneously improving strategic focus and differentiated competitive positioning in very attractive growth markets that are all squarely aimed at driving shareholder returns. So with that, I'll turn it over to Gary for more information and our third quarter financial results and insight into our outlook for the fourth quarter and FY '26 as a whole. Garrett Chase: Thank you, Mark, and good afternoon, everyone joining us on the call. As always, a special thanks to the ViaSat team for the hard work to produce the results we're about to discuss. Our financial mantra remains to build our franchises and earnings power, generate and grow free cash flow and delever and set a path to a value maximizing long-term capital structure. You can see the progress our team has made against these key priorities, but we have more opportunities ahead, and we need to keep executing well, especially in the coming quarters as we bring our new satellites into service. Additional and higher-performing capacity with ViaSat-3 will increase our capabilities and help us continue to grow and achieve our goals. Thus far, the year is playing out largely as we expected, and we remain focused on delivering the fourth quarter and positioning ourselves for faster growth in fiscal '27. We're committed to delivering long-term value and confident in the strategic direction Mark just outlined. Now let's turn to the third quarter of fiscal '26. We generated revenue of $1.2 billion, adjusted EBITDA of $387 million and a 33% adjusted EBITDA margin. Cash flow from operations was $727 million or $307 million, excluding the lump sum payment from Ligado, with CapEx of $283 million, resulting in free cash flow of $444 million or $24 million, excluding the lump sum payment in the quarter. As I begin our discussion of both consolidated and segment results, I'll note that all my statements will reference the third quarter of fiscal '26 compared to the prior year period, the third quarter of fiscal '25. Awards were $1 billion, down 10%, but can be lumpy and the trailing 12 months has been solid with growth of 4%, including DAT, which is up double digits. DAT maritime and government SATCOM have been key drivers of the trailing 12-month growth. Backlog was about $4 billion, a record for us, up about 12% or $430 million, in large part due to strong awards in the second quarter reflecting secular drivers, especially within government SATCOM and DAT, where we expect continued momentum in awards of backlog. Revenue was $1.2 billion, up approximately 3%, reflecting growth in both DAT and communication services. Net income was $25 million, an improvement of $183 million, principally due to higher interest income recognized during the quarter on the deferral of Ligado's quarterly fees, which we received as part of the lump sum payment. Adjusted EBITDA was $387 million, down 2%, primarily reflecting $10 million of incremental R&D investments related to growth initiatives as well as impact from the government shutdown. Capital expenditures rose to $283 million, up 12% as we invested in the completion of our ViaSat-3 system. During the quarter, we spent about $80 million on ViaSat-3, bringing our year-to-date total to approximately $130 million. We generated $440 million of positive free cash flow or $24 million, excluding the lump sum Ligado payment despite incremental CapEx related to ViaSat-3 completion. Trailing 12-month free cash flow is in excess of $200 million. We're focused on growing free cash flow in the years ahead and using it to retire debt as the best way to reduce our capital base, driving returns higher. During the quarter, we entered into an agreement to divest our minority interest in Navarino, a maritime distribution partner. Navarino's results have flowed through the equity and income line item on our income statement. Transaction is expected to close in March of this year, subject to regulatory approval, and we'll provide more details upon closing. Finally, reflecting strong cash generation and Ligado payment, we ended the quarter with net debt to trailing 12-month adjusted EBITDA of 3.25x. This is a year-over-year and sequential decline and a substantial change from where we were a year ago at this time at about 3.7x levered. Now let's turn to some segment highlights. Communication Services awards of $671 million declined 11%. Reflecting lower aviation awards, effects of the government shutdown, fixed services and other awards. Maritime awards grew 25%. Revenue was $825 million, up 1%, while solid growth in aviation and government SATCOM was moderated by declines primarily in residential fixed broadband and maritime. Aviation revenue grew 15%, led by a 9% increase in commercial aircraft in service, combined with higher average revenue per aircraft as our customer base migrates to higher value offerings. Aviation awards were less than expected during the quarter, with continued growth in our installed base, combined with updated indications from customers on their future plans, our commercial aircraft installation backlog declined sequentially. We now anticipate that approximately 1,100 additional commercial aircraft will be put into service with our IFC systems under existing customer agreements. The aircraft we no longer expect to install on our IFC systems were to be run on legacy Inmarsat platforms. The team continues to win new business, and we have hundreds of incremental aircraft working through the contracting process and expect to see materialize in our backlog over the coming quarters. We're excited for what Flight 2 service entry will do for our Aviation business and believe its successful deployment will be a catalyst to drive new orders, accelerate contracting and expand ARPU with existing customers through higher value service offerings. Our government SATCOM revenue grew 4%, reflecting good growth with the U.S. and international governments. We're well positioned to take advantage of strong secular drivers in defense and expect strong growth to continue. Maritime revenue declined 3% as vessels in service were down. NexusWave orders are strong, and installations were up another 33% sequentially while continuing to be paced by vessel availability. As of quarter end, we've received a very positive cumulative total of NexusWave orders of more than 2,600 vessels with about 65% of those yet to be installed. We're taking actions to accelerate our install rates and still expect slight year-over-year growth in Maritime to resume by fiscal year-end with a higher NexusWave installed base driving higher ARPUs. Fixed services and other revenue was down 20% as U.S. fixed broadband subscribers continue to decline as expected. We ended the quarter with 143,000 subscribers and $112 in average revenue per user. We faced significant headwinds on fixed broadband due to bandwidth constraints in the U.S. for several years. We anticipate that ViaSat-3's Flight 2 entry into service beginning in the first quarter of fiscal '27 will allow us to improve our service offerings and increase gross additions. Communication Services adjusted EBITDA was $319 million, down 3%, primarily driven by higher investments in R&D. Turning to Defense & Advanced Technologies performance during the quarter. Awards of $300 million declined 8% due to impact from the government shutdown. As I mentioned earlier, trailing 12-month period has been a strong one for data awards, up 11% year-over-year. That revenue was $332 million, up 9%, driven by strong backlog and growth in Infosec and cyber defense and tactical networking. Infosec and Cyber product revenues were up 8%, driven by high assurance encryption products. An additional consequence of the government shutdown on the fall was a certification delay for our new space reprogrammable crypto product, a new market for us and a good example of synergy between our space and encryption businesses. Space & Mission Systems revenues were flat as we ramp up a number of programs. SMS has strong secular drivers supported by a large backlog. While quarterly growth rates can vary, we continue to expect SMS to grow nicely on a full year basis. Tactical networking revenues were up 20% year-over-year, reflecting strong growth in Tactical Communications and TrellisWare growth in the quarter. Defense & Advanced Technologies adjusted EBITDA was $68 million, up 7% compared to the third quarter of fiscal '25 driven by the revenue growth I just mentioned, offset by higher segment research and development investments supporting future growth in areas seeing strong secular trends where we're well positioned competitively such as Golden Dome and high assurance communications. We estimate the government shutdown impacted third quarter EBITDA by about $10 million and expect a similar impact in the fourth quarter. Overall, third quarter results were good, and we're on track to achieve what we set out to this year. We've realized growth in both segments, invested in our future and drove cash generation. ViaSat-3 Flight 2 continues orbit raising and the launch of Flight 3 is expected next quarter shortly after Flight 2's deployment is complete. We expect the capabilities of these satellites to catalyze future unit and ARPU growth in our government and commercial franchises and begin turning the tide in our residential business. Let's move on to our outlook. We continue to expect fiscal '26 revenue up low single digits with flat adjusted EBITDA. We're pleased with the third quarter, especially our progress on free cash flow and in terms of how we're positioning for future growth. Deployment and service entries for ViaSat-3 is an exciting catalyst for that growth. We provided additional segment level detail in the outlook section of our shareholder letter and slides. While our leverage ratio has improved substantially, our focus on delevering remains as well as our intense focus on free cash flow generation. During the quarter, we spent about $80 million of CapEx related to the completion of ViaSat-3, bringing the year-to-date total of $130 million. For the full year, we expect to spend just over $200 million of this amount with another $40 million or so to spend in the first quarter of fiscal '27. The timing of these expenses is hard to pinpoint and may shift a bit between the fourth quarter and the first quarter of fiscal '27. We will keep reporting to you on the remaining spend as we incur it. Overall, fiscal '26 CapEx is now expected to be $100 million to $200 million lower than prior guidance in the range of $1 billion to $1.1 billion, with about $350 million of that in the Inmarsat silo. We now expect positive free cash flow for fiscal '26, fiscal '27 and beyond, while continuing to invest in growth in our very attractive market franchise. For clarity, our free cash flow guidance does not include free cash flow benefits from Ligado lump sum payments as they're nonrecurring. It does, however, include the benefit of ongoing quarterly payments that we expect to receive. Of the $1 billion to $1.1 billion of CapEx we project for the year, approximate breakdowns are as follows: about $200 million is capitalized interest, $450 million is maintenance, $200 million for ViaSat-3 completion, $75 million success based, and the remaining $150 million is for growth. We're investing in capabilities to serve next-generation defense demand, satellite programs other than ViaSat-3 capabilities and customer equipment that will help us better serve commercial and government customers with new higher-value offerings in the future that leverage ViaSat-3 and multi-orbit capabilities. We've talked a lot about our financial mantra of building franchises generating cash flow and reducing debt. We want to minimize our cost of capital. But you just heard Mark describe how we're putting the bulk of our energy and investment into ensuring that our future returns exceed that cost of capital. Our focus on the growth of our franchises will drive returns higher, while cash generation will enable deleveraging that reduces our capital base, all driving our ROIC higher. Let me now speak quickly to the financial impacts of our Equatys venture. Our L-band spectrum and existing MSS franchise are valuable assets, and we're investing wisely to develop them in ways that enhance existing services while meeting new market opportunities. We're taking a capital-efficient approach that is entirely consistent with our financial mantra, growing franchises, growing cash flow, deleveraging and improving returns on capital. Negotiations around the formation of Equatys are ongoing, and we won't bring them into the public. But we can say our plans to develop our L-band franchise are entirely consistent with the financial objectives we keep repeating, increasing cash flow, reducing debt and investing wisely for the future. One housekeeping note. Subsequent to quarter end, we moved $175 million in cash from Inmarsat to Viasat. As previously discussed, we expect the total amount of funds will move over time to be $400 million to $500 million. Thus far, we've moved $350 million, including the $175 million just referenced. So in closing, in fiscal '26, we're working to deliver our commitments and position our franchises for sustained and profitable growth and free cash flow with easing capital requirements following the deployment of our ViaSat-3 satellites. Team Viasat is determined to close out the year strong and well positioned for the future. With that, I'd like to hand the call back to Mark. Mark Dankberg: Okay. Thanks, Gary. And with that, we would like to open it up for questions. Operator: Your first question comes from the line of Rick Prentiss, Raymond James. Brent Penter: A couple of questions. First, on the all-important Flight 2, Flight 3 launches and in services. It looks like maybe a little bit of a delay on Flight 2, saying now May versus early '26. And then Flight 3 will go up, hopefully launch shortly after Flight 2 in service. How fast can Flight 3 get into service? Are there differences given the rocket you're using as far as how fast that can get in service? Mark Dankberg: Yes. Yes. The Flight 3 will probably have more like a 2-month orbit raise as opposed to more like 100 days for Flight 2. So that will get -- that's kind of the dominant factor that orbit raise in terms of time from launch to in-service. Brent Penter: Great. And as we think about the strategic review you all are going through, obviously, this is not something you take lightly or that you would do without careful review. It's a long process not necessarily a quick process, obviously. But it seems like, as I read through the comments in the letter and I listened to you on the call, we want to see Flight 2 and Flight 3 successfully go in service. You want to see macro market conditions of the segment. You want to see achieving delevering and free cash flow generation. It sure looks like the tick points are starting to come along where that decision process and any external gating factors that might affect it are kind of getting knocked down. Is that the right way to think about this that kind of opens up the aperture of when you might do something? Mark Dankberg: Yes. I think you've got the factors right. Those are the things that we're looking for, and they'll all go into the mix of what we decide to do and when and how, if anything. I just want to be sure that we're evaluating, and we're going to look at online. And you got the factors just right. Brent Penter: Okay. Okay. Makes sense. And the progress goes along there? And then kind of the wacky question then is and there's been a lot of stuff going on in space, what are your thoughts about data centers in space and AI with space? Just trying to think -- as you think about you want to target fast-growing segments and profitable segments of space, where do those fit in your calculus? Mark Dankberg: Okay. Yes. So on the data center side, I think that the entire premise really hinges on power generation in space. That's the ultimate. That's what -- the ultimate test will be is, does it ever make sense that you can generate power more cost effectively in space than you can get it anywhere in boundaries, so I think that -- and that's an open question. I think that along the way there, and this is what I think other people have identified as well, kind of the two of the big swingers there are going to be how efficiently can you generate power in space from solar cells and then how efficiently can you dissipate the heat from all that power off-board satellites. Those -- so from our perspective, the work in those areas is really helpful because it improves the productivity communication satellites as well. I think there's another aspect that does get some coverage, but probably not as much as it should, which is what is the orbital debris mitigation plan or sustainability factors associated with the amount of mass that's required for those data centers and the surface area for those data centers? And does that provide a gate or does that create a gate or a limit to the amount of power you can generate at least in near earth orbit. From our perspective, we don't have any plans to be in the data center business. Everybody does note that if you want to be in the data center business in space, you're going to need a lot of communication capability to and from that. And so those -- that part we're certainly interested in. And we're certainly interested in partnering with others that might want to actually put the compute storage resources in space. Brent Penter: It is. And so when you think about fast-growing segments that you'd be interested in that would fit kind of your capital intensity and your free cash flow generation that Gary was talking about, what should we think are kind of at the top 1, 2, 3, 4, 5 segments that you think make great addressable markets for what you guys bring as far as competitive advantages? Mark Dankberg: The 2 areas I think if you look at it from a technology perspective, think of it as the broadband sector, which is kind of Ka-band and higher frequencies that are being used for broadband communications. We see that there has been, for the last 10 years, lots of demand growth as unit prices come down, get more speed, more volume per unit cost. And those markets have grown. We still think there's quite a bit of growth in there and that we can certainly compete really well in that space. And then -- there's the whole trade-off between fixed and mobile uses. The mobile uses, certainly, we see lots of growth in those parts. And especially given what's expected to be a substantial increase in autonomous mobile platforms. The other area from a technical perspective is going to be the L-band or the low band, people refer to them as mid-bands. And that market right now, if you look at analysts -- a range of analyst estimates, that could be one of the single largest markets in the satellite communications space. Within those 2 categories, within the broadband market in the L-band market, we really see number of vertical markets in the broadband market, certainly, mobile platforms is one of the biggest and most interesting and within that market, the government applications of that is really a big opportunity. And one of the big trends we highlighted there, we think, is going to be sovereign ownership, that is international and domestic applications. So that's going to be operating those networks, designing the network, building the networks, but a lot of them, we think, ultimately, will end up under control of individual countries as opposed to outsourced to private enterprises when those countries are so -- going to be so dependent on those -- that type of communications for national security. There's also the other thing, we see coming in the mobility market is that just as a kind of consequence of some of the geopolitical conflict around the world, there's large parts of the earth that are just closed off to access to navigation and communication services. And we think those services that shipowners, airplane operators use, they're going to want to be able to navigate and communicate through those, not just -- not necessarily over individual hotspots, but in the surrounding areas that often are intended. So we see big opportunities that are kind of a mix of commercial and government in that broadband mobility area. And the big difference between the L-band mobility area and the broadband areas, think about L-band will have higher unit airtime costs or lower speeds just because there's way less spectrum to work with. But the antenna that you can use for that is going to be really small, very small omnidirectional. That's like conventional cell phone, IT devices, watches. And in the history of satellite communications one of the main barriers to growth has just been having people with terminals capable of working with your satellites. And so the big thing that's happening in this D2D NTN interoperable network space, well, there are going to be literally billions of devices that are connected, and as long as you can do the handovers quickly and well, we think as long as there's interoperability between the terrestrial and satellite domains, well, that's going to be a big market. So those are -- and that's going to be for consumer use, enterprise use, it's going to be on autonomous vehicles. There's going to be some question about how quickly each of those markets develop. But ultimately, just like in terrestrial, having spectrum that works with those devices is going to be approved requisite to being able to participate where we feel that we've put ourselves in a good position as one of the very few operators that really has access to both the broadband, microwave frequencies and the mid-band L-band frequencies and can deliver that continuum of service. So that's -- in a nutshell, that's where we really aimed at with our satellite services. Brent Penter: Norway in a nutshell, that was satellite in a nutshell. I appreciate that. And good to have a spectrum and good to have satellites about to come in service. Operator: Your next question comes from the line of Sebastiano Petti from JPMorgan. Sebastiano Petti: I guess, Mark, related to your response there to Rick's last question, just thinking about -- in the past, you've talked about a tower model as it pertains to direct to device. I mean, can you perhaps maybe elaborate on that? I guess, what gives you confidence that we'll see 2 plus 3 D2D players that can perhaps emerge over time, particularly without the requisite spectrum that's out there, right? I guess that's kind of my first question. I think maybe the sovereign angle probably answer part of that. And then relatedly, I guess, to your -- to the end of the prepared remarks there, just kind of thinking about Equatys in the L-band spectrum, or just your overall spectrum ownership. I guess I understand growing the value of the franchise, but we're also at a point in time now where perhaps spectrum might be a little bit -- satellite spectrum is in vogue and very hot right now. And so just the considerations there of -- is it about controlling your own destiny and maintaining option value long term? Mark Dankberg: Okay. Yes. So for the first question, one is there is a fair amount of satellite spectrum that has been allocated to mobile satellite services and has been for like 40 years. And those satellites serve real and valuable functions for people that don't have access otherwise and/or depend on the weather resilience of those frequencies compared to the microwave stuff. So Ka and Ku band is great for 100 megabit or plus higher speeds. That's a really nice feature. But the fact that it is highly attenuated in storms is a big issue for maritime as an example, and for some other users as well. So the spectrum has been allocated. There are multiple players that have it. Often, countries who use it for national security purposes or who worry about having literally millions of people in their country with devices that can completely bypass their terrestrial infrastructure are going to and have been asserting their requirement that operators in those countries to comply with national telecommunications regulatory laws. So we think that, that's just -- that there are good reasons for that. They're not technical reasons. They are more national security sovereignty reasons and other safety reasons. So we think that those are just going to be requirements to play in the market at a large scale in many parts of the world. So we -- one of the reasons we're interested in Inmarsat in the first place was it was formed as an international organization to solve some of these issues around mobile satellite services and the need for that. And it still has -- and we still have really good relationships with a lot of countries around the world where we can work through these problems as we evolve the capabilities. And so that is one part of the issue about why we think there will be multiple players. The first part of your question is related to some extent, which is the issue about high count. So I think it's not always well understood that the thing that creates the potential of communicating with an off-the-shelf terrestrial cell phone is increasing the power levels that are allowed for mobile satellite service. And this -- we're talking about power levels on the surface of the earth. That doesn't really matter what altitude you're generating them from. The big issue, one of the issues that always has been an issue and issue in basically all wireless spectrum uses is how high of a power can 1 operator reach or radiate at without interfering with neighboring frequencies. And so that has been one of the main issues that's probably going to work more in the U.S. than others, and there, a lot of focus has been on through satellite emissions that can interfere with terrestrial cellular. Of course, anybody that wants to do it from satellite at these power levels is also going to have to coordinate with other satellite operators. So that's one of the things that we've been really focused on. And just to be clear, the 3GPP standards, which is what the chip designers and the handset designers are working towards the infrastructure. Everybody's working to call out these higher power levels that would be required. With higher power levels required for the broadband services versus the narrowband services that are already in service and that we are participating in service for right now. So I mean these are kind of the same fundamental issues that all satellite operators had to deal with for decades. They're not going away. I think there are solutions to them. We know what our constraints are in terms of interfering with neighboring operators, and we are designing our network in a way that it both achieves what's required in the 3GPP standards and does not interfere with neighboring users. And that is an artifact both of our system design and who our neighbors are. So that's how we're doing it. We think we have good spectrum for that purpose. And we think we understand the issue as well and are addressing it. Operator: Your next question comes from the line of Ryan Koontz from Needham & Company. Ryan Koontz: Wanted to ask about the IFC and you announced this new next-gen terminal with Telesat. Maybe you could expand on what's attractive about their Lightspeed Constellation for you, Mark and how that differentiates from other opportunities out there? Mark Dankberg: Okay. What we're looking to do with Telesat is basically recreate what's been working in the maritime space in a multi-orbit system. And in the maritime space, there's a lot more room onboard ships and it's easy to put on multiple antennas. And so for what we -- for the NexusWave service, which has grown and has had really good market reception. And we're getting good adoption and financial results over time. And it's been in use for about a year. So we've got good field results. I mean that's -- we're using a Ka-band broadband service, which uses our GEO satellites plus Ku band LEO. And we do have 2 different antennas. With our new aero services, we'll have a new single antenna that can operate both LEO and GEO simultaneously, effectively. So we'll do there, just what we're doing in the maritime space, we're -- essentially, we're using the GEO satellites to provide the bulk of the bandwidth and LEO satellites to manage traffic that is latency sensitive. So what you get is you get the cost benefits of GEO, which not all GEO satellites are the same. We've been really focused on putting bandwidth where there's demand at very low cost per bit and being able to move it around to follow these mobile platforms, all that stuff works well. The big thing we're going to do in aero is instead of having 2 antennas, we have 1 antenna that can do both LEO and GEO, at the same time, we route -- primarily route the latency-sensitive traffic -- excuse me, over LEO. And the vast majority of the traffic tends to be video, which is not latency sensitive at all, very well suited for GEO. So that's the basic principle behind that. I think that the last Telesat is that they expect to start to be launching their LEO satellites by the end of next year. And so that's when we'll be able to offer that service. The other point I'd make is even our existing Ka-band aero terminals are capable of operating with LEO. They're just not capable of doing both at the same time. Ryan Koontz: Helpful. And then maybe kind of big picture question about once you get F2 and F3 in service here, it sounds like your third quarter time frame. What's the time frame from which you really start to see a revenue inflection time for that comp services business to turn around? Are we talking about a couple of quarters? Or how should we think about that on a modeling basis? Mark Dankberg: I think -- so we've had steady growth in pretty much everything except for residential has been a headwind for us. Maritime as we've seen slight downturn, but we're expecting that based primarily on the NexusWave service to be back to growth again by this quarter. So we think we'll see good continued growth in those services plus growth in the government services. On the residential side, we're not going to give the projection right now, but it will probably take a few quarters for us to get terminals out in the field and to see that first, what we're going to be aiming for is that we slow the rate of decline, and then we think we'll level off and be able to grow that business a bit. Garrett Chase: Mark had said in the past has referred to it as being paced by the demand. And we have a lot of opportunities on the unit side as well as continue to upgrade some of the service offerings like you're seeing in aviation. Operator: Your next question comes from the line of Mike Crawford from B. Riley. Michael Crawford: Back to the evaluation you're doing on your government assets. Like could you just walk through some potential scenarios of how you would manage these key dependencies of satellite assets, if you were to separate, say, that business from the rest of Viasat? Mark Dankberg: No. I mean you're on the right track in terms of the issues that we need to resolve, right? And so that is part of what we're going through both from a capital structure perspective, from a technology perspective, prospective potential licensing or other cost agreements, that's what we're going through. And those would be the factors that it's -- we're not going to speculate. I think at this point, there's just too many ways to go about it. We're not -- I think we're trying to make sure we do a really thorough evaluation and it may evolve over time. We'll be able to speak more about it after we've gotten through these gates. But the whole thing is -- so we are very focused on shareholder value. We're not going to dismiss things that will drive shareholder value and -- but we also -- we're going to make sure that whatever we end up with has a -- we think has a good competitive position in the growth markets, and then can get -- the shareholders can get the benefit of those things. Michael Crawford: And just one final question from me. Just given this global refresh driven by quantum resistant cryptography and your historical leadership position in information security, protecting data in movement and at rest, are you seeing your position today as competitively the same or stronger or may perhaps threatened by emerging competitors? Mark Dankberg: We're seeing good growth in that business. We think we're -- how I'd put it is I think that our competitive position is probably improved a little because of the urgency of the problem and the market size has improved a lot because of the urgency of the problem. So we're pretty bullish about that area. Operator: Your next question comes from the line of Edison Yu from Deutsche Bank. Xin Yu: Wanted to actually come back to your comments about the space data centers. Let's assume that on the energy side, efficiency side and everything that kind of gets sorted out, do you think spectrum is or becomes a limitation and I ask in the context of there was an announcement by Borge and TerraWave, and they seem to be using or wanting to use very high frequencies, Q-band, V-band and doing like optical from MEO to ground. So just wondering if spectrum then becomes some type of constraint. Mark Dankberg: Yes. So I think you're already seeing a migration to higher RF bands. So from Ku to Ka, now V-band is coming more into play. E-band will probably come into play as well. So that opens up more spectrum. Ultimately, I think the number of people have talked about optical links from space to ground. And one of the benefits of optical links is it's very easy for -- to support large numbers of different operators, each with large numbers of satellites without interfering with each other that it's going to -- at some point, if there is to be a big market for data centers in space, optical space to ground links, it's got to be a significant part of it. Xin Yu: Okay. And separate topic. I know you're working in the pipeline on a sort of micro or mini GEO satellite. Wondering any updates on that? And is that something you think could become kind of more prevalent in the future? Mark Dankberg: Yes. Yes. I think basically, our -- one of the points I would make is we've -- I think we've been holding our own and competing pretty well without having any new broadband satellites, while competitors have launched thousands and thousands of satellites. We've really been working -- been able to deliver competitive performance and pricing without having a lot of new bandwidth in the space. We're going to get a lot of new bandwidth and space this year. I think that's going to help our business a lot. But we know that given the market growth and the consumption growth, that we're going to want follow-ons, and we're going to want to follow on some specific areas. So the strategy that we're working on, and I think we'll be able to disclose more of this over the course of this year, once we get through getting the other satellites in service is to come up with satellites that cost a small fraction than what the current ones do, but have even better unit productivity, so that's what's going to allow us, we think, to maintain and improve our competitive position in the satellite broadband space. And so we have -- we're not going to end up with large multi-hundred million dollar single investments that are where we have big exposure for large capital buys. What we'd like to do is to have much, much smaller satellites that are much less expensive, that have kind of sort of pretty comparable capacity and we can put wherever the hotspots are. And then I think that's going to drive -- one of the things we keep talking about is how do we drive down capital intensity, that's a big component of it and that will drive a return on capital, which is clearly the way that we're going to deliver more shareholder value. Operator: Your next question comes from the line of Justin Lang from Morgan Stanley. Justin Lang: Mark, maybe just quickly on the back on the strategic review, I'll try one here. A large defense prime just a few weeks ago announced a planned IPO, one of its businesses with the U.S. government as an equity investor. Curious if you see any particular merits or attractive elements in this sort of structure as you think through the optionality around that business? Mark Dankberg: That's an interesting one. Okay. I think -- yes. Look, I think that part of that is going to be around the priorities of individual governments. And I think that right now, the U.S. government seems to be taking an interest and providing some benefits to what otherwise had been purely private enterprises. So if those -- to the extent that those are available and improved competitive position and shareholder value, that's an interesting thing to do. There are maybe more instances of that internationally. And so being able to do so internationally would also be a benefit. So I'd tell you that those are examples of things that we might look at when we consider some of these more fundamental strategic capital structures. Justin Lang: Great. That's great color. And maybe just quickly, Gary, and I might have missed it. I was hoping just for a little more color on the revised CapEx outlook and specifically whether the new guidance reflects more of a push out of some of the planned investment into '27 or just trying to understand if it's timing related? Garrett Chase: Yes. Generally not. We did note there was $40 million that we expect to continue into fiscal '27 from the ViaSat-3 spend that we've been talking about. Beyond that, the rest of it really is efficiency driven, and we've had a big focus here on making sure that we're efficient with our capital. It has not at all been about cutting or reducing and everybody has embraced it. I think we've done a nice job of it. So other than that $40 million I described a minute ago, it's real efficiency gain. Operator: That concludes the question-and-answer session. I'd like to turn the call back to Mark for closing remarks. Mark Dankberg: Okay. So we appreciate everybody joining us for the past hour and all the questions and look forward to speaking again next quarter. Operator: That concludes today's meeting. You may now disconnect.
Jostein Lovas: Good morning, and welcome to DNO's Full Year 2025 Interim Results Earnings Call. My name is Jostein Lovas, and I am the Communication Manager here at DNO. As you may understand from the color photo, we've had a landmark year with lots of celebration. Recently, our Board of Directors and senior management were in Kurdistan, marking that 500 million barrels of oil have been produced from our operated Tawke license. This photo shows our 2 chefs, Executive Chairman, Bijan Mossavar-Rahmani, cutting the cake together with the chef at the Tawke field. Now back to Oslo and the results. Present with me here today are Managing Director, Chris Spencer; and CFO, Birgitte Wendelbo Johansen. And the Chairman is joining us online from New York, and we will kick off the presentation. Please, Bijan, go ahead. Bijan Mossavar-Rahmani: Jostein, thank you, and good morning to everyone attending this call. We will, of course, be discussing the interim results for the fourth quarter of 2025 and for the full year, but also taking a peak look at the direction of the company in 2026, our goals, our targets, our plans and programs. As Jostein mentioned, 2025 has been a very transformative year for DNO with milestones and records. He mentioned the great milestone of 500 million barrels produced from the Tawke license that includes the Tawke field itself and the Peshkabir field. 500 million barrels produced is a lot of barrels. And this field has outperformed the expectations of many not necessarily ours. We've always known this is a very important license. And we produced 500 million barrels and many hundreds of millions of barrels still left to be produced from these 2 fields. So this has been a terrific asset for DNO. And I think we've managed it responsibly and safely and well over the more than 20 years that the DNO has been producing from this license. Going beyond that important celebration and visit that the Board and I and senior management paid to Kurdistan in January. I'll say a few words about other records reached by DNO in 2025. Our net production increased significantly by about 43% year-on-year to 110,700 barrels of oil equivalent per day. That is the highest level reached in the company's 54-year history, boosted in important respects in the second half of 2025, of course, by the transformative acquisition of Small Energy Group in Norway. Of that total, 110,000, 111,000 barrels a day equivalent, 54,300 barrels of oil equivalent per day was in the North Sea and an almost equivalent amount of 52,600,000 barrels of oil per day equivalent in Kurdistan. So the company is now about evenly balanced between the North Sea, most importantly, of course, Norway and also Kurdistan. So our 2 legs are now about equal size and both very strong and robust. We have a smaller leg in West Africa, where we produced last year 3,300 barrels of oil equivalent per day. Most of that is gas in the Ivory and in the Ivory Coast. The figures picked up in the fourth quarter of the year with net production of as much as 88,300 barrels of oil equivalent per day in the North Sea and 58,000 barrels of oil equivalent per day in Kurdistan. Our revenues in 2025 more than doubled year-on-year to close to $1.5 billion. That's a very significant figure, of course, for us, with cash from operations also nearly more than doubling to $929 million last year. Our operating profit was strong, increasing to $513 million, while net profit stood at a negative $25 million, that reflects importantly, the income tax in Norway and net financial expenses. And our CFO, Birgitte will go into some detail on those numbers. And Chris will -- in this coming presentation, go over our operational issues and then talk about both in more detail the figures that I just presented and our plans for 2026, which are very exciting as well. We now have a very strong platform coming out of 2025 to go into '26 and into the ensuing years. One final point for me. The Board of Directors yesterday approved another quarterly dividend of NOK 0.375 per share to be paid to our shareholders later this month. Last year, our total dividends paid to shareholders was $130 million, again, in 2025. And I should also note that we have been paying quarterly dividends consistently since August of 2022. And we're pleased to have that also as part of our ongoing targets is to prioritize our shareholders and pay quarterly dividends on the back of our performance. So with that introduction, I now pass this on to our Managing Director, Chris Spencer, to cover the operational issues, and I will stay, of course, in the meeting and happy to respond to questions together with my colleagues during the Q&A at the end of the presentation. So thank you. And Chris, if you would please resume the presentation. Christopher Spencer: Thank you very much, Bijan, and good morning from me from cold Oslo. So as Bijan mentioned, I'll take you through the operational aspects of our quarterly report. And as the title of the slide -- I'm starting in Kurdistan, obviously, and as the title of the slide indicates, we are putting our foot back on the accelerator in Kurdistan. As the previous slide mentioned, 2025, however, was characterized by tremendous resilience of our business in that region. And that's really the first couple of bullet points that we have on the slide are alluding to that. So notwithstanding the production deferment resulting from the drone strikes back in July, our team did a fantastic job recovering from that, and we managed to average 70,000 -- just over 70,000 barrels of oil equivalent per day throughout the year. And you can see that from the numbers how the recovery panned out because by fourth quarter, we were back at 77,000 barrels a day roughly. And that looking back, it's -- we highlighted it in several of the quarterly presentations last year, but it's a real credit to both the team and the quality of the assets that we have in the region [Audio Gap] and compares very favorably with the 2024 average production rate of about 79,000, so despite not drilling for 2 years, the team has kept pretty much a flat production apart from when we've been hit by drones. So as Bijan mentioned, we've been celebrating 500 million barrels, but I think that, that performance in the last couple of years has illustrated for us that there's plenty of potential left in the Tawke and Peshkabir fields. And that is one of the reasons why we've decided after a [ 3-month ] hiatus to get back to drilling. That has started already. We have -- in December, we kicked off our 2-rig 8-well program. So it's a little bit in '25, but mainly 2026. And that's the company-owned Sindy rig and one contracted rig from our long-term partner, DQE. Second contracted rig and third rig in total is now being signed up, another DQE rig. And so we -- by April or so, we should have 2 bigger rigs and Sindy all working in the Tawke license. That makes us by far the most active international operator in the region once again. Of course, that means increased CapEx this year. But that's good news, good money spent. It's going to have very short return on investment times. And of course, as a reminder to everyone, the cost that we -- all cost that goes into the company license is recovered as we spend it under the cost recovery mechanism in the PSC. But of course, that requires one to be paid, which I'll come back to. On the back of that resilience that we've seen from the assets and our ability to maintain production at around the 80,000 mark combined with the drilling program that we're now putting in place, we have our target to hit 100,000 barrels a day of gross operated production from the license which, of course, DNO share would represent 75,000 working interest. And as you will -- if you've read the press release, you will see we are guiding an average of 65,000 share from the Tawke license this year. As I touched on, the cost recovery, of course, requires one to be paid. And this is a key driver, as we discussed before, for the choice we made to continue to sell our oil to a local buyer where payment, we call it -- we call or use the shorthand cash and carry, but it's actually a bank transfer, international bank transfer, and we make sure the money hits our account before we hand over any oil. So we are -- we have that payment certainty in an uncertain region. We're not content with that. However, we're very pleased that [indiscernible] and other producers agreed to get back to using the export pipeline last year. I think that's very positive for the country. And the buyer of our oil puts it into the export pipeline as well. So with that reopening, we hope there are and aim to find a way to get back into export markets or export pricing for our own oil during 2026, and that's a key aim for us this year. Moving on to North Sea and a couple of general themes here. First of all, the slides talk to the business model of the North Sea, where we have -- we're turning exploration -- we're doing exploration and identifying upsides in existing assets, maturing those into resources, reserves, production and therefore, dollars. And as you know, DNO is pushing hard to fast track that process wherever we go, trying to shorten the cycle time from an actual investment to return on that investment. And that is one of the themes that runs through the slides we have for you. The other, of course, is the impact of the Sval acquisition on that business model for us and the operational financial synergies that we are realizing from that transaction. So we maintain our active but focused exploration portfolio. We're making discoveries and then we are impatient to get those on stream. We've guided 82,000 of net production for this year from the portfolio, which gives us that financial and tax efficiency for the fast track development model that we're pursuing. We just gave for your reference here the pro forma figures as if we had owned Sval throughout last year, just to give you a sense of where the assets stand. Of course, for DNO shareholders, this is the first year where we have the full effect of Sval production. So the increase in production that Bijan mentioned is the real number for DNO shareholders to consider, but the 81,000 just gives you a sense of where the assets have been performing and that we're tweaking those up this year as well. Many, many fields that we're involved in now as the slide says, the recent highlights of the start-up of [indiscernible] and Verdande. But as we show in the slides, this is part of conveyor belt of opportunities that we're working on ongoing developments that have been sanctioned and are in halfway through the projects with start-ups in the next few years. And that's seeing -- that means that we need to ramp up the CapEx a little bit. Again, in Kurdistan, we have the cost recovered in Norway, as most of you know, these are tax deductible when you have a portfolio such as we have now with 82,000 barrels a day of production. We are also realizing cost synergies from the Sval acquisition. I would -- and we've just been through the painful process of downsizing and streamlining the team. That does realize cost synergies, but I think from my perspective, that's much more about getting the right team, streamlined efficient team in place to go after the business model we're pursuing. And I would say that we have a fantastic team. We've actually had to let some good people go in order to get the rightsized team because we believe that an efficient team is the way to run the business. And then back to the conveyor belt of exploration through to production and dollars. Right at the front end of that is, of course, the APA licensing rounds that we are very active in Norway. And again, we had a very successful round. I think we were ranked third in terms of the number of licenses received from the ministry. We move on to the next slide. This one, we think, speaks for itself. And I'm really pleased to show the progress that we've made since we announced the acquisition, which was the yellow dotted line here. So back in March, when we came to the market and then started raising money on the back of the acquisition, this is what we expected to achieve from the combined portfolios. And as you see, we've been, I was going to say pleasantly surprised, but we've also been working very hard to make this happen. So the projection now looks better. And of course, this is our daily work that we are seeking to improve this further. And again, you see from the different colors, this life cycle I'm talking about of working through from exploration and upsides are shown here through the 2C category into 2P and then out the back in production and dollars, which is what then comes back for capital allocation to dividends and reinvestment in the business. So I think that one speaks for itself as a very strong development for the outlook for our business. Subset of that is, of course, the 4 discoveries that I touched on earlier. The interesting thing here is that those are in a prime core area for us. This is one of the core areas that we highlighted for operational synergies, again, on the back of the acquisition, and you see that coming through. So we have very strong production from the Nova field, which is not actually labeled here, but is just to the southwest of the hub. And that is what also the Suttaka development is to be tied back to Nova and into. So great example of the operational synergies that we were hoping to achieve. And Suttaka is also the best example of fast tracking that we are looking for, where together with Aker BP, we are going to have that in production 3 years after discovery and that we are trying to replicate across the portfolio. Also, the -- as you see from the statistics on the slide, the fast track is not done at the -- by sacrificing sort of breakeven price for these developments. $40 to $45 per barrel seems to be very much part of the course on the NCS when I look around the industry. And as I've touched on a few times, we have many other discoveries in our portfolio where we're trying to unlock time lines and get fast track developments moving. And if I take the next slide, please. And then we go back to the ones that we're trying to add to our hopper. And so we're back very active exploration appraisal program again, $200 million spend, again, tax deductible. I have to be careful how I use that phrase because I don't want to give the impression that we don't care about costs. We are very cost focused, but investors should be aware that those hard spent dollars are still tax deductible in Norway. So very exciting wells coming up this year. I'm not sure what to touch on. But of course, there's 2 appraisals there of very significant discoveries that we've made, [indiscernible] and Norma. So I'm excited by the outcomes there and numerous exploration wells. [indiscernible] is worth just mentioning because that's a higher risk than many -- all of the others, but we have a carry arrangement there. So for us, financially, it's not such a high risk on the chance of success since we have the carry. We've added a column to this slide as well to talk to -- we try to express what we're working on, which is that one thing is whether you find something or not, which is the traditional geological chance of success on the left. The other is how quickly and efficiently you can bring that into production. And so we're trying to give you a sense of that on the chance of commerciality column. As you would expect from what we've been saying before, if we have discoveries, then we see the chance of commerciality for all of them is medium to high. And the second bullet point on the slide explains that a little bit more where there's 3 examples there where exploration prospects are going into licenses where you've already got discoveries that are heading towards development that they should be able to piggyback very quickly on the back of that. Another example is Carmen where the adjacent Atlantis discovery is being matured by Equinor to tieback to [indiscernible] , where we have a 19% interest. And so if the resources there are firmed up, that also should be able to hop on the back of Atlantis and be developed rapidly. In the interest of time, sorry, I could go on all day on these topics. Let's move on. And I think I'm now handing over to the CFO, Birgitte to take you through the numbers. Birgitte Johansen: Thank you very much, Chris, and good morning, everyone. Yes, let's dig into the financial results. We start with presenting the preliminary income statement for the full year of 2025. Our revenue was $1.474 billion, up 120% compared to 2024. The growth is strongly influenced by the acquisition of Sval Energi last year, which was consolidated into our accounts as of June. 86% of the group's revenue stems from the North Sea business in '25 compared to 65% in 2024. Operating expenses have increased also following the inclusion of Sval and operating profit ended at $513 million, also a substantial increase from 2024 and also previous years, as you can see. 2025 pro forma operational spend was $1.55 billion, which we expect to see climb to $1.65 billion in '26, as you've also read probably in the press release this morning. Net profit in '25 was negative $25 million, roughly at the same level as $27 million we had in 2024. And the large difference between the operating profit and net income is due to higher financing costs as well as tax rate above 100%, and I will explain the latter as a part of the quarterly results on the next slide, please. So we have an extra table here to give you some more details on the fourth quarter isolated. Our revenue in the fourth quarter was $481.6 million compared to $546 million in 2025. And the main drivers for the reduced -- the revenue decrease is reduced sales volumes and realized prices in the North Sea, partly offset by higher sales volumes in Kurdistan. And for the North Sea, it's worth mentioning, reminding you that we had a strong production growth in the quarter, 14% higher than the previous quarter. But as you know, revenue is recorded based on sold volumes, and we had a large underlift in the quarter -- in the fourth quarter of '25. Our operating profit was $177.1 million in the fourth quarter, down from $221.8 million in Q3. The main drivers are reduced revenue and increased exploration costs expensed in the North Sea, partly offset by the impairment reversal and gain on license transactions. And as you can see, we have a net impairment reversal of $56.8 million. And I've seen this morning that this has caused a little bit of a confusion amongst the analysts. I'll give you some more details on that. If you look at Note 7 in the report, we have the full description there with all details. And there, we see that the net impairment reversal contains a reversal relating to Bestla in the Brage area, and this reversal is subject to a 78% tax charge. Then we make some impairments related to other assets, but these are goodwill impairments. So there is no corresponding tax shield related to this. So with the combination of tax charge on the reversals and no tax shield on the impairments, we end up with a net impairment contributing positively to the pretax profit, as you can see, but negatively to the net profit. Move over to the cash flow, please. Thank you. Here's an overview of the full year main cash movements. And as you can see, they are quite substantial. Net cash moved from NOK 899 million at the end of '24 to NOK 454 million at the end of '25. Quite substantial movements also in between, as you can see on the waterfall on the slide. Our operational cash flow is strongly supported by the inclusion of the Sval numbers and totaled NOK 929 million in 2025 compared to NOK 433 million in '24. Sval is also the main change when we report our tax payments, which totaled NOK 264 million in '25 compared to only NOK 1 million the year before. Look at our investment activities, NOK 814 million out of the NOK 831 million you see on the bar there represents investments in organic and inorganic assets, including the Sval acquisition. And the rest is decommissioning with NOK 33 million and net cash from equity accounted assets in West Africa. For financing activities, it has been a very active year, as those of you following us would know. We've had a lot of moving parts in form of establishing new financing facilities as well as the redemption of the DNO04 bond and as Sval DNO RBLs. These activities have been covered in previous presentations as they mostly relate to quarters 1 to 3, so I'll not dig into the details there. But on the back of these numbers, we're also very pleased to announce that the Board has decided a dividend distribution for the 15th consecutive year in a row. So that's very good news for our shareholders. Balance slide, please. Thank you. You see the same effect here on the balance sheet. It's been a year of significant changes with much more assets, as you can see in the blue bar, balance sheet with a net debt position and a book equity supported by the hybrid bond. We still have a very solid and healthy balance sheet, well in compliance with all our bond covenants in addition to being a very strong basis for new potential M&A activities also with the financial toolbox we now have in place. So all in all, we have had a very strong quarter from DNO, -- no specific surprises or special items to take note of and not least a year with high activity, both operationally and on the business development side. So we're growing production in all 3 regions, and we are ready for an exciting year in 2026. So by that, I hand the word back to Jostein for the Q&A. Jostein Lovas: And I believe I should give some instructions while people are lining first up. [Operator Instructions]. So -- but first up is Teodor Sveen-Nilsen. Teodor Nilsen: Congrats on a transformative 2025. A few questions for me. First, on the export in Kurdistan. You said that you expect exports during 2026. I just wonder how does it work? Are you able to join the current export deal? Or what do you need to see to put you in a place to join that export agreement? So that's the first question. Second question, that is on Tawke production. You mentioned 100,000 barrels per day. Could you share some more thoughts around the time line on that, when you will reach that or if it's already there? And final question, that is on 2026. Dividends, you talked about the 2025 dividends, but could you share some thoughts around 2026 dividends levels or whether that will be a percentage of cash flow or earnings or some other numbers? What we could expect for 2026 dividend would be useful. Bijan Mossavar-Rahmani: Let me tackle the first and third questions, and I'll ask Chris to tackle the second one. On the first one, yes, of course, we can join the tripartite agreement any time we wish to do so. In a sense, we're partially doing that by the fact that, as Chris mentioned, that while we sell our oil on a cash and carry or deposit and bank account and carry basis, our oil does go into the pipeline. But we're not part of the agreement in the sense that we're not part of the review of the contracts by WoodMac as the other companies are and our payments again are made by our buyer and they're made in advance. So we have that certainty of payments, and we've been paid since the beginning of the opening of the pipeline, while the other participants had to wait some time to get paid, and they have a different arrangement. But we can join that agreement at any time we want. And I think the other participants, both the companies, certainly [ Somo ] would like that to take place. We still don't know how the tripartite agreement is going to work. We don't know the time line of the WoodMac study. We don't know what the WoodMac study is studying and what it will say and how that will be processed by the [ Baghdad ] and when that is still going through a time taking process of government formation, how the new government in place will view the agreement and its terms, we don't know. And when that will take place, we don't know. So our position is to wait and see what, in fact, that's going to look like and how that compares to the arrangement that we already have in place. That will take us probably until midyear, maybe it will drag on later depending on government formation. And by midyear, the existing pipeline agreement between Turkey and Iraq will expire, as you know. What will replace it? We don't know. And so that is another trigger for a decision by us as to what to do next. And of course, the tripartite agreement itself is constantly renewed. So there's uncertainty. And because we're making substantial investments in Kurdistan drilling and we're the only company doing it, we want to reduce that uncertainty as much as possible to be able to sustain our investments. Other companies are not investing because they're not quite sure what comes next. They're getting some payments now as we understand it. But the fact that they're not investing suggests that there's uncertainty in their minds. We don't have that uncertainty under our arrangements, and we're investing. And when the -- some of the cloud over this disappears, we will have more wells, more production, more reserves under production, and we will gain the benefit of that at that time later this year. But I expect that because of the changes that might come into play on the pipeline, the Iraq, Turkey pipeline, there may be other, again, ways that exports and export pricing will take place or because of a decision on our part once the uncertainty is removed to join or not join the tripartite agreement or have our own separate agreement with [ SOMO ]. That's a possibility as well that there will be the tripartite plus 1, much like OPEC+ 2 or 3, whatever OPEC+ is now. So that's another option, too. That's why we believe that in 2026, we will be either part of the export -- the current export arrangements or we will find another mechanism to be exposed to export pricing. I think we're pretty certain that's our aim anyway to either export or have our pricing approach export and global prices. So that's the answer to the first question. On the issue of dividends, again, we've been paying dividends since August of 2022, regular dividends and rising dividends. and we're pleased to do that. Birgitte, you might say some words as to what cumulatively we've done in terms of return to shareholders. But before I turn to her to do that, I will also say that the matter of dividends distributions is one for the shareholders. And each year in June, we come back to the shareholders, and we make a proposal for dividend policy and dividend payments and the shareholders will make the determination as to what level and or what discretion to give the Board to make decisions about shareholders moving forward. So we will make those recommendations for the next 12 months after our AGM. We'll make a recommendation to the shareholders. And ultimately, they will make the decision but we've established this record of shareholder returns and shareholders always vote in favor of dividends. So it's a question of what is a prudent level that allows us to continue this policy. And we've already signaled a number of times in the past several years that we've made this -- we've made prioritizing shareholder dividends an important part of the company. And of course, we've always prioritized our bondholders and have this incredible track record of over 2 decades of solid bond raises and solid bond returns. So this is not at the exclusion of bondholders, they are as much a stakeholder of DNO and have been for a long time as are our shareholders on the equity side. Birgitte Johansen: Yes. My calculations are correct that we have paid $455 million in dividend and $60 million in share buyback after COVID. So that should total $515 million in distribution to our shareholders. So that's quite substantial. Bijan Mossavar-Rahmani: And Chris, on 100,000 barrels a day in Kurdistan? Christopher Spencer: Thank you, Bijan. Yes, I just think it is a presentation of 500. So we're not just celebrating 500 million barrels but $500 million in shareholder distributions. Bijan Mossavar-Rahmani: Excellent. Christopher Spencer: Thank you, Bijan. On the 100,000 target, great question. Just start by reminding everyone, as I did in my presentation of the incredible performance that we've achieved on the 2 fields in the [indiscernible] license in the last 2 years without drilling. We used to get questions pretty much every quarter about the decline rates of Tawke and Peshkabir when we were drilling, what was the underlying decline rate? We were asked time and time again. Well, it's quite amazing, isn't it? -- because we've had 2 years without drilling and we haven't had any decline. Now I thank our team. They've done a brilliant job, but that obviously reflects on the quality of the assets underlying also. And that's what's given us the confidence to set ourselves this target of 100,000. And a key component of achieving that as we also wrote on the slide is that some of the wells we're going to drill are aiming to add reserves to what we already have booked on those fields. So that would be converting what's currently either in the contingent resource category or within the so-called 3P possible reserves into probable reserves and quickly into production. So the time of that depends on the success of the drilling program, and we haven't guided on when -- we haven't -- we're not guiding the market on when we'll hit 100. What we are guiding on is the average this year for DNO share production of 65,000, which you can simply do the math and figure out that, that is 86,000 to 87,000 barrels a day gross on average this year. So you can do the simple math to see that the trajectory is upwards from this quarter. And we are working to hit 100 as soon as we possibly can. But what we're guiding the market is that figure. Jostein Lovas: Okay. With that, I believe [indiscernible] questions were answered. And we'll move on to another analyst, Tom Erik Kristiansen. Tom Kristiansen: Congrats on last year. The performance in Norway particularly looks better than expected. Can you say anything more about how the portfolio has developed compared to your expectations in general and where is the upside being realized? And secondly, on the developments in Norway, you have focused of course, moving this forward at a higher pace than usual in this contract. What are the key drivers to achieve that? And is there also some corporate M&A aligning interests along with different blocks or discoveries would help in that regard? Bijan Mossavar-Rahmani: Chris, do you want to put back on again, our expectations last year versus what it looks like today? Christopher Spencer: Do you have the slide there. Jostein Lovas: Yes, sorry. Christopher Spencer: Yes. Thank you for the question. So as -- and the slide I hope will be coming up shortly, but as our production projection slide shows, Tom, it was -- we've been very pleased. So we are upgrading our outlook for North Sea production just, what, 10 months after the announcement. Now as we said in the -- I also mentioned in the slides, we have some 30 fields that we're now in. So it gets very long-winded if you go through all of the ups and downs. But clearly, the overall effect has been positive. I think on the production side, then the examples are [indiscernible] Brage, but they're all contributors. I don't want to spend too much time on that. I think really, when we're looking forward, what you see is this combination of the fast-tracking developments. I mean Kjottkake discovered in the Q1 last year and coming on production in 2028. That is a fantastic driver not only of the production, but also value. And that's underpinning the mid-life of this particular chart. And then as we said in -- when we announced the deal as well, you have the big assets getting bigger effect as well. So we're in the Martin Linge, the [indiscernible] rigs and Brage evening as well, where -- which is a huge field, and we keep finding a bit more -- as we're hoping to do in [indiscernible] and Peshkabir, we keep finding a little bit on the edge of the field that's adding up to making quite a big difference. So it's probably better to focus on those themes of turning the 2C into the -- turning the discoveries into 2C into 2P and the 2C that are in these big fields into 2P, and we're seeing positive developments on both of those fronts, and we're still working to achieve more. I'm glad you asked about the M&A because we announced -- we -- that's an important part of the -- not just the corporate strategy in terms of looking for more substantial M&A. But it's going to be a big part of the toolbox we have in the North Sea as well is optimization M&A. And that's what you saw us announce a couple of deals on in Q4, and we are working on more of those. So we're trying to adjust our growth profile on the back of M&A as well and high grade the portfolio to get out more cash spinning off the asset base that we have. Bijan Mossavar-Rahmani: Also on that point, I'll add that as we wrote in our press release today, 2026 could be a year of opportunity for us. The market is going to be nervous. We've already seen that because of geopolitical issues and trade issues and so on and the price of oil has been uncertain and it could go up, it could slide back down again depending on events outside of our control, but it is going to be a nervous year for oil markets and could be a difficult year for some companies, especially prices come back down again into the low 60s for Brent, perhaps even lower. So there could be opportunities for us to move quickly to pick up assets. And we've said that this will be a 2026 is a nervous year because of uncertainty and maybe pressure on some companies because of oil prices, but that it will also be a risky year. There will be an opportunity and the DNO is a risky company. We can move quickly as we've demonstrated. Decision-making is rapid at DNO, and we're opportunistic. And we have a line of -- effectively a line of credit with the arrangements we have in place with ENGIE on our gas and also ExxonMobil and Shell on our oil. And we can tap into sale of those funds and other resources to move quickly to make acquisitions, and we're poised for that as well. So we will be on the lookout and able to move quickly because of the way we're organized and because we have perhaps we're better positioned in terms of our balance sheet and our access to credit than other companies of our size or smaller or maybe even somewhat larger to move quickly to acquire opportunities if they fit and look attractive to us, primarily in the North Sea, but not limited to the North Sea. Jostein Lovas: Okay. Are you happy, Tom? It seems Teodor has a follow-up question. Tom Kristiansen: Very happy. Just a short follow-up for me as well. Is it correct to assume that with those facilities you mentioned the cash on balance sheet and also, of course, some leverage capacity on assets you buy, especially if they are producing in the North Sea that you could do a deal of $2 billion, $3 billion without issuing any equity, if it's producing assets in the North Sea. Do you think that's kind of a range of what you can take on right now without any equity issues? Or could you make some adjustments to that? Bijan Mossavar-Rahmani: I don't want to comment on that because we don't know what those opportunities are. When I said that we can move fast on -- to acquire assets that are a bit more distressed, I had a smaller size assets in mind because of smaller companies. But there could be larger companies that may have want to divest from Norway or reduce their assets, and we'll be on the lookout for those. And I think we will be positioned and we'll have market support and to do acquisitions. We're not fearful of those acquisitions of that size. That's the small acquisition that we made was in that category, and we were able to execute and quickly. And with that now under our belt, we are able to go even larger. So we are -- there are some assets we have -- we've been on our radar. But whether or not they become available opportunistically, I don't know. But my point was this will be a year, I think, of nervous market reactions to price movements, especially on the downside, and that could happen. But it could happen that prices will jump for some geological -- geopolitical reasons. But we're on the lookout, and we are open to doing those and certainly have the appetite and the wherewithal and the mindset, the mood and the emotional sort of riskiness. We want to do deals, we want to get bigger. So... Tom Kristiansen: Sounds very good. Jostein Lovas: With that, I think Teodor Sveen will get the last question as there are no other people on the list now. So please, Teodor. Teodor Nilsen: Actually, 2 new questions and follow-ups. You talked about exploration and definitely a [indiscernible] exploration prospects. I just wonder whether you can discuss the most promising ones or maybe pick up a couple of favorite wells. So that's the first question. The second one is on just the technicality on the Bestla reversal of impairment. I assume that forward curves on oil price is slightly down past year, but still you reversal of impairment. Could you just explain us the drivers behind that reversal? Christopher Spencer: Can maybe put up the exploration slide again. Thank you for the question. I hate to pick favorites as you know, because the implication for the other wells is what people take away. But I would just say that as -- Bijan has spoken about in previous quarters, as we have grown as a company, our ambition is actually to have a higher working interest in these opportunities. And because those are the ones that will really move the dot on -- for DNO. And so when I look at that right-hand column, then you can see that if I were using that criteria as a favorite, then you would be looking at the ones where we are 30% or 20% rather than 10%, having said that, all of these investment decisions have come across my desk, and I wouldn't have been positive to them if I didn't think that they were going to add value to the shareholders. And of course, exploration is a funny game. Sometimes the one you're not expecting to come in comes in and the one you're banking on doesn't. And we've all seen that many times over our career. So it's tough to figure out. I'm personally, I guess I'm very interested to see the appraisal results on Carmen and Norma. Those are 2 of the most exciting discoveries we made over the last few years and have substantial potential even [indiscernible] as well as being close to infrastructure. And when we talked about exploration strategy in the past, we've said, yes, we are close to infrastructure, ensuring we have rapid routes for commerciality. But we've also been looking for new play types in this new infrastructure area. [indiscernible] is an example of that to mention that one again. But Carmen and Norma also are in that category. And so they have a greater potential volume-wise than some of the others. But I don't just look at last year, when you were in Brage and you hit 10 million barrels, I mean, the value of that is tremendous because you can produce it next year. So yes, lots and lots of factors. I'm excited by the program is the way I'll finish that. The other question an impairment question, Birgitte. Birgitte Johansen: Yes. Christopher Spencer: All I know as an engineer is that we have moved closer to the startup of ore production, so the NPV has gone up. Is that part of it? Birgitte Johansen: Yes, that's part of it. The significant development work has been completed, including drilling of production wells. So we have a new assessment that led to a $30 million impairment reversal that is post tax. You asked about the input we use or the commodity prices we use. It's worth mentioning that there were some movements on commodity prices since we delivered our annual report or quarterly report for fourth quarter of '24 until we announced the acquisition of Sval. So the input in our impairment assessments will be different from '24 to when we did the Sval PPA, which was, I guess, in March, was before my time, but that's also worth mentioning. So we haven't reduced our expectation when it comes to the input we use on the commodity prices since we -- since March, quite stable. And we follow our peers and the forward curve, as you mentioned also, Teodor. There's also a lot of details in the notes. We have at least one page, even more, I think, on Note 7 in the report. So there's also quite a lot of information. There you also find a table with a lot of details on each adjustment we have done in Q4 '25. Teodor Nilsen: Okay. Have you increased any reserves or resources in the latest assessment? Birgitte Johansen: Not reserves, I think, no. Christopher Spencer: That's no material change in the reserves. The wells have confirmed what we were expecting. Bijan Mossavar-Rahmani: Jostein, would you put that exploration slide you just had on back on the screen, please? -- comments. And I'd point to 2 columns, both of which Chris has talked about. One is the DNO interest, which here we have this 10%, 15% interest and then the 30% interest. That shows the evolution of DNO as a North Sea player. When we returned to Norway several years now about 4, 5 years ago, we came in and started up as a pure exploration company. We took small interest or were awarded small interest in blocks and the target was to make discoveries. As we've matured, -- we've now -- we're now taking a larger interest and being awarded larger interest in assets. And this is significant because as a larger company, then discoveries will be more meaningful for us. Plus with larger interest, we have the ability to farm down. And for example, then reduce our exposure in terms of CapEx. We don't want to do that, but at least with larger interest, we have the ability to sell down if that makes sense for whatever reason or combination reasons. So that's been a change. And you'll see, again, that moving forward, our interests are going to be 30%, 40% in that range larger than was the case when we were a small exploration-only company with more limited resources and less of a track record. We've also added importantly this chance of commerciality. The point isn't just to make discoveries, it's to make discoveries of commercial molecules, both oil and gas. And that's now a consideration as we decide which wells to drill. It's first, what is the geological chance of success. And the second is having made the discovery, how quickly can we bring it to market. And that better be under 5 years. It hopefully will become 2 to 3 years, and that's what we're targeting. And that means we have to have discoveries made near infrastructure which we've been doing now for a number of years, but also that it's not just near infrastructure, but it's near accessible infrastructure that we are able to get into that infrastructure and to do all of this in very rapid time in terms of the time between discovery and production. So our business model has changed in that sense as we've matured. And you see that here, and you'll see it in successive quarters when we show these slides again that you'll see more wells that have high or medium to high chance of commerciality and where the DNO interest is larger, and that's -- that shows the evolution of DNO as a small exploration-focused company to a more mature company that focuses on exploration, but with access to infrastructure already, importantly, through the small acquisition of the small assets and the fact that, again, we are -- have this fast-track mentality and developing fast-track partnerships that you'll see us continue to mature and that will make us even more successful as a North Sea player than we have been because of exploration, will make us more successful because of development and then larger production volumes. So I think you see this evolution in this slide, you'll see it further in the future quarters as well. Jostein Lovas: Well, then, ladies and gentlemen, that's a wrap. And thanks to all for participating, and see you again in a couple of months. Christopher Spencer: Thank you. Birgitte Johansen: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Karina Calzadilla, Vice President, Investor Relations. Please go ahead. Karina Calzadilla: Thank you, Daniel, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies Fourth Quarter and Full Year 2025 Earnings Conference Call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of '25. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will be referencing to a slide presentation that has been posted to the Investors section in our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements depending on a number of factors, which are set forth in our public filings with the SEC and listed in this presentation. In addition, non-GAAP financial measures will be discussed during the call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-Founder, and Kyle Piskel, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, I'll turn the call over to Chad. Chad? Chad Robins: Thanks, Karina. Good afternoon, and thank you for joining us on our fourth quarter and full year earnings call. 2025 was a remarkable year for Adaptive, marked by strong execution and meaningful progress across the business. As shown on Slide 3, in the MRD business, full year revenue grew 46% year-over-year, and we achieved profitability ahead of expectations. We also delivered several key catalysts in the year that position the business for sustained growth and continued margin expansion. These include accelerated EMR integrations, including the integration of clonoSEQ into Flatiron's Onco EMR, expanding access across the community setting. The launch of NovaSeq X+ to help scale operations and improve margins. Our first Medicare coverage for recurrence monitoring in MCL, expanding the lifetime value of each MCL Medicare patient, updates in NCCN guidelines across all reimbursed indications, which continues to deepen clinical validation and strong data generation, which was marked by an all-time high with over 90 abstracts presented at ASH, reinforcing MRD's growing role as an interventional tool in patient care. In the Immune Medicine business, we scaled our TCR antigen data and modeling capabilities, leading to our first 2 data partnerships, and we completed a preclinical data package for our lead TCR depleting antibody program in ankylosing spondylitis. Taken together, the strong MRD execution, the continued progress in Immune Medicine and the disciplined spending across the organization drove 55% total company revenue growth and a 68% reduction in cash burn, leading to a strong cash balance of $227 million at year-end. Let's turn to Slide 5 for a closer look at the MRD performance and future expectations, starting with clinical testing. ClonoSEQ clinical testing revenue grew 64% for full year 2025 and 59% in the fourth quarter compared to the prior year. As shown in the chart, volumes increased sequentially throughout the year, reaching a new record of 30,038 tests in the fourth quarter, up 43% year-over-year and 11% sequentially. Growth was broad-based across all reimbursed indications with DLBCL, MCL and multi myeloma driving the majority of year-over-year growth. Multiple myloma represented 44% of U.S. clonoSEQ volume followed by ALL at 30%, CLL and DLBCL, both at 9% and MCL at 5%. Volume growth throughout the year was driven by a combination of interrelated factors, including blood-based testing, community presence, EMR integrations, clinical guideline inclusion and ongoing data generation. In the fourth quarter, blood-based testing accounted for 47% of clonoSEQ tests, up from 41% a year ago. In multi myeloma, blood-based testing reached 27%, which is a 6% -- 6-point increase year-over-year, which is particularly meaningful given the bone marrow-based nature of the disease. Community testing also continued to expand with volumes up 18% sequentially and representing approximately 33% of total tests in the quarter. We further scaled our digital footprint, completing Epic integrations in 8 accounts during the quarter, bringing the total to 173 integrated accounts, which now drive approximately 40% of ordering volume. Finally, NCCN guideline updates and continued data readouts across marketed indications supported our commercial execution. Ordering HCPs increased 9% sequentially and 45% year-over-year in Q4, with particularly strong adoption in the community setting. Taken together, these drivers continue to increase both physician adoption and testing frequency per patient across indications. Turning to Slide 6. In addition to volume, clinical revenue growth was also driven by continued ASP expansion. We ended the year with an average ASP in the U.S. of $1,307 per test, up 17% year-over-year, and we exited the fourth quarter at about $1,350 per test. ASP growth during the year was driven by strong execution from our reimbursement team across several initiatives. These include the successful renegotiation of 8 major payer contracts with national and regional payers, including Humana, Aetna, Horizon and multiple Blue Cross plans as well as the signing of new agreements with Anthem, Centene, Florida and LA Care. We also expanded commercial coverage policies with new coverage wins in DLBCL and in CLL. In parallel, we delivered meaningful revenue cycle management improvements, including Medicaid collections, appeals, prior authorization processes and time to cash. These operational enhancements supported by AI-enabled workflows are driving higher paid claim rates more consistent realization and improved commercial payer cash collections year-over-year by 74%. Looking ahead, we expect these initiatives, together with 2 additional large national payer contracts, we anticipate closing this year to support our targeted average ASP of approximately $1,400 per test in 2026. Turning to Slide 7. Our MRD pharma business had a strong year with revenue growth of 20% year-over-year, including $19.5 million in regulatory milestone revenue. Excluding milestones, pharma grew 11%, and we ended the year with approximately $210 million in backlog. Several important shifts in our pharma portfolio are worth highlighting: First, multi myeloma remains the largest driver, accounting for roughly 70% of sequencing revenue and approximately 60% of backlog; second, CLL and ALL bookings more than tripled in 2025 supported by emerging data underscoring the need for higher sensitivity MRD to differentiate therapies in both disease states as well as updated NCCN guidelines for fixed duration regimens in CLL. Third, MRD is increasingly embedded directly into regulated interventional trials with approximately 60% of our portfolio, including MRD as an endpoint, up from about 40% in 2024. This shift has been driven by regulatory momentum including the ODAC recommendation and most recently, the subsequent FDA draft guidance supporting MRD as a primary endpoint in multi myeloma accelerated approvals. Of note, registrational trials that incorporate MRD carry higher economic value and have a halo effect in the clinical business. Overall, we're encouraged by the expanding role of MRD across hematologic oncology trials, and we believe broader endpoint adoption, increased testing time points and the need for greater sensitivity will continue to drive MRD pharma revenue growth. Turning to Slide 8. Our focus this year is clear: continuing driving top line growth while expanding margins building on the same durable growth drivers that powered performance in 2025. In 2026, we expect clonoSEQ test volumes to grow by more than 30% year-over-year, supported by a continued mix shift towards blood-based testing, which we expect to exceed 50% of total MRD volume, deeper penetration in the community setting, where we expect more than 35% of testing to originate, further scaling of our EMR integration effort adding approximately 40 with a focus on high to mid-volume accounts, and continued generation of clinically meaningful data across multiple indications to further expand interventional use and support the guideline evolution. From a pricing standpoint, we expect to increase ASP to an average of about $1,400 per test based on the initiatives described earlier. In pharma, we plan to increase the number of registrational and primary endpoint studies across multi myeloma, CLL and DLBCL, leveraging growing regulatory and clinical endorsement of MRD. We also expect continued margin expansion driven by higher volumes throwing through the NovaSeq X+ and operating leverage across our production and our commercial infrastructure. We believe these priorities position MRD as a scalable, durable and increasingly profitable growth engine for Adaptive in 2026 and beyond. Now let's turn to Slide 10 to discuss Immune Medicine. The premise of our Immune Medicine business is to generate large-scale, proprietary immune receptor data that allows us to understand how T cell receptors bind to antigens and how those interactions drive immune responses across cancer, autoimmunity and infectious diseases. Over the past year, we have continued to scale this data we now have more than 5 million paired TCRs spanning over 20,000 antigens and nearly 50 HLA types, a data set that is orders of magnitude larger than is one is publicly available. We believe this scale is sufficient to train predictive models of the adaptive immune response across diseases. In parallel, we are applying our platform to identify what we believe are likely disease-causing T cell receptors and their antigens in certain autoimmune conditions, including type 1 diabetes, celiac disease and multiple sclerosis. These insights have the potential for TCR-based target discovery to enable existing and future partners develop -- to develop immune-based therapeutics. Turning to Slide 11, I'll briefly review our 2025 achievements and how they set us up for our 2026 strategy. First, we began to monetize our data with 2 distinct licensing deals with Pfizer. One is a data licensing agreement in which Pfizer has access to a subset of our TCR antigen training data. Pfizer will use this data to develop and train its AI and machine learning models to accelerate research and drug discovery in multiple disease area. The second licensing deal focuses on target discovery and rheumatoid arthritis or RA. Here, we are applying our IM platform and capabilities to identify the specific autoreactive T cell receptors that are highly enriched only in RA patients. Pfizer will then use these data to accelerate its research and development of potential RA therapeutic candidates. Together, these partnerships continue to validate the strength of our differentiated platform and the value of our large-scale proprietary data. In addition, we completed a preclinical data package for our lead antibody program in ankylosing spondylitis. While potential next steps include initiating IND-enabling studies, we made the strategic decision to stop further investment in this program and instead prioritize capital toward data generation and AI modeling. These are key areas we believe leverage our core differentiation and represent the highest return on investment for Immune Medicine. Along with these key achievements, we also maintained a disciplined capital allocation, executing against our objectives while keeping annual Immune Medicine cash burn to around $30 million, as promised. Looking ahead to 2026, we plan to continue advancing on our TCR antigen data sets and our AI/ML modeling work with a lower target net cash burn of $15 million to $20 million. We continue to focus on securing additional data partnerships, which we believe have the potential to drive meaningful long-term upside for Adaptive. Now I'm going to pass it over to Kyle, who's going to walk through the financial results and our 2026 full year guidance. Kyle? Kyle Piskel: Thanks, Chad. Turning to our financials. First, I'll cover our reported results, which include the noncash revenue recognized from the amortization of amounts previously received under our Genentech collaboration. As you know, following the termination of the collaboration in August, all remaining amortization was accelerated and recognized in the third quarter. As a result, there are no ongoing Genentech collaboration economics in our results after Q3. Total company revenue for the fourth quarter was $71.7 million and for the full year was $277 million, representing 51% and 55% year-over-year growth, respectively. Total company adjusted EBITDA was $4.1 million in the fourth quarter compared to a loss of $16.4 million a year ago. For the full year, adjusted EBITDA was $12.2 million compared to a loss of $80.4 million in 2024. Interest expense from our royalty financing agreement with Orbimed was $3 million in Q4 and $11.8 million for the full year, while interest income was $2.1 million and $9.4 million for the same respective period. Net loss was $13.6 million for the quarter and $59.5 million for the full year. Now turning to Slide 12. The revenue and adjusted EBITDA figures I'll discuss from here on forward are presented excluding all noncash revenue from Genentech amortization at all period shows. On this basis, fourth quarter revenue was $71.7 million, which increased 63% year-over-year with 86% contribution from MRD and 14% from Immune Medicine. MRD revenue was $61.9 million, up 54% year-over-year with clinical and pharma contributions of 67% and 33%, respectively. ClonoSEQ test volume increased 43% to 30,038 tests, up from 20,945 in the prior year quarter. Immune Medicine revenue was $9.8 million, up from $3.8 million a year ago, driven primarily by our data licensing agreement with Pfizer. For the full year, total revenue was $235.7 million, up 42% year-over-year. MRD revenue was $21.2 -- $212 million, up 46%, including $19.5 million in milestone revenue. Excluding milestones, MRD revenue grew 45% versus 2024. Immune Medicine revenue was $23.4 million, representing a 17% increase from the prior year. Moving down the P&L. Sequencing gross margin, which excludes MRD milestones, Genentech amortization and the licensing revenue from Pfizer, was 71% in Q4, up 12 points year-over-year and 5 points sequentially. Full year sequencing gross margin was 66%, up from 53% in 2024. Lower cost per sample were driven by production efficiencies, labor leverage and the transition to NovaSeq X+. Total operating expenses, including cost of revenue, were $84.5 million in Q4 up 4% year-over-year, primarily due to higher MRD sales and marketing investment, primarily from EMR and market access initiatives, partially offset by lower Immune Medicine R&D. Full year operating expenses were $334.1 million, down 2% year-over-year. As shown in the segment table, MRD adjusted EBITDA was positive [ $15.2 million ] in 2025 compared to a loss of $41.2 million in 2024, driven by higher revenue. Immune Medicine adjusted EBITDA loss improved to $31 million from $37.9 million, reflecting lower operating spend and increased revenue. As a result of strong top line growth, improving efficiency and disciplined spending, we ended the year with $227 million in cash, cash equivalents and marketable securities. This amount excludes $13.1 million of cash held by digital biotechnologies. Now turning to Slide 13 for our full year 2026 guidance. We expect full year revenue for the MRD business to be between $255 million and $265 million. This includes $8 million to $9 million in MRD milestone revenue based on our current line of sight. At the midpoint, this guidance implies 22% year-over-year growth or 30% growth excluding milestones. We expect MRD revenue to be approximately 45% weighted to the first half of the year and 55% to the second half as clinical volume and ASP growth compound with sequential clinical volume growth anticipated throughout the year. We expect full year operating expenses, including cost of revenue to be between $350 million and $360 million, representing 6% growth year-over-year at the midpoint. This reflects merit increases in additional targeted investments in MRD sales and marketing to support continued market expansion while leveraging our existing commercial and operational infrastructure. In addition, we expect to achieve positive adjusted EBITDA and positive free cash flow for the whole company by the end of 2026. We -- of note, as in prior years, Q1 will be our highest quarterly cash utilization primarily due to annual corporate bonus payments. I am pleased and encouraged by the strong results we delivered in 2025 and look forward to providing financial updates throughout the year as we execute towards our goals. With that, I'll hand it back over to Chad. Chad Robins: Thanks, Kyle. To bring it all together, 2025 was an outstanding year for Adaptive on all fronts. In MRD, we achieved profitability and grew the top line by 46%, driven by strong clonoSEQ volume growth. In IM, we scaled our TCR antigen data and began executing on targeted monetization opportunities that build long-term strategic value. And importantly, we maintained our strong cash position giving us the flexibility to execute across both businesses. Looking ahead to 2026, we're focused on continuing to fuel MRD revenue growth, expand margins and deliver company-wide profitability. We have a great playbook in place, and we're executing against it. We're encouraged by the momentum we are seeing and are confident in our ability to execute and deliver on these priorities. I'll now turn the call back over to the operator and open it up for Q&A. Operator: [Operator Instructions] Our first question comes from David Westenberg with Piper Sandler. David Westenberg: Congrats on a very strong volume quarter in Q4. So actually, I want to start with that, that sequential step up in clonoSEQ volume. Can you discuss how to think about that trend? Is there any seasonality there? And can you discuss some of the weather-related issues you might see in Q1? And one of the things I want to get at is you have a higher base now, so growing that sequentially up on a percentage basis might be a little bit more difficult, obviously, given how big your volumes are starting to get. Susan Bobulsky: Sure. Thanks for the question, David. We were really pleased with the Q4 results. And certainly, I think it addressed any questions that folks had about whether there was deceleration in prior quarters. I think we like to see that Q4 number really as a testament to, I think, the long-term opportunity to grow this business at a strong rate. We are -- I think that we see seasonality at various points in the year. Typically, Q1 has been a strong quarter for us, and Q1 has been lighter just given holidays, weather, et cetera. We have seen some weather-related impacts, as you are well aware, in recent weeks, primarily on timing of sample arrival as opposed to volume, although some impacts, of course, on volume as well. FedEx was not delivering for some number of days, hospitals and practices closed down. But good news is samples are starting to flow back in, in large volumes, and we had a very strong start to the beginning of Q1. So we remain confident in the guide for the year, I remain confident in the forecast for the quarter and that we'll show another strong sequential growth quarter-over-quarter in Q1. David Westenberg: And I'll just ask one more and I want to kind of ask this a little bit more directly since I think you have a really good tech and a good position in blood. So how should we think about the penetration rates in DLBCL? You have a first major advantage in a lot of the blood cancers particularly the multiple myeloma, how do you parlay that massive lead in multiple myeloma, for example, to [ DLBCL ] where your penetration of late is a little bit lower. And there is some concerns about incoming competition. Susan Bobulsky: Sure. I mean, I think we've learned a lot from the myeloma experience. And as you noted, have established a really strong position there, 45% or so of our business comes from that indication and we've been able to post strong quarter-over-quarter growth repeatedly in that space, in part, thanks to the advancement of the assay in blood in addition to bone marrow. In DLBCL, I think the playbook looks similar in a lot of ways in the sense that we are starting with an underdeveloped market where people need to be convinced that MRD has a value. And that's been our major focus. And we've seen strong results in Q4. We saw 14% quarter-over-quarter growth sequentially in DLBCL, I think, 115% versus Q4 of the prior year. But we're still, like you said, only at 3% of penetration of the patient opportunity. We do believe that increased noise in this space has potential to really help expand the market. And so we'll be continuing to focus on the things that we think are the major drivers, which are data generation with our enhanced ctDNA assay that we launched early last year further advancing the guidelines, which made some significant initial progress a year ago, broadening commercial payer coverage, which will help boost our ASPs and deepening penetration with pharma, where the interest in MRD guided trial designs in DLBCL is really ramping up. And we'll continue to underscore the sensitivity of our assay, but also the specificity, which is really crucial both in the clinic and in interventional studies. We'll continue to rely on some of the other strengths and sort of head starts that we've built, including our reimbursement, our strong relationships with hematologists who are treating us both in the community and academia. And the data -- the head start in data that we've accomplished as other entrants come in and determine what their path forward will be. Operator: Our next question comes from Subbu Nambi with Guggenheim. Subhalaxmi Nambi: A competitor came out with the flow cytometer pay positioning as competitive to NGS for myeloma and probably a significant price advantage. Would love to hear your thoughts on this product from both sensitivity and pricing perspective. Susan Bobulsky: Sure. It's interesting to see that Quest has launched a product in the space. From our perspective, it's not particularly a new dynamic for us. There are competitors already offering next-generation flow products with similar sensitivity claims in our space. But what we know is that flow-based methods for MRDs are inherently less sensitive than clonoSEQ and they always will be for any given amount of sample material. Obviously, Quest hasn't published any data yet, but their claim that their sensitivity is comparable to clonoSEQ is hard for us to reconcile. Their stated sensitivity is [ 5x10 ] to the negative 6, which is equivalent to 1 in 200,000 with 10 milliliters of blood. And as you know, clonoSEQ can routinely achieve clinical sensitivity of 1 in 1 million, 5x higher with just 2 milliliters of blood, our validated sensitivity for our FDA label is even higher, around 1 in 1.5 million, and that's the same in both blood and marrow. So the assay that's being launched is at best 5 to 7x less sensitive in blood than clonoSEQ and I think there's 2 things to keep in mind with that. One is the myeloma landscape is evolving in a direction that requires more sensitivity, not less. Treatments are driving really deep responses. Most patients now are negative in marrow at a depth of 100,000 and 200,000. And two, for myeloma, MRD sensitivity is especially important when you're testing in blood. The biology of myeloma is such that disease burden in blood is, on average, 100x less than in marrow. And physicians know this. So they want to use an assay in blood that's maximally sensitive. So remember, in the community, in Q4, over 60% of clonoSEQ/myeloma MRD testing was done in blood. And in that setting, we're also broadly reimbursed. 90-plus percent of patients have 0 out-of-pocket cost and we're broadly EMR integrated in the community with Flatiron and other large integrations. So ultimately, we're talking about another next-gen flow assay that has some similar benefits as clonoSEQ, blood-based testing, turnaround time, broad availability, but with less sensitivity in a sample type where sensitivity is really key. So of course, there are a single-digit percentage of patients for whom a diagnostic marrow isn't available to run a clonoSEQ IP test. So that's a subset of patients, perhaps next-gen flow could be a backup option. Subhalaxmi Nambi: Super helpful. I have a question for Karl. I think as you think about ASP pacing this year. How should we face it just given the private figures are in advanced negotiation stage? Kyle Piskel: Yes. I mean I think at this time, it's best to think of it as a linear growth. There are some specific timing things that we've got it locked down as it relates to some of the key payer contracts, we're focused on on converting. But I think at this point, where we are in terms of the timing of the year, it's best to just think of it as a lending or growth. Operator: Our next question comes from Dan Brennan with TD Cowen. Daniel Brennan: Maybe just first on the EBITDA guide for 2026. So I think you said EBITDA positive, maybe exiting '26. Can you just flesh it out a little bit. Is that Q3, Q4? Was that for the full year? And any help between where MRD versus immune medicine goes and kind of implicit in that, like are you making any changes to the sales force and puts into that? Is there any more sales force expansion in '26. Kyle Piskel: On the EBITDA guide, I'd say right now, it's an exit on Q4 for the entire company. MRD obviously positive adjusted EBITDA at this point, but we expect to see that continue to grow. And some of the initiatives across the business we're putting in place give us confidence to be able to achieve it across the whole company. And I'll let Susan take the field force. Susan Bobulsky: Yes. Currently, we have about 65 reps in the field. They're split 50-50 between academic and community focus. And we believe this is the right number of reps for now as our territories are manageable in terms of potential. The reps are calling on the right number of accounts and HCPs. And most of the territories are reasonable size. So while I'm not saying we don't add a territory here or there opportunistically and also I will acknowledge that we will continue to evaluate new deployment strategies to address market dynamics as they evolve, which could justify additional hiring we're not anticipating in the plan for this year, any significant expansion in the sales team. Daniel Brennan: Terrific. And you rattled off a bunch of the progress you made on a lot of the volume drivers between blood community penetration and EMR. I'm just wondering, makes sense to not get ahead of yourselves, but I think blood really ramped, and I think you're only baking in a little bit of an increase in '26. Is that just because we're kind of capping out on what's realistic? Or is that -- is there a reason and some way, I think community, I think, really ramped in the fourth quarter, and it looks like you're baking in a little bit of an increase there. Just maybe speak to those 2 assumptions. And is there some reason why they wouldn't potentially increase further in '26. Susan Bobulsky: Right. So I think in both cases, there is no -- we're not capping it out, and we don't believe that there is any reasons they couldn't potentially increase further, but we are sort of looking historically at what the pace has been of progress and then thinking about balancing the various drivers and sort of being prudent around what we set up as expectations at the beginning of the year. But on the blood-based testing front, we were at 47% in Q4 overall blood-based testing and 27% -- no, sorry, 45% and then 27% for myeloma specifically. Myeloma is a really big opportunity to grow that. Additionally, if we continue to grow DLBCL and mantle cell in our lymphoma indications disproportionately to the rest of the business, we will see blood as a contribution to the total business continue to to ramp. So I think there is upside, but we are confident that we can get to above 50% in 2026. And same thing on the community side. The guide that we have is over 35% of the business coming from community. It was 31% in 2025, and we closed the year in Q4 at 33%. So we hope to exit above 35% by the end of this year. And it will be a big area of focus, and it is a disproportionate area of investment for us. It's where our competitors are likely to focus and it's where things like the key data sets like Midas that came out multiple myeloma, helping inform the potential avoidance of transplant. That's a really big deal in the community, favorable guideline updates, guidelines matter a lot to community clinicians. So we'll continue to focus on those things. And also continue to drive new testing pathways in large community practice networks that help us standardize utilization of the assay across indications. And those things will -- again, the drivers, combined with our Flatiron integration and the serial testing that we can achieve through that, which have some potential upside in 2026. Operator: [Operator Instructions] Our next question comes from Mark Massaro with BTIG. Mark Massaro: Congrats on a strong 2025. I wanted to start on gross margins. It looks like they came in at 66% sequencing for the full year, and you hope to expand that to over 70% in 2026. I guess there are a number of parts to this. And where I'm going with this is your ASPs are still rising. In fact, last month, you indicated a plan to get to 1,700 to 1,800 in ASPs by 2029. So I guess my question is, the over 70% level in 2026, my sense is that you're not fully loaded there of long term. So is there any way you could give me a sense that maybe 3, 4 years from now, you could be perhaps meaningfully above 70%? Or do you think that, that's a pretty good place to consider in the out years? Chad Robins: Yes, Mark, this is Chad. I'll start and then I can pass it off to Kyle, if you want to kind of double-click on anything that I'm saying. But first of all, at JPMorgan, we came out and kind of moved that number already, up from 70% to 75%. And so -- and you're absolutely right. We're not fully loaded in the sense that the transition to NovaSeq X+, if you recall, just happened in the back half of this year. So we talked about a 5% to 8% percentage increase in the first 12 months and over a 10% increase just attributable to the NovaSeq X+ transition. So you're going to get a significant amount of additional uplift from that as you layer more samples on the same sequencing run. So that's a big one. The second, as you noticed, as you mentioned, as ASP. So as you continue kind of growing on the top line, along with better cost per sample, that margin continues to increase. So I think there's probably some even upside further from there, but we're going to, at this point, sequentially walk it up as we have from 70% to 75% but we are very confident in long-term durable high margin profile, both at the gross and the operating margin level. Mark Massaro: That's super helpful. And then maybe just to drill into ASPs. I think you guys indicated that you exited 2025 at $1,350 a test, and you came in at $1,307 for the full year, which is up 17%. So can you maybe share why is $1,400 the right rate in 2026. That's a 7% growth. Are there any particular items you could point to that might sort of not create for a similar growth rate in '26 than '25. Kyle Piskel: Sure. Thanks for the question, Mark. Remember, in 2025, we saw a meaningful growth across a number of initiatives, but one of the biggest ones was the gap sell rate that went into effect right at the onset of the year for our Medicare business, our Medicare fee-for-service business. So that provided a decent amount of the growth in 2025. We're starting to get some traction on the commercial side as we've implemented contract rate renegotiations and new payer rates. I think as it relates to 2026, I think right now, hey, we want to be with where we are during the year. I want to be prudent around guiding around ASP. There are kind of 2 -- I'll say 2 major things we're really focused on. One is renegotiating with 2 large payers that kind of move a significant amount of our volume in upwards of 17% to 18% of our volume. And so getting those rates established at the appropriate rate is really important and the timing of that can drive variability and ultimately, the ASPs we realized for the full year. The second piece, as Susan mentioned, we're anticipating growth in DLBCL and MCL, but to the extent that growth is even better than we thought. We've got to kind of navigate the coverage dynamics on the commercial payer front, and hopefully, we can continue to see positive coverage decisions with regards to those indications. But again, we would just want to be prudent in managing that and monitoring it over time. Operator: Our next question comes from Sebastian Sandler with JPMorgan. Sebastian Sandler: Great. Can you walk us through where you see upside to the ClonoSEQ volume guide in the year, I think it implies pretty healthy community volume growth, looks like around 50% year-on-year depending on what you assume more than 35% of total volume means. But where would you point to there being the most potential upside, whether that's NeoGenomics contribution, guidelines, incremental recurrence, monitoring coverage. Just walk us through that. I think that would be helpful to get a grasp of it. Susan Bobulsky: Sure. I mean from a volume perspective, on the clinical business, I think one of the areas of upside just based on sort of early -- we're in early days and have limited experiences in terms of EMR integration. The Flatiron integration and the [ serial ] testing, which we've talked a little bit about over the last quarter or so, we're really just starting to see what the pull-through on serial testing looks like. And so far, we've been pleased to see that about 60% of serial tests are actually showing up as scheduled. And so we think there are opportunities to potentially continue to focus on that and see if we can improve it or at the very least, ensure that we continue to see strong contribution from serial testing, which could have upside to what we've forecasted and guided. Additionally, on the EMR side, we've increased the focus on already integrated sites to what we call optimize those sites. This is things like standardizing order sets to increase testing consistency or further reducing friction and integrated workflows, which will improve order pull-through. Those kinds of initiatives are new, but the early results from pilots that we've completed have been very strong. And so I think there's a lot of promise there and source of upside. I talked about potential for upside on our anticipated contributions on blood and on the community, and those will be areas of continued focus. The other thing is that on the ASP side, we have some key payer contracts that we're still in the process of renegotiating. So the timing of those can be a source of upside on revenue as can potentially the negotiations turning out more favorably than we think. But overall, I think we feel like this guide is very reasonable, and we are being prudent early in the year, but there are many different ways that this business can be driven and can be accelerated and all these things kind of work together. So it's one of the things that we like about this business and one of the reasons we're very confident that we can meet or exceed our goal. Chad Robins: Yes. And I kind of add a fine point to that because I mentioned kind of this playbook. And [indiscernible] common with all these things working together. There were 5 things last year that drove the business blood-based testing community data results -- data readouts guidelines and EMR integrations, and those are the 5 things we're reinvesting in this year, and those are the things that we are going to drive growth, not only drive growth, but also give us an opportunity to be extremely confident in our guide and hopefully outperform. David Westenberg: That's helpful. Maybe touching on the ASP guide for '26. It seems like $1,400 is dependent to some degree on those 2 contracts you called out. Can you give us a sense of any sort of execution risk there or whether those contracts are kind of locked down at this point? And then just if those contracts were less favorable than expected, can you quantify where ASP could land? And any sense on whether -- you said to keep ASP flat or kind of linear throughout the year, but any sense of whether this is more of a first half or a second dynamic -- first half or second half dynamic would be helpful. Kyle Piskel: Yes. I mean there's certainly some level of execution risk. Otherwise, I think we wouldn't be in the stage we're at. But we're confident in getting there in the long term, and we want to make sure we're establishing the right rate. That's really the priority with these payers. As it relates to the dynamics in terms of pacing, yes, I mean, it's probably more of a second half dynamic just given where we're at in January. But I think at the end of the day, if those things don't come in, it does represent some minor risk, but there's other levers within the business that we can pull on, but continue to grow ASP. Chad Robins: Yes. I mean just -- we're quite confident in the ASP guys, and we've got multiple levers to get there. One contract or another is not going to necessarily impact that we're going to get there. Operator: And then our final question comes from Bill Bonello with Craig-Hallum Capital Group. William Bonello: And I applaud you for the prudence. I'm going to go a different way here. But really -- given the pre-release, what really stood out to us were actually the comments on the IM business, which I know you don't talk about all that much, and you don't want people to get out over their skis. But clearly, the way you're positioning this is much less as a therapy development business and much more as a data and informatics business, and it was good to hear about a couple of big contracts. I know it's probably early days on this strategy, but would love to hear any thinking you have around sort of ways that you monetize this leading database that you've created and sort of ultimately how we might think about how a business like this could scale out over time. Chad Robins: Sure, Sharon, do you want to take that? Sharon Benzeno: Yes. Thanks for the question. So as you alluded to, we're excited by the two distinct Pfizer deal, including both of which were data licensing deals, and we certainly look forward to continuing and believe that we can sort of rinse and repeat similar or even sort of differentiated additional data licensing deals. And really, this stems from the fact that we've generated this really massive differentiated data sets that certainly there's value across applying in different immunology applications and solving different immunology problems. So it's early days, but more to come as the year progresses, and we're super excited and enthusiastic in terms of where we are and where we're going. Chad Robins: Yes. And further, I think the Pfizer deal represented 2 types of different types of data deals. One is we're just kind of licensing data for AI modeling by pharma companies and the second, where we're using our unique set of capabilities to do target discovery work. And so there's kind of multiple different types of kind of opportunities that can provide monetization from this really a unique data set. William Bonello: That's helpful. And maybe just as a follow-up, as you think of sort of how the data stands today, are there investments you need to make to sort of make it more accessible potentially to pharma clients and others and just to be able to sort of meet the kinds of demands you anticipate that they're having? Chad Robins: Yes, Bill, the investments we're making are [indiscernible]. Remember, there's revenue coming in from that business as well, which we consider a [ burn off offset ] to the investments that we're making. So all the investments we need to, we believe, generate kind of this robust data set are captured in that kind of $15 million to $20 million net burn of the investments that we're making this year. William Bonello: Okay. I was just thinking more probably in terms of timing of when a business like this could inflect if it could. Chad Robins: Yes. Yes. And we'll come back at that point if there's kind of future investments to be made with a business case on a high risk-adjusted return on the capital based on what we're doing, we will come back and kind of share what the plans are at that time. I'm just -- I'm talking about for kind of the current path forward. We're looking at this as a kind of $15 million to $20 million net burn for the year for the business. Operator: Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thanks for participating, and you may now disconnect.
Operator: Welcome everyone to Barrick's Fourth Quarter 2025 Results Presentation. At this time, all participants are in listen-only mode. As a reminder, this event is being recorded, and a replay will be available on Barrick's website later today. We will now turn the call over to Cleve Rickert, head of investor relations. Please go ahead. Cleve Rickert: Thank you, Mariana, and good morning, everyone. We hope you have had an opportunity to review the press release we issued before the markets opened this morning. This presentation deck is also now available to download on our website. Presenting our results today are Mark Hill, Barrick's president and CEO, and Graham Shuttleworth, senior EVP and CFO. Other members of Barrick's management team will be available after our prepared remarks for Q&A. Before we begin, please note that we will be making forward-looking statements. This slide includes a summary of the significant risks and factors that could affect Barrick's future performance and our ability to deliver on these forward-looking statements. This material is also available on our website. I will now hand it over to Mark. Mark Hill: Okay. Thanks, Cleve, and thanks, everyone, for joining us for this call this morning. Barrick finished the year in very good condition. We delivered on our 2025 operating plan, and this resulted in multiple financial records. We also completed the operational review we discussed last quarter and have taken a number of actions, which I will touch on later. We achieved a resolution to the dispute in Mali, securing the release of our detained colleagues and resuming control of the asset. Record free cash flow allowed us to repurchase $1.5 billion of our shares as well as increasing our dividend. Turning to our performance in Q4, we built on last quarter's momentum and posted strong financial results. As I said, we logged several company records, including adjusted earnings per share, cash flow, and, importantly, shareholder returns. Production increased from last quarter to the highest level of the year, resulting in an 82% increase in EBITDA versus last year. We increased our base dividend by another 40% and adopted a new dividend policy. Cash flow for the quarter was up 96% from last year, and we logged a year of record annual cash returns to our shareholders. Fourmile continues to grow, and we are excited about advancing this 100% owned gold asset. Finally, consistent with the announcement we made in December, and following rigorous analysis, the Board has decided to move forward with preparations for an initial public offering of Barrick's North American gold assets, aimed at maximizing shareholder value. We are targeting to complete the IPO by late 2026 and will keep you updated on progress throughout the year. Returning to Sapient Health, our operational and financial achievements were overshadowed on Fort Huge last year with four fatalities. Last quarter, I made that commitment to making sure safety was our top priority, and this continues to be the company's number one focus for 2026. Clearly, there is more to be done because Q4 was not where we needed it to be. But our highest priority is that all our people go home safe and healthy at the end of each day. I will continue to work with myself and the Exco team to achieve and maintain that goal going forward. Moving on to the operational highlights, operationally, our business performed well in Q4, and importantly, we delivered on our guidance to steadily lift production throughout the year. Gold production was 5% higher, driven by a 25% increase at Carlin, and quarter-on-quarter increases across the NDM site. Our processing facilities ran well, and PV throughput rose to another record high. Full-year gold production of 3,260,000 ounces was in line with our guidance. Copper production increased 13% from Q3, driven by higher throughput at Balwana. Also, as I said before, we completed the operational review we discussed in the last quarter. Some important outcomes of that: we have now restructured our business units, putting PV in the North America region, which places all our key autoclave processing facilities under common leadership so that we can share best practices. Jim Cribb, previously overseeing Reco Dick, has moved to take over North America. Operational ownership, particularly in Nevada, is back in the hands of the operator. The mine plans have been reviewed from the bottom up, and we are entering 2026 with high confidence in our guidance. I will touch on this work a bit later, but now let me turn it over to Graham to discuss the financial pilot. Thanks, Graham. Graham Shuttleworth: Thank you, Mark. As most of you will know, this is my last earnings call, and I must say it is a real pleasure to finish on such a high note. Quarter four was a record quarter across almost every financial metric. The combination of our sequential increase in production and record high gold prices added to our strong financial foundation and sets us up with a lot of flexibility going forward to continue delivering significant cash returns to shareholders. Shown here on the right, revenues increased 45% from quarter three, driven by increased production and sales and a 21% increase in our realized gold price. Net earnings nearly doubled from the prior quarter, and we reported record quarterly cash flow, free cash flow, earnings per share, and a record cash balance. For the year, we reported $7.7 billion of cash flow from operations and $3.9 billion of free cash flow, up 194% from a year ago. Another company record. When you consider our gold sales volume declined 13% in 2025, with one of our key assets not operating for most of the year, those results are even more impressive. We are excited about the year ahead. Attributable CapEx ended 2025 below the low end of our guidance as our engineering partners came on board and we refined our spending schedules, particularly at our biggest projects at Recordedick and Lemwana. The graphs on the right-hand side of this slide highlight Barrick's financial value position. Our attributable EBITDA increased 53% versus the prior quarter on higher margins. As the 21% increase in the gold price dropped to the bottom line. Importantly, we steadily increased our attributable EBITDA margin through the year, tracking the gold price higher and demonstrating the operating leverage our business provides to the gold price. All of this enabled the highest annual shareholder returns in Barrick's history, with more to come. We ended the year with a net cash position of $2 billion. Building on the capital allocation framework we highlighted last quarter, Barrick's balance sheet is in phenomenally good shape, and our future capital investment programs are well funded. Suffice to say, Barrick is generating significant excess cash flow in the present environment. As I mentioned earlier, we generated $7.7 billion in operating cash flow, of which we reinvested $3 billion back into the business and bought back $1.5 billion of our stock, reducing our share count by 3%. You will recall that with our Q3 results, we increased the base dividend by 25% to 12.5¢ per quarter. But on the back of the strong annual results, the board has authorized a further 40% increase to 17.5¢ per quarter. In addition, the board has determined that it will target to pay out 50% of attributable free cash flow, incorporating a further discretionary component to reach the target. On this basis, the board has authorized a Q4 dividend payable in March of 42¢ per share, which is a 140% increase on the quarter three dividend. This new policy will replace the previous performance dividend policy, and at the same time, given the focus on cash returns to shareholders through increased dividends, the Board has determined not to renew the annual share buyback program. I will now turn the call back over to Mark. Mark Hill: Okay. Thanks, Graham. So turning back to our operation and looking first at North America, where we had strong performance. Gold production increased 11% from last quarter, driven by a 25% quarter-on-quarter increase at Carlin. Phoenix production hit its guidance range for the year, while Cortez and Turquoise Ridge achieved the top end of their ranges. Importantly, we did not high-grade the operation at the end of the year. We rather maintained focus on consistent, disciplined delivery and compliance with our plan. As a result, we are seeing a smoother transition from December into January. This has helped to achieve one of the best starts since the EAS and P NGM joint venture was established. The Carlin roaster had its highest January throughput in the last five years. In fact, the new management team and the focus on operational discipline, the processing team at Carlin has delivered its best sixty days since the formation of the joint venture. The underground mines at Carlin, Turquoise Ridge, and Goldrush have also had their best January since I joined formation in terms of tonnes mined and developed. This performance is exactly what we wanted to achieve from the operational review we highlighted last quarter. The teams have rebuilt their plans from the bottom up based on achievable metrics. The mines implemented this disciplined approach to their operation, enabling delivery of a solid result in Q4 and now in January. It is also clear that we have experienced challenges attracting and retaining talent at NBN. As a result of that, we have looked at many employment conditions as part of the operational review. We will be adjusting the remuneration framework to help attract and retain the best people, and importantly, we will be simplifying the bonus structure at the operational level to focus clearly on safety, our number one focus for the year, and then production, costs, and growth. We also restructured the executive team both at the group level and in North America. We have added a chief technical officer, Megan Tibbles, and an evaluation team. So this brings stronger operational experience into our senior leadership. PV had a better year with plant throughput up 12% and gold production up 8% from 2024. That said, the recoveries are not where we expected them to be. As we said last year, the main issue is the performance of the weathered stockpile. There is metallurgical inconsistency across those 90 million tonnes stockpiles, and we are not getting the same result in the plant that we saw in the lab for the initial feasibility study. We undertook extensive test work in 2025, and this will be reflected in the update of the 43-101 report, which is due out next month. So although the life of mine recovery rate is lower, we have been able to extend the life to 2048, maintaining the total overall output produced. Work on the new TSF is progressing well. And the housing project is well advanced with more than 600 homes constructed and over 300 families now resettled. So just briefly on Foremile, which continues to demonstrate its potential as a world-class gold asset in Nevada. 2025 was a major derisking year. We successfully delivered on our commitment to double four miles resource at a higher grade, and as you can see from this updated model, there is a lot more to come. The next step will be working on the Bullen Hill declines, which will enable efficient resource conversion from underground access. So moving down to South America and Asia Pacific region, which include Veladero and Porgera, this region also performed well against its plan in the quarter and the year. Veladero exceeded the top end of its 2025 guidance and its cost guidance by over $100 an hour. Work is continuing at Balladera to expand the resort. In the same vein, Porgera achieved the top end of its guiding train, keeping costs within guidance. Demonstrating strong operational flexibility. So on Africa, Middle East region, they achieved their production guidance and point out for the seventh consecutive year. And as I have said, we successfully resolved the dispute in Mali during the release of our incarcerated colleague. At Kibali, the ARC discovery delivered significant progress in 2025 and 3.5 million ounces to resources. Including 1 million converted to reserve. Further drilling in 2026 is expected to continue to grow this high potential discovery. North Mara reported a strong finish to 2025 with production in the top half of its 2025 guidance range. And Bull on Hulu overcame grade dilution and dewatering challenges in Q4. Ending the year within guide. So we regained operational control at LuluConcotter at the end of the year, we are ramping up the most accretive areas of the mine. We expect production to steadily increase throughout the year. And lastly, copper. Delamana finished the year on a high with production up 11% over Q3, thanks to higher throughput. Ending the year with a record high annual production. C1 cash costs were up in the quarter due to the higher maintenance and interim power costs, and the super pit expansion is tracking slightly ahead schedule with good progress during the quarter on the mill building which is on the project's critical path. Okay. So let's move over to guidance for 2026. So we expect our gold production to be in the range of 2.9 to 3,250,000 ounces. At 2025 gold production, as I said, was 3,260,000 ounces. But to give you a like-for-like comparison, that's about 3 million ounces if we remove Tongon and Hemlo, which was sold at the end of the year. We expect Lulu and Kuncutta's ramp-up to be the main contributor to the production increase in 2026. Along with slightly higher production from PV. Carlin and Turquoise Ridge production is expected to be marginally lower due to the open pit sequencing and the grade in the mine plan. Across the year, we are expecting gold production to split about 45% in the first half and 55% in the second. Higher production in quarters three and four will come from the ramp-ups of Lulu and Kotter and Goldrush and the timing of the shutdown at NPM. For copper, we are guiding 192,000 to 220,000 tonnes. Which compares to the annual production of 220,000 tonnes in 2025. Production is expected to be highest in quarters two and three and lowest in Q1, mainly driven by grade at the mine. And looking a bit further ahead, we continue to expect production uplift in 2027 and again in 2028. Returning now to reserves and resources. For our 2025 gold price assumption, we used $1,500 per ounce. For reserves and $2,000 per ounce for resources. Both modestly higher than last year. And for copper reserves, we used $3.25 per pound and sorry, for reserves and $4.54 resources. So today, Barrick, we hold one of the largest reserve and resource bases in the industry, and as of year-end, Barrick's attributable proven and probable gold reserves totaled 85 million ounces. On the resource side, attributable measured and indicated gold resources totaled 150 million ounces. With a further 43 million ounces of incurred resource. While there were declines as a result of divestitures, we continue to see strong organic growth across the asset in Nevada and at PV. Turning briefly to copper, attributable proven and probable reserves remained stable at 18 million tonnes. Copper resources increased with measured and indicated resources of 24 million tonnes. And an additional 4 million plus tonnes in the inferred category. Overall, our reserve and resource base continues to support long mine lives and a strong production outlook. So just to wrap up, in 2025, we demonstrated disciplined execution delivering on our operating plan, strengthening our balance sheet, advancing our growth pipeline, and returning record cash to shareholders. Looking ahead, we enter 2026 with momentum, flexibility, and a clear plan forward. So just before we move to questions, I just want to acknowledge Graham and thank him for his leadership and significant contribution he has made to Barrick over the past seven years. Under Graham's stewardship, we strengthened our balance sheet, reinforced capital discipline, and delivered record financial performance and shareholder return. So on behalf of everyone at Barrick, I want to thank him for his commitment and wish him well in his future endeavors. Also, we announced Helen Cai will be joining us as CFO on March 1, and I look forward to working with Helen as we continue to execute our growth strategy and drive long-term value for our shareholders. So thank you, everyone, for your continued interest and support. I will just remind you, I have just about the whole Exco team sitting around the table with me, so we should be able to manage any questions that you have. I will hand it back to the moderator. Thank you. Operator: Thank you. For the Q&A session, we will use the raise hand feature in Zoom. If you would like to ask a question, click on the raise hand button at the bottom of your screen. Once prompted, please unmute yourself and go ahead. We will now pause for a moment to assemble the queue. Our first question comes from Daniel Major at UBS Securities. Daniel, your line is open. You may unmute and ask your question. Daniel Major: Hi. Can you hear me okay? Mark Hill: Yeah. We can hear you, Daniel. Daniel Major: Great. Thanks. And Graham, good luck in the future. Yeah. So my first question focuses on the IPO potential. And really, I guess it is a question on a strategic level why you believe a partial IPO of MGM and PV would unlock more value than a full separation of those assets from the remainder of the group. I mean, if we look at previous examples in the sector, conglomerate discounts exist due to the complexity of organizations, and this will not dramatically reduce the complexity of Barrick. Mark Hill: Okay. Thanks, Daniel. I am going to hand it over to Greg. Thanks, Dan. Graham Shuttleworth: Dan, I think, as you can imagine, the board and the team have gone through a lot of different permutations. And you will recall we spoke about this last year as well when we first mentioned the opportunities that we were examining, and, you know, they have done a lot of analysis and looked at different outcomes, different permutations. And at the end of the day, they feel that this is the best opportunity that is going to drive value uplift for shareholders. You know, we believe that the current portfolio of assets in North America is substantially undervalued within Barrick. And by doing the North American IPO, we will be able to shine a light on that valuation and that light will then translate into a rerate for all Barrick shareholders. So that is the focus, that is the intention, and at the end of the day, that was the view from the board that that was going to drive the most value of all of those options. Daniel Major: Okay. Thanks. And then maybe a follow-up question then on what would be the intended proceeds from the IPO? Graham Shuttleworth: Thanks, Dan. Yeah. Using proceeds. Sorry. Again, you know, we are in the middle of that process at the moment. There is a lot of work that is going to have to be done between now and when we go live, and as we indicated, that is likely to be in the fourth quarter. All of that will be determined as part of the preparation work for the IPO. Daniel Major: Okay. Thanks. Then just maybe another follow-up on this similar topic. Have you had a discussion with Newmont around the clauses in the JV agreement pertaining to changes of ownership of the Nevada JV? Graham Shuttleworth: Thanks, Dan. Yeah. I think as you can imagine, you know, we are very well aware of all of the legal contracts and documents that we have. And we would always honor and respect those contracts and documents. Yeah, we are comfortable with the progress that we are making, and we will continue to progress down this road. Daniel Major: Okay. Great. Actually, if I could just get one more in, Graham. Just what is the latest on the record at financing? Graham Shuttleworth: Thanks, Dan. Yeah. I mean, as you saw in the press release, the board and the management are a little concerned about the security situation on the ground in Balochistan. There has been some escalation in security events there, and as you know, our primary focus on everything we do is the safety and security of our people. And so they have asked us to do a review of that situation, and so, clearly, as part of that review, we have indicated to the lending consortium that we need to complete that before we can close the financing. So we will work through that and then we will take it forward after that. Daniel Major: Alright. Thanks a lot, and good luck. Graham Shuttleworth: Thank you. Operator: Our next question comes from Fahad Tariq at Jefferies. Fahad, your line is open. You may unmute and ask your question. Fahad Tariq: Great. Thanks for taking my question. Mark, right at the outset, you mentioned that at Nevada, you have done a comprehensive mine plan review from the bottom up. Can you maybe talk a little bit more about how that has changed and has been reflected in the updated guidance? And maybe particularly on Carlin. Thanks. Mark Hill: Okay. Sure. I will give a bit of an introduction, and then I will hand it actually over to Tim, the new COO. Look, we went back to the teams, and there had been some top-down numbers generated over the last twelve months. And so we just asked the teams to go back and run the mine plans using current productivities that we are actually achieving and then building in, obviously, upside for productivity improvements only if there was an actual plan and a target to get up to those productivity. So it was not just a let's increase things by 10%. Unless there is an actual plan for that continuous improvement, then it was taken out. So it is why I said at the end too that we have a much higher confidence and certainly in January, we are off to a good start, of achieving our guidance. But I will hand it over to Jim if you want to add anything to that. Jim: Yeah. Thanks, Mark. I think, you know, as Mark said, it is about that in delivery of the plan. So you will see some reductions in some of the mines, like you have probably noticed in Carlin. So we do see some of them having a lower production, but we are much more confident in the delivery of that production. And I think as Mark said and as he highlighted in the outset, that performance at the Carlin roaster having a record throughput in the last sixty days the joint venture was formed. That highlights when you can move to a planned maintenance structure and we can cut out the interruptions and the reactive maintenance overall, we expect to get better results. So I think that is at the core of why we reset these plans and build them on actual past performance. Fahad Tariq: Okay. Great. And then just on Recodique because you were asked about it in the previous question. Is it fair to assume that all options are on the table up to and including divesting the asset? Thanks. Mark Hill: Look. I think it is too early to say that. I mean, we had the board meeting yesterday, and they basically asked us to go back and review the project across all areas. So we are in the first stages of that and working out what we are going to look at and what options we are going to look at. Fahad Tariq: Okay. Great. Thank you. Mark Hill: Thank you. Operator: Our next question comes from Lawson Winder at Bank of America. Lawson, your line is open. You may unmute and ask your question. Lawson, your line is open. Please unmute. Lawson Winder: Thank you very much, operator. And hello, Mark, and hello, Graham. Thank you for today's presentation. If I could ask one follow-up on Barrick North America, is the intention for Barrick America to be domiciled in the United States? Graham Shuttleworth: Again, there is a lot of work going on on that project, and as it is determined, we will keep you updated. Lawson Winder: On capital return, the new dividend policy is very clear. And it makes a lot of sense. How might share repurchases factor into capital return going forward? Graham Shuttleworth: At the moment, Lawson, the board is very clear that they want to focus on dividends. You know, I will say, my experience of engaging with shareholders is that this is an area where everybody has a strong opinion. And I know you are never going to please everyone. Because, yes, some people favor dividends and some favor buybacks, but now the board is very focused on dividends and hence the reason why they have not renewed the buyback approval. Lawson Winder: Okay. Very clear. On Veladero, how would you describe that asset in terms of the importance to the overall portfolio? And would you go so far as to describe it as non-core? And have you explored the salability of that asset? And then if so, could Pascua Lama potentially be packaged as some sort of sale with Veladero? Thank you. Mark Hill: So, Lawson, we have not Veladero is not non-core, and in fact, it is one of our top-performing assets in the last twelve months. So we have not looked at divesting it, if that is what you are asking. Lawson Winder: Okay. Great. Thank you very much, Mark. Mark Hill: And thanks, Graham. Operator: Our next question comes from Anita Soni at CIBC World Markets. Your line is open. You may unmute and ask your question. Anita Soni: Everyone, thanks for taking my question. So first question, Mark, just moving to PV. I just want to understand what the guidance is based on in terms of grades, recoveries, given that you are, as you mentioned, the recovery rates are fairly low. I did see you have, you know, still some of the blending of stockpiles. Is the plan to take out the stockpiles or continue to, you know, forge on with the stockpiles blended in and try to fix the recovery rates with those stockpiles? Mark Hill: Okay. Well, let me start off the answer, and I will again, I will hand it over to Tim. But it is obviously, the 90% was in the feasibility study. We are not going to achieve that. We are targeting 84, but to get to the 84, we are going to have to do the blending and a few other things. Right? So we are currently sitting, I think, Tim, around 75, 76. And so we will then ramp up over the next years as we get more confidence in how we blend the stockpiles into the fresh material. And when we can actually get up to that 84%. And there are also some projects we have to do as well. But Tim, you want to expand on that? Tim: Yeah. Thanks, Mark. I think the key is to define the projects. We have Hatch working with us at the site on the key projects that we can look to deliver the improvement from 76 up to 84%. Those stockpiles do make a key portion of the feed over the coming three to five years. So it is important that we do optimize that and get the from that. The technical report, which is coming out at the February, that will obviously have a lot more detail on this. But for the long assumption, we have basically updated the full recovery model to incorporate this latest test work. So we have run that through the life of the mine. Anita Soni: Is there any reason to lose Sorry. Just to reiterate that the updated 43-101, which will obviously have all of this information, will be available at the February. Anita Soni: Right. And I guess the question that I had as a follow-up for that part of it was, do you expect to all of the ounces that you reported in the reserve resource statement at year-end? In that 43-101, or will that potentially take some of the ounces out? Mark Hill: No. No. We expect to maintain Tim. Correct? Yeah. Anita Soni: Okay. And then my second question was just with respect to the IPO. I know you, you know, you are saying you will have an update at year-end on that or it will be completed by year-end. But could you give us an idea of what portion of the Nevada gold mines and, you know, Fourmile North American assets, what portion of those assets do you intend to IPO? Heard ranges between 10 to 15-30%, but I am not sure what you guys are doing. I think it is fair to say it will be on the lower end of that and be on already pop up. Of those assets. Anita Soni: So 10 to 15% more along the lines of 10 to 15%? Mark Hill: Sure. Yes. Anita Soni: Okay. Thank you. That is it for my questions for now. Mark Hill: Thank you. Operator: Our next question comes from Bennett Moore at JPMorgan. Bennett, your line is open. You may unmute and ask your question. Bennett Moore: Good morning. Can you hear me alright? Mark Hill: Yes. We can hear you better. Bennett Moore: Great. Thank you for taking my questions. I wanted to come to Mali. And since gaining control back there, what has the dialogue been with the government, and what are the state of the assets? And is there any incremental investment required there? Mark Hill: Okay, Bennett. Let me hand it over to Seth if he can give us an update soon. Seth: Hi, Bennett. The relationship is really at a reset. And the engagement so far has been really positive. We took control of the asset on December 16. It was actually in much better shape than we expected. So we started off feeding low-grade stockpiles, and at this point, we have now started up all three of the underground mines. And we are ramping up the open pit, which we expect to be doing that in the second half of this year. And so the focus is really on getting that ramp-up in a safe manner so that we can achieve our historical run rates by the end of this year. And so if you would have seen in our guidance, that for Rudo Goncotto, this year, we are guiding between 260,290 ounces. Attributable. Bennett Moore: Thanks for that. And now with the employees no longer detained and the worst seemingly behind, I wanted to get your latest thoughts on a potential asset sale there. If you have seen any interest or dialogue from other parties. Seth: No. I think at this point, the focus is really on ramping up that mine and restoring the relationship, and everyone is really committed to doing that. Bennett Moore: Okay. I will get back in the queue. Thank you. Mark Hill: Thanks, Ben. Operator: Our next question comes from Carey McGrory at Canaccord Genuity. Carey, your line is open. You may unmute and ask your question. Carey McGrory: Hi. Good morning, guys. Can you hear me? Mark Hill: Yeah. We can hear you, Carrie. Carey McGrory: Yeah. Just going back to the IPO. Just wondering about the timing. I mean, production in Nevada has come down pretty much consistently every year. Looks like it will be lower again this year. So just wondering why now and not when Nevada looks a bit more stabilized. Mark Hill: Okay. So look, Carrie, this is my view. I spent a lot of time in Nevada over the last four months, as you can imagine. So I think Nevada is stabilized. And I think what we have demonstrated in a very short time, far quicker than I thought, is that we have given control back to the general manager. We have a very strong team in Nevada, like we have had for twenty years. And you have seen the performance in Q4, and January is even stronger again. As I said, I think the best January we have had in five years. So I am completely comfortable they are going to deliver this year every quarter, which you are going to see before we go to this IPO. And I think we are now in a position where we will not disappoint and that production over time will actually grow. And again, Tim, anyone else? Feel free to chime in if you have anything else. Carey McGrory: Okay. And maybe just on the 2027 outlook, if you can just sort of walk through sort of the big you know, what is moving from 2026 to 2027? Graham Shuttleworth: Is that sorry, Gary. Is that for the group or at MGM? Carey McGrory: No. No. Group level. Graham Shuttleworth: Yeah. So the biggest movers really are continued increase at Blue Lagoon Cotto, and a small increase at Naval and then an increase at PV. So those are the three key areas. Carey McGrory: Okay. That is me. Thanks, guys, and congrats, Graham, and all the best. Graham Shuttleworth: Thank you, Carey. Operator: Our next question comes from Josh Wolf at RBC Capital Markets. Josh, your line is open. You may unmute and ask your question. Josh Wolf: Yeah. Thanks very much. I noticed the new guidance does not include costs or CapEx indications for the next couple of years. You know, the historical guidance for the company did indicate that there was a cost reduction over time. How should we think about costs going forward after 2026? Graham Shuttleworth: Yeah. I mean, Josh, obviously, we did not give you guidance. I am not about to give you guidance now. But I think, you know, broadly, I would say flat would probably be a better way of thinking about it. Josh Wolf: Thank you. And then another question on the IPO. I am wondering how is the company thinking about the management of NewCo and what sort of governance rights will Barrick have with the state given it still will be controlling. And then sort of along those lines, you know, how is the company ensuring that both Barrick shareholders will be aligned with the new co shareholders? Thank you. Mark Hill: Well, look, Josh, I think it is too early to say. I mean, we are starting a nine-month process, and as I said, we will keep you updated as we move along. I have not got the answers to those questions at the moment. Josh Wolf: Thank you very much. Mark Hill: Thanks, Jeff. Operator: Our next question comes from Martin Pradeer at Veritas. Martin, your line is open. You may unmute and ask your question. Martin Pradeer: Thank you. My question is if you are going to unpack a little bit the big cost increase from this year, you know, on from the outlook compared to 2025. What are the big drivers? If you can provide some color. For gold and for copper, please. Graham Shuttleworth: Thanks, Martin. Really, there are sort of three buckets, two of which are the most significant. The first one is the gold price assumption. So I hear you. Can you hear me? Mark Hill: Yeah. I can hear you. Can you hear me? Graham Shuttleworth: K. Moderator, can you hear me? Operator: Yes. We can hear you loud and clear. Martin, we can hear you as well. Mark Hill: Martin, can you hear us? Looks like we have lost Martin. Operator: We can move on to the next question. A reminder, if you would like to ask a question, you can click on the raise hand button at the bottom of your screen. Our next question comes from John Tumazos at Very Independent Research. John, your line is open. You may unmute and ask your question. John Tumazos: Thank you very much. Barrick sold 31 million ounces of gold resource for $2.55 billion or $82 an ounce. Will you sell any more gold? Is it because you do not have enough managers for all of your properties or would you reverse course and buy gold to offset the gold you sold? Graham Shuttleworth: Think it is not a question of just selling gold for the sake of selling gold. It is really about focusing on a strategy. Our strategy has always been to focus on our tier one high-quality assets. And the dispositions that we have made have been in respect of those assets that did not fit that strategic filter. So we will definitely continue to invest in gold going forward, you know, in line with our strategy. We definitely believe in gold, and the focus of this company going forward is very much around gold. But it is, you know, within the constraints of the strategy. Mark Hill: You still there, John? John Tumazos: Thank you. Operator: As a reminder, if you would like to raise if you would like to ask a question, please click on the raise hand button at the bottom of the screen. This concludes our Q&A session. Back to Cleve for any closing remarks. Cleve Rickert: Great. Thank you, everyone, for joining us today. Look forward to speaking with you again on our first quarter results call in May. Please get in touch with us if you have any further follow-up questions. Good. Thanks again. Mark Hill: Thanks, everyone.
Operator: Hello, and welcome to Fortinet's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Luscri, Vice President of Investor Relations. Please go ahead.\nAnthony Luscri: Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Fortinet's fourth quarter and full year 2025 financial results. Joining me on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; Christiane Ohlgart, our CFO; and John Whittle, our COO. Ken will begin our call today by providing a high-level perspective on our business. Christiane will then review our financial results for the fourth quarter and the full year of 2025 before providing guidance for the first quarter and full year 2026. We will then open the call for questions. During the Q&A session, we will ask you to please limit yourself to 1 question and 1 follow-up question to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation accompanying today's remarks, both of which are posted on our Investor Relations website. As a reminder, this is a live call that will be available via replay via a webcast on the Investor Relations website. The prepared remarks will also be posted on the quarterly earnings section of our Investor Relations website following today's call. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I'll now turn over the call to Ken.\nKen Xie: Thank you, Anthony, and thank you to everyone for joining our call. We are very pleased with our excellent fourth quarter growth, driven by broad-based demand across our platform as building increased 18% and revenue grew 15%, driven by product revenue growth of 20%. Our provision margin was strong at 37%, reflecting our continued focus on [ betting ] growth of profitability. Secure networking billing grew 13%, outperforming the overall secure networking market as we continue to gain market share. Fortinet remained the #1 firewall leader with a 55% unit market share and the highest product revenue among our segment security peers. Fortinet has led the convergence of networking and security for over 25 years, and secure networking is expected to surpass the traditional networking by the end of this year. Our firewall leadership is driven by FortiOS, which unified networking and security, and our FortiASIC technology, deliver 5x to 10x better performance than competitors while lowering the total cost of ownership and energy consumption, which provide a large advantage and a scale and securing AI data center. We will introduce the FortiOS 8.0 at the Fortinet's Annual Customer and Partner Conference accelerated in March, featuring significant and new capability in security and networking, especially in AI security, such as agentic AI security in enterprise, plus a new bundled SD-WAN and SASE service. We also recently partnered with NVIDIA to leverage their BlueField 3 DPU to secure AI infrastructure. Unified SASE billing grew 40%, representing 27% of our total billing, supporting our belief that Fortinet is the fastest growing SASE leader and scale. Our momentum is powered by 3 key advantages. First, Fortinet uniquely integrate [ Negen ] firewall, SD-WAN and SASE on a single OS for the OS, running on-premise all in the cloud, allowing customers to expand a SASE in minutes and driving upsell across a large customer base. Second, we're supporting both Sovereign SASE and Public SASE. Sovereign SASE enterprise and service provider to deploy SASE in their own data center to meet the data privacy, sovereignty and the compliance requirement. We are seeing strong demand in Sovereign SASE, and none of our major SASE competitors offer a Sovereign SASE solution, making Fortinet's total Unified SASE addressable market significantly greater than our peers. Third, our owned and long-term invested global cloud infrastructure for the cloud delivers high performance and security and roughly 1/3 of the total cost of ownership of our peers. These differentiators position Fortinet as a leader in the 2025 Gartner Magic Quadrant for SASE platform as we continue to be the leader in SD-WAN and believe we'll be the #1 Unified SASE within the next few years. AI-driven secured billing grew 6% in the fourth quarter and 22% for the full year, while ARR was up 21%. Our strong performance was driven by more than 20 AI power solutions as customers consolidate multiple security vendor on to Fortinet's platform. In addition, Fortinet's leadership in security also extend to operational technology and the cyber physical system, offering enhanced visibility, robust threat protection and secure connectivity. The demand for OT solution has driven significant growth, with billing up more than 25%. Finally, we reaffirmed the midterm target we shared at our Analyst Day, reinforcing our commitment to continue to grow faster than the overall market, including delivering billing and revenue CAGR above the market growth of 12% and achieving a Rule of 45. I would like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work. I will now turn the call over to Christiane.\nChristiane Ohlgart: Thank you, Ken, and good afternoon, everyone. As Ken mentioned, we are very pleased with our strong fourth quarter performance, exceeding the high end of guidance across billings, total revenue and operating margins. This outperformance reflects solid global execution and broad-based demand for our solutions, with product revenue growth accelerating in the second half of the year. We are well positioned to deliver durable long-term growth as a leader in large and rapidly expanding cybersecurity markets, including secure networking, Unified SASE and security operations. This opportunity is supported by strong secular tailwinds such as vendor consolidation, the convergence of security and networking, ongoing technology upgrades and the expansion of enterprise [ attack ] services across cloud, OT and AI. Our strong network security foundation drives adoption of SD-WAN, SASE and SecOps while creating significant opportunities to upsell integrated solutions across enterprise customers. Building on these market dynamics, our leadership in secure networking, combined with our Unified FortiOS operating system and broad platform, enables customers to deploy security anywhere across private, public and hybrid multi-cloud environments and in any form factor, including hardware, software and SaaS. As a result, our platform approach drives strong customer expansion, increases wallet share and supports growth across both existing and new markets. In addition, we benefit from durable competitive advantages through our proprietary ASIC technology and single integrated operating system, which delivers superior performance, lower total cost of ownership and meaningful differentiation versus peers. At the same time, continued investment in R&D across custom silicon, OS convergence, AI-driven security, quantum readiness and Fortinet own cloud infrastructure supports rapid innovation and organic growth. Finally, our highly diversified business across geographies, customer segments and industry verticals reduces volatility and enhances resilience across economic cycles. Complementing this diversification, we operate a strong and balanced model with the Rule of 45 plus profile, robust recurring revenues, strong free cash flow generation, a solid balance sheet and a disciplined shareholder-focused capital allocation strategy. This balanced model supports our confidence in our 2026 guidance and continued long-term shareholder value creation. Now moving to an overview of our strong fourth quarter results. Total billings grew by 18% to $2.37 billion, driven by strong growth in Unified SASE, OT security and success in large enterprises in the U.S. and Europe. Unified SASE billings grew 40%, driven by growth in cloud security solutions. Furthermore, SASE adoption momentum has remained strong, as 16% of our large enterprise customers have purchased FortiSASE, an increase of over 50%, highlighting our continued expansion of FortiSASE in our customer base. Operational technology use cases continue to contribute strong growth to our success with billings growth of over 25%, with broad-based demand for both our hardware and software solutions. And our continued momentum in large enterprise drove growth in the fourth quarter as the number of deals greater than $1 million increased by over 30%, while the total deal value grew by over 40%. The U.S. and Europe were the largest contributors to growth in $1 million-plus deals, delivering more than 30% growth. In addition, we continue to expand our customer base. 7,200 new organizations selected our Unified FortiOS platform, reinforcing our strong position across all market segments. With regards to ARR, Unified SASE increased by 11% to $1.28 billion, which included an increase of over 90% for FortiSASE ARR, while SecOps ARR increased by 21% to $491 million. Total revenue grew 15% to $1.91 billion. Product revenue increased by over 20% to $691 million, reflecting broad-based growth driven by strong performance across our product portfolio as we continue to gain market share. Both hardware and software grew 20%, supported by technology upgrades, upselling and expansion into new use cases. Service revenue grew 12% to $1.21 billion, reflecting lower product revenue in 2024, while service billings growth was strong at 18% in Q4. As a reminder, we view product revenue growth as a leading indicator of future service revenue growth, as shown on Slide 20 of the earnings presentation. Now I'd like to highlight some key deals that demonstrated our market leadership and customer expansion. In the competitive 7-figure upsell deal, a large consumer services company and existing 41 SD-WAN customer selected FortiSASE to secure more than 10,000 users as part of its next-generation access and security transformation. The win was driven by our single OS approach that tightly integrates SD-WAN and SASE, enabling rapid expansion to SASE and delivering strong performance at a meaningfully lower total cost of ownership. The customer chose Fortinet for our Unified FortiOS operating system, which reduces complexity by enabling a single consistent security policy across FortiSASE and FortiGate devices while leveraging our globally distributed PoPs. By integrating our PoPs into their existing SD-WAN fabric, the customer has simplified centralized policy management and enable secure private access at scale, which highlights our platform model. Next, a leading global data center provider supporting AI and cloud workloads signed an 8-figure deal with Fortinet to support its rapid global expansion. The customer selected Fortinet for a predictable, scalable investment model that aligns security growth with its accelerated data center build out. As the company standardizes on our FortiGate, FortiSwitches and [ FortiAPs ], our solutions will streamline operations across IT and OT environments, including critical power, cooling and physical security systems. This strategic partnership enables the customer to scale security and consistently, supporting its long-term global growth strategy. In another key win, a major utility company expanded its partnership with us through a high 7-figure agreement to secure its operational technology environment. The deal includes a comprehensive set of solutions covering network segmentation, identity and access management and zero-day threat detection across the utility's advanced distribution management system. Along with the adoption of 4D AI, this competitive win was driven by our ability to automate critical security operations, our proven expertise in protecting critical national infrastructure and a compelling price for performance advantage. Lastly, in the competitive displacement win, a Fortune 100 company signed an 8-figure multiyear agreement for Unified SASE, selecting our virtual firewall solution to secure approximately 1,800 store locations. The customer chose FortiGate VM through our FortiFlex points-based consumption program, which supports flexible hybrid firewall deployments and a broad set of security solutions. Fortinet was selected after a highly competitive evaluation due to the flexibility of the program and our ability to meet demanding technical requirements at scale, enabling the customer to consolidate security on a single architecture while gaining deployment flexibility, centralized management and long-term cost efficiency to support future growth. Turning to margins and cash flow. Total gross margin of 80.3% was better than expected, which is especially impressive given the strong product revenue growth and related mix shift. Operating margin of 37.3% exceeded the high end of the guidance mainly due to stronger-than-expected revenue growth and cost management. Free cash flow was very strong at $577 million, and adjusted free cash flow was $589 million, up $130 million and represented a margin of 31%. We repurchased approximately 730,000 shares of common stock for $57 million during the fourth quarter and an additional 4.6 million shares for $356 million quarter-to-date. In January, our Board of Directors approved a $1 billion increase in the authorized stock repurchase amount, and the remaining share repurchase authorization as of today is approximately $1.4 billion. Turning to our full year 2025 results, where we once again exceeded the Rule of 45 for the sixth consecutive year. Billings grew 16% to $7.55 billion. Our faster-growing pillars of Unified SASE and SecOps grew a combined 24%, representing a 2-point mix shift year-over-year and 6 points over the past 2 years. The 2 pillars now make up 36% of total billings, reflecting the value of our integrated platform approach and the convergence of security and networking and success in cross-selling our other solutions. [indiscernible] revenue grew 14% to $6.8 billion, driven by strong product revenue growth of 16%. Service revenue grew 13% to $4.58 billion, representing 67% of total revenue. Gross margin of 81.3% was flat despite the shift to product -- new and investments in the build-out of our data center infrastructure. Operating margin increased 50 basis points to a record of 35.5%, resulting in operating income of $2.41 billion, which is up 16%. Our GAAP operating margin of 30.7% continues to be 1 of the highest in the industry. Earnings per share increased 16% to $2.76. Free cash flow was a record of $2.21 billion, representing a margin of 33%, while adjusted free cash flow was $2.5 billion, representing a margin of 37%. Our adjusted free cash flow CAGR of greater than 20% over the past 5 years demonstrates the strength of our business model. Now moving on to guidance. As a reminder, our first quarter and full year outlooks, which are summarized on Slides 24 and 25, are subject to the disclaimers regarding forward-looking information that Anthony provided at the beginning of the call. For the first quarter, we expect billings in the range of $1.77 billion to $1.87 billion, which at the midpoint represents growth of 14%. Revenue in the range of $1.7 billion to $1.76 billion, which at the midpoint represents growth of 12%. Non-GAAP gross margin of 80% to 81%, non-GAAP operating margin of 30% to 32%, non-GAAP earnings per share of $0.59 to $0.63, which assumes a share count between 746 million and 750 million, infrastructure investments of $80 million to $120 million, a non-GAAP tax rate of 18%, cash taxes of $45 million to $50 million. For the full year, we expect to achieve the Rule of 45 for the seventh consecutive year and expect billings in the range of $8.4 billion to $8.6 billion, which at the midpoint represents growth of 13%, revenue in the range of $7.5 billion to $7.7 billion, which at the midpoint represents growth of 12%. Service revenue in the range of $5.05 billion to $5.15 billion, which at the midpoint represents growth of 11%. We expect service revenue growth to pick up in the second half of 2026, driven by accelerating product revenue growth in 2025 as a key leading indicator. Non-GAAP gross margin of 79% to 81%, non-GAAP operating margin of 33% to 36%; non-GAAP earnings per share of $2.94 to $3, which assumes a share count of between 747 million and 753 million; infrastructure investments of $350 million to $450 million; non-GAAP tax rate of 18%; cash taxes of $350 million to $400 million. Before we open it up for Q&A, I just wanted to share a few modeling considerations. As a reminder, the majority of our service revenue is recognized relatively on a daily basis, and the first quarter this year has 2 fewer days than Q4. From a margin perspective, our first quarter operating margin guidance reflects the timing of several marketing events. Additionally, the recent weakness of the U.S. dollar may create a modest headwind in the first quarter. And finally, we plan to repay the first tranche in the amount of $500 million of our senior debt at maturity at the end of the first quarter. This, alongside lower market interest rates, will reduce net interest income for the year. As we look to 2026 and beyond, we are confident in our growth strategy, driven by significant secular tailwinds such as rising cybersecurity spend, the convergence of security and networking, vendor consolidation and the increasing need to secure AI and OT environments. We believe we can sustain product revenue growth of 10% to 15% over the midterm on average and reaffirm the midterm targets shared at our Analyst Day, including delivering billings and revenue CAGR above 12% and achieving the Rule of 45. We are enforcing our commitment to continued growth beyond that of the overall market. Our leadership in innovation and price for performance enables the lower total cost of ownership across secure networking, Unified SASE and SecOps, positioning us to outperform the overall market. We are well positioned to deliver durable long-term growth considering our highly diversified, cash-generative and profitable business. I will now hand the call back over to Anthony to begin the Q&A session.\nAnthony Luscri: Thank you, Christiane. As a reminder, during the Q&A session, we ask that you please limit yourself to 1 question and 1 follow-up question to allow others to participate. Operator, please open the line for questions.\nOperator: [Operator Instructions] Our first question comes from Shaul Eyal at TD Cowen.\nShaul Eyal: Thank you so much. Good afternoon, everybody. Congrats. I'm interested in what drove the strength or the change that you've seen during the quarter, specifically the Unified SASE billings and the strong guide? What gives you confidence into 2026?\nKen Xie: Yes, that's a great question, Shaul. Thank you. Actually, you can see the Unified SASE grew 40%. That where we see probably the fast-growing Unified SASE vendor and skill. Because the 3 unique advantage I mentioned, first, actually, the Sovereign SASE, we see very, very strong growth. I believe the Sovereign SASE market probably even bigger than the current public. So that's all the other vendors doing right now. But we don't see any of them try to get in the Sovereign SASE or have the function to support Sovereign SASE, which we kind of design the SASE in the beginning to supporting our service provider and all these things, which is all kind of Sovereign SASE approach. Last, have a huge growth and Sovereign SASE usually buy the product first, then deploying the customer or service provider data center and then where we're keeping supporting with additional service. So that's a huge market opportunity. We believe we are the only leader in the space for the Sovereign SASE. Second, we have 3 functions into single OS: network security, SD-WAN and SASE. That's actually give us a huge advantage lever our huge customer base. None of our competitors has this advantage. And that's making us grow very, very quickly, both our sales and the partners see the huge advantage and starting to ramp up very quickly. And then also long term, because of our investment in the infrastructure. So we do see -- we have a cost advantage. So our cost is about 1/3 compared to some of the competitors, right? So that's also we can pass all this kind of cost savings to customers and play the long-term game. That we see very strong growth of Unified SASE. Maybe Christiane and John had some other point?\nChristiane Ohlgart: Yes. So I think we saw a really good traction on our execution in Q4, and it was very broad-based. So -- as you heard from me, I mean we were great in enterprise. We executed well on the OT side. We had successes in SASE. AI was a big driver. So that gives us significant confidence for 2026 that these growth drivers are going to continue because the demand is definitely there.\nJohn Whittle: I would just say, obviously, the sub-security market is growing really nicely. As Ken highlighted, we have a lot of competitive advantages where we feel like we can grow faster than the market and faster than each of the 3 pillars that we focus on, as we did throughout 2025. And we see a lot of different growth drivers amongst the 3 pillars, the OT momentum. We see opportunities with AI and with quantum. And when you look at our business, it's really diversified in a number of ways, geographically based on customer segments and also industry verticals. And then if you look at our solution sets as well is diversified amongst the 3 pillars that we focus on. And when we focus, we have a track record of doing really, really well. If you look at what we did at SD-WAN, we focused and did really, really well, starting around 2018 or so and really grew that business. And we're really focused on Unified [ SaaS ] in these other areas as well and expect to do well just like we've done in the past.\nShaul Eyal: Got it. Maybe just a brief follow-up. Ken or team, what are your views on AI eating for specifically as it relates to cybersecurity? We have seen -- we're sitting here in front of the screens. We probably -- everyone else, my peers here, seeing software demise. Cyber has been holding a little better. But I think today, the past few days, it hasn't been fun at all. Just curious as to your views whether security actually augments AI or maybe it's the other way around?\nKen Xie: Yes, definitely changing the -- especially enterprise landscape. Some software probably also need to be changing to see whether they take advantage of the AI or they kind of falling behind, which led AI to eat some of the software. But on the other side, we do see as an opportunity in the cybersecurity space because also how to control some of the AI. We do see in the enterprise environment as kind of -- see some strong demand in whether internal segmentation to kind of control some of agentic AI or some other data leakage provision. So on the other side, the AI data center also, we see some huge opportunity there. I think we will present more detail in the next month [ Accelerate ] if you see some of the presentation I did in the last few Accelerate 6 years ago. I don't see the edge will the cloud and mobile. So that's where I think some time -- some of this like AI solution and the immersive technology with AI, I think it would be kind of changing some of the traditional weather software infrastructure, which we keep invest, be keeping kind of prepared this in the last 5 to 10 years. So we see this as an opportunity to both leverage there and also helping enterprise to secure the AI.\nOperator: Our next question comes from Saket Kalia at Barclays.\nSaket Kalia: Okay. Great. Ken, maybe first for you. Can you just talk a little bit about how you're navigating the current environment in memory? And maybe as part of that, Christiane, can you just talk about how you're thinking about the impact of higher memory prices as part of your guide in 2026?\nKen Xie: That's a great question. Actually, we prepare for this kind of supply chain since -- you can see 5 years ago when there's a supply chain issue during the COVID, we're doing quite well because we do have inventory on average about 6 months. We try to buffer during this kind of time. And also, we keep mentioning during the Analyst Day, we were maintaining a healthy margin. So we're adjusted by some of the price based on our margin. And because even we had adjusted recent price, we still have a huge advantage like leverage our technology, whether the ASIC give a 5x to 10x better performance for the same functions, same cost. At the same time, the OS offer more function than other competitors. So that even with a little bit of recent price to maintain our margin, we still feel we are very competitive compared to any other competitors. So we view this just like 5 years ago, it's an opportunity to gain market share. So that's where we're well prepared with good inventory and also managed operation manufactured directly with our own operations center worldwide. And also with the technology, we feel we even a little bit price rise, we still ever competitive will not reduce our growth or market share. Christiane, other things you want to add?\nChristiane Ohlgart: Yes. As Ken mentioned, we are planning to maintain our kind of profitability and gross margins on our products in 2 ways, right? One is by negotiating and making sure we get the components early, but also, we are -- we've already raised some prices where we have some component cost pressures, and we will potentially continue to do so throughout the year depending on what the components prices do.\nKen Xie: Yes. The other part in helping the margin is we're starting to see the service revenue will be turn around probably during 2026 this year. And also when we shift the more like sales into like whether Unified SASE or the [ AMCP ], which has the most service, we feel the margin also will be kind of improving from that angle, which has more service. So that's also helping. But there is other things we also kind of measure, whether the currency issue mode. But we kind of feel we are prepared and with all the diversification we have by vertical, by geo, we feel we kind of maintain the margin and keeping the Rule of 45.\nSaket Kalia: Got it. Got it. Christiane, maybe for my follow-up for you. It's a great billings result in the quarter and good to see the guide. Can you just -- and apologies if I missed it, but can you just remind us what billings duration was this quarter? And to Ken's point, just as we think about that driving services revenue for next year, is there a way that you just have us think about the shape of services revenue for next year through the year?\nChristiane Ohlgart: So from a billings duration perspective -- because of all the enterprise deals, it was slightly up, it's around 2.5 years. And so yes, not too much different than it is normally in Q4, yes.\nOperator: Our next question comes from Rob Owens at Piper Sandler.\nRobbie Owens: Great. I know you highlighted the Sovereign versus Public SASE is 1 of the strikes. Curious if you can give us a sense of what your actual revenue mix looks like, Sovereign versus Public? Number one. And then number two, to kind of follow up on sockets. I think it was the third question, but I'm not going to call them out. When you look at the shaping of services revenue and the recovery there, and I know you talked about the second half being stronger. But it doesn't seem to track with where you've been historically in terms of a recovery given what you saw with product revenue this year. So is there something unique in 2026 or something unique going on that's causing that to lag just a little bit more than maybe you've seen historically?\nKen Xie: For the service or product revenue, as you can refer to the Page 20 on the presentation, we gave out the last 16 years since IPO, the growth between the service revenue and product revenue. You can see that since changing the product revenue leading indicator of service revenue, so we do believe this year with the last few quarters with product revenue in the last few quarters growth stronger. That's what's helping drive the service revenue turnaround, starting to grow faster. On the first question, sorry. Sorry, what's the first question?\nRobbie Owens: Sovereign versus Public SASE mix.\nKen Xie: Yes, I believe the Sovereign SASE market is probably even bigger than the current Public SASE market, but kind of approach is different. The Sovereign SASE market, the service provide enterprise handled by the product first, which also we see the product growth very, very strong in Q4 and also believe it will helping drive this year product revenue growth with Sovereign SASE. We have not compared the Sovereign and also the Public yet. But I believe probably pretty close to each other right now, but Sovereign SASE, we see more strong growth because we don't see any of our competitors offer this Sovereign SASE approach. And also with the product with the ASIC salary is a huge advantage for us. So that's why I do believe we have probably doubled the total addressable market in the SASE market with a Sovereign SASE supporting the service provider enterprise with their own kind of SASE approach.\nOperator: Our next question comes from Gabriela Borges at Goldman Sachs.\nGabriela Borges: I know last year, we shifted the conversation away from refresh tight end of support and more towards refresh tight to technology upgrade cycles. Tell us a little bit, Ken and Christiane, on what you're seeing in the pipeline from the 2020 and 2021 refresh cohorts, their willingness to engage across the platform? And do those cohorts look more meaningful or notable than the cohort that you had refreshed last year?\nKen Xie: Yes. I think there's 2 things. One is we mentioned on [ Antas ] an end of a service, which we think there's the 11 part, 11 product will be end of this year, may end of the service. But actually doing some communication with the customers, some of them still want to supporting young and service. So I think we kind of found some solution probably win-win. We may extend and our service instead of try to force customers to buy the new product. We may give them actual external services, but we do charge more service fee, both hardware, [ AFE ] and also the to maintain a software fee. So that's a win-win situation. And then also, like I said, that's not the major driver of this growth because the growth will come from the new function, come from all these kind of like new demand in the market. The second refresh is that as -- in the past, probably the average hardware product, whether network security, network can even serve probably after 5 to 6 years, they may have to get a new one. So we do see 5 years ago during the supply chain COVID time, there is a strong growth of product revenue, you can see on the Page 21, 22, there is a pretty strong product revenue growth, like over 40%. Some of that one probably will help in the next couple of years. But like I said, the better driver will be new function, like how to support in the SASE in the [ T trust ] network environment, how to go internal segmentation supporting enterprise to convert from the traditional network into the network security and like helping protect the data level, whether the data decade or some kind of AI agent. That fuels the 1 to drive the strong growth. Just like the strong growth comes from the Unified SASE used 40% in Q4. A few customers definitely more interested in if you have a better function and also kind of -- they can see the future of advantage, that will more drive customers to buy. Otherwise, they may replace the product with some other different vendors. So that I see is more important we more focus on the how the strong function, how the future kind of advantage we have and also how to leverage the long-term investment we have, whether in the AI in the content, in the infrastructure. That gives the customer confidence and also keeping more partner with Fortinet.\nGabriela Borges: [indiscernible] Please, Christiane.\nChristiane Ohlgart: Yes, I would confirm what Ken said, based on the customer conversations we are having. The driver is that they need additional security. And so as they look at 40 SASE or similar, they upgrade their underlying technology at the edge as well.\nGabriela Borges: Yes. That makes sense. And my follow-up is on how to think about the second derivative of AI compute demand. So more on the inference side. How does that impact what you see from a network security standpoint and a network traffic standpoint in particular?\nKen Xie: That's everybody still kind of -- because the space changes so quick with AI. We definitely tried working closely with customer, with our engineer, try to develop all this technology, try do better protection. But in general, I think we kind of move in to weather like edge computing and also how the broad infrastructure protection instead of too much weight on certain cloud, also in software. That's where we kind of -- a lot of long-term investment we have whether in the ASIC chip in all this kind of system level in the infrastructure level and also in the support and a few is a kind of more broad approach will be helping better instead of just too much focus on 1 single area.\nOperator: Our next question comes from Fatima Boolani at Citi.\nFatima Boolani: My first question is for you, Ken. The strength in Unified SASE at 40%, your product growth this quarter in excess of 20%. That paints really the interesting picture that maybe is in contrast to some fears around SASE or FortiSASE, rather, being maybe a force of cannibalization of the product refresh opportunity. And I know you alluded to SASE Sovereign SASE specifically. But I'd be curious to get your perspective on how you are independently driving strong growth in SASE and independently driving strong growth from a product refresh perspective? That doesn't seem to be affirming fears of cannibalization, especially for branch location environment. And then I have a follow-up for Christiane, please.\nKen Xie: I have to say that's the same kind of by some of the networking security come from somehow competitor. And even SASE will be canonized all these network security, even the branch I think would be complement and also will be added on additional business opportunity. That's what we're doing both in the networking and like traditional network security and also SD-WAN and SASE for many, many years. So from our anchor, we do see SASE to offer additional business opportunity, additional product service, both in the customer level, in the service provider level and also in some other like a branch approach and eventually may even try to supporting working remotely, working from home of this kind of approach. And also will be leveraged both the infrastructure in the public cloud, in the colo and also on kind of infrastructure. So that's where we see there's a lot of different approach to SASE and the different customer, different regions may have a kind of a different need. So that's where we kind of -- in the very beginning, when we developed SASE technology probably like 6, 7 years ago, we more believe the Sovereign SASE service provider kind of SASE will be the future. That's where we're kind of keeping investing in this area. But also like when we launch our own kind of SASE over 2 years ago, we also feel kind of who can see side provide of our own SASE and even some infrastructure also very, very important. So that's where we see the SASE actually will be a complement also will be additional business opportunity to add beyond the traditional networking and network security. In the branch office, you still need a physical device, that's the advantage we have. We have like we call 3 in 1. You look at the networking device, network security device and a SASE device into 1 solution, 1 for the [indiscernible] in the branch office, as probably not our competitor offer this kind of a solution, and that we see a huge opportunity. So we don't see SASE will be replaced and trial phase and network security solution. And you can see the unit shipment in the branch office solution, a low end in retail grew very, very strong. Some of because of SASE, but some also they try to buy, deploy, I believe the future they able whether the SASE was some other additional security service they needed, but they do need to have a device in the branch office. They do need some kind of edge solution to handle the both security and networking.\nFatima Boolani: I really appreciate that detail. Christiane, I wanted to go back to some of your comments with respect to pricing actions in response to an earlier question and something you mentioned in the prepared remarks. I was hoping you could quantify what degree of pricing, gross pricing increases you've been able to roll out in the base and to the extent there's a net pricing yield associated with that and how that's influencing your guidance? And maybe just to take that a step further, is that 1 of the reasons why we're maybe seeing a slower ramp in the services trajectory of the business because you are seeing a price action yield on the product, which may not necessarily be translating to services? I'd love for you to just explain that for all of us.\nChristiane Ohlgart: So the pricing actions are on specific products and of course, dependent on the components that go into it. Overall, it's -- I think it's between 5% and 20%. But then also positively impact services because our service pricing is a percent of list price. But of course, it's going to take longer until that materializes in service revenue, right? So for a product, you will see it in the next couple of quarters for service revenue, it's going to take a bit.\nOperator: Our next question comes from Junaid Siddiqui at Truist.\nJunaid Siddiqui: Great. I just had a question on your software firewall business. As AI transformation across enterprises, accelerate growth and cloud workloads, do you feel that your software firewall business, which has been growing at a nice rate, could inflect even further? And how do you think about that hardware software firewall mix going forward?\nKen Xie: I think Q4, we see the software for and the hair grew almost the same pace, up 28%. So the partnership with NVIDIA, the BlueField DPU, that's probably more like the software approach. And also we're working with some kind of -- some other service provider, cloud provider to offer some software. But I do believe we have also more advantage to leverage our own kind of secured ASIC, which kind of give a 10x better performance compared to some software approach and with lower cost. And that's probably -- but I see so far, it's almost the same growth pace.\nChristiane Ohlgart: And for most of our enterprise customers, I would say they have hybrid models. And so they buy our hardware, but they also buy virtual firewalls.\nJunaid Siddiqui: Great. Just got a follow-up as well. Great to see the billings number. But just wanted to ask about specifically billings for SecOps. It seems like a decel from Q3. Could you maybe just unpack that in terms of what were some of the drivers there?\nChristiane Ohlgart: Yes, I don't want to call it a driver. I would say if you look at the annual growth, billings growth or SecOps, it's very compelling. Our growth is compelling. Revenue is compelling. So billings is always a little bit of a more volatile number. And in Q4, we had a lot of success in secure networking and Unified SASE, but our SecOps portfolio is solid, and we continue to see interest and demand. And so I wouldn't take this 1 quarter as a trend.\nKen Xie: Yes. Also, the secure networking and Unified SASE can be a leading indicator for some future sir because they tend by the product first and then eventually will also handle the additional like operation service. I have to say because lot of our calls and the partners see the Unified SASE demand is so strong, they're probably shifted more focus in that, and they can see that's more easy win. But secures were long tail. And we have so many different products with AI, you probably looking at annual number will be more kind of addressable instead of some quarterly numbers.\nOperator: Our next question comes from Patrick Colville at Scotiabank.\nPatrick Edwin Colville: Nice end to 2025. Could I just get a clarification on the pricing comments? Because I thought that was interesting. And Fortinet, a company that over the years has clearly demonstrated pricing power, we saw that most evidently in 2021, 2022, good to see that lever being pulled again. Christiane, did you say that expect pricing for appliances in 2026 to go up between 5% and 20% on average?\nChristiane Ohlgart: It depends on the appliance, but that's what we are targeting, yes.\nKen Xie: Yes, we can actually justify the price monthly. We usually give a distributor like a 30 day notification. So some of them already see we probably reach the price next month. But on the other side, we do have a buffer. That's where we feel we can kind of react this kind of situation better than other competitors. And we also have a good -- like a global operation with the whole operation center, we managed to manufacture directly.\nPatrick Edwin Colville: Okay. Okay. And I guess I just want to ask maybe just kind of a question zooming out. I mean, we've seen your peers really accelerate the pace of M&A. You saw that at your kind of endpoint peer, you saw that, your firewall peer, both for tuck-ins and for larger deals. Fortinet hasn't done that over the last few quarters. What's your thinking in terms of M&A philosophy and whether like how we should think about that into 2026, whether they're tuck-in deals are needed in certain areas?\nKen Xie: I think like the technology we developed, whether the FortiOS, FortiASIC and integrate all this function together sometime probably more in internal innovation will be better. But we do open 4 merger acquisition and also we do look in different opportunities, especially in the secure operation area. But on the other side, we have a discipline whether the Rule of 45 or some healthy margin and also we try to plan the integration before the acquisition. I think with the multiple, the market a little bit more reasonable now, I think definitely, there's more opportunity we're looking at the merger acquisition. But we do have the discipline which will maintain in the last 25 years kind of tend to acquire the technology or some talent and instead of try to buy some market or customer base.\nOperator: Our next question comes from Adam Borg at Stifel.\nAdam Borg: Excellent. Maybe just thinking about your ASIC chips. I don't want to front run anything from Accelerate, but we've been talking about the opportunity for ASIC chips this year. And just remind us what kind of opportunity there is when those chips come out? How long after an announcement do you typically see those being adopted by customers? Obviously, it goes into the test first and okay production. But any color over there in terms of that and the ability to drive innovation and additional attach going forward?\nKen Xie: We see the new ASIC chip will come up this year, but we tend to announce together with the product. But also, the new ASIC chip also takes some time to build in the product. That's where like the next month Accelerate is more focused on the FortiOS first. And the ASIC, we try and not guide exactly too early, to put it this way. But definitely, it's a good technology. We're improving the performance. We add more function there. But we usually announce the product after we deliver instead of some competitors try to announce ahead of the time. So that's where we want to keep in the same way, same culture. Once we have the related product or we are very sure we can deliver to the customer partner, then we announce it.\nAdam Borg: That's incredibly helpful. And maybe just as a quick follow-up on the clarifying question. When we talk about the refresh opportunity, be it COVID or otherwise, when those boxes typically come up -- and I'm sure the answer is it depends. But do you typically see like a one-for-one box refresh or they come back and buy more boxes? And I guess the follow-up to that would be, what is the kind of the sales motion about cross-selling and upselling SASE and SecOps as part of those refreshes?\nKen Xie: We do see there's some more kind of -- what do we call a tax service or there's a more area you can deploy the network security and also the convergence also starting to kind of take more effect. So now that we see the -- a lot of network security deploy inside the company do the segmentation, replacing some traditional network here. Even our own kind of demand for FortiSwitch for the AP, which has a [ filing ] technology can link to FortiGate is more like a hardware agent as a SASE also see pretty good growth. On the other side, there's like OT security, there's some others whether supporting work from home, eventually the network security can expand into the consumer space, that also could be the new opportunity. But I say -- if you look at -- it probably depends on the vertical also maybe defend on certain regions, how mature the networking network security is. I have to say by vertical, like 5 years ago, the first strong growth come from some retail, right, so whether retail or other online service. So that part, we do see -- they heavily use in the box. And then this kind of [ water 31 ] like networking, network security and also the SASE kind of into same box, that we're probably the only 1 can solve that issue as we do see that will be -- continue to -- will be -- continue the market for us basically. On the other side, there's a lot of -- whether it's in the data center, with some other kind of big infrastructure. That's probably the new ASIC chip or some other solution we will have unlike a [indiscernible] for some others it maybe will help. But it's depend on -- I do see the market get definitely more broader, bigger because there's more tech service to cover and also more function needed both inside enterprise and also in the consumer and also in different regions.\nJohn Whittle: And to your other point, we do see any refresh opportunity as an opportunity to expand. And when you look back 5 or 6 years, we didn't have a lot of the solutions that we have right now that are at the maturity level that they're at right now. So any time we can have those conversations whether through our partners or through our sales force, it's an opportunity for us to expand to not only sell the firewall, but to sell beyond the firewall.\nChristiane Ohlgart: And I would add -- any of the discussions on with regards to firewall upgrade at the edge is combined with the FortiSASE discussion because it's so compelling for our customers to expand.\nOperator: Our last question comes from Brian Essex at JPMorgan.\nBrian Essex: And congrats on some solid product growth this quarter. I guess I wanted to -- just maybe 1 question with regard to memory questions that were asked previously. Ken, just really I appreciate the fact that you have 6 months of inventory supply. Could you help us understand the dynamics there, maybe what percentage of your bill of materials is exposed to memory? And then how your contractor agreements, how long do you have those committed out? Just to understand that as we see like the acceleration in prices here. Just -- maybe a little bit more clarity in terms of how do you manage your supply chain.\nKen Xie: I think we're very similar to any other system server tend to be 10% to 20% cost come from the memory. Because we also manage a lot of manufacturer components directly with the supplier instead of go through some third party. That's where we tend to have some direct contracts. That's also dependent on lead time. I think lead time, probably a little bit different than 5 years ago. 5 years ago, you see that there's like communication chip. There's some CPU. There's a lot of -- this ham probably more related to memory. Actually, you can't track the memory. There's a daily memory price tracker actually. And you can see somehow in the last couple of days since starting coming down. So it's kind of interesting. But for us, we -- like I said, we do maintain 6 months inventory and also based on the growth based on the projections, sometimes we also kind of up and down and also dependent product. So we feel this is the opportunity just like how we did it 5 years ago is the opportunity for us to gain market share and also we will prepare for that.\nBrian Essex: Right. Super helpful. Maybe a quick follow-up for Christiane. On the security networking side, how much of that was networking, like switches and access points versus more -- or firewall mix? Just kind of curious to get the mix there and how that might influence what you're thinking in terms of software services acceleration in the back half of the year?\nChristiane Ohlgart: So it was a broad-based mix, so pretty much similar growth rates across all components. So we had good firewall growth as well as APs and switches.\nKen Xie: Also, the reason they buy the switch APs because we have this we call FortiLink technology that link multi-switch A to the FortiGate and then using FortiGate to process certain traffic like if WiFi is the identified there's a visitor, that traffic probably will go to FortiGate. It's more like kind of local SASE approach with the hardware agent, which is AP, with the hardware agent, the same thing for the switch. That's actually go a lot for the internal segmentation. So to kind of broader security inside the local air network, that's where the convergence we see happening. But I think on the percentage, definitely, the FortiGate is the key part. It's all leading by the FortiGate. The other part is a pretty small, I have to say.\nOperator: We have no further questions at this time. I will now hand it back to Anthony Luscri for closing remarks.\nAnthony Luscri: Thank you. I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by Bernstein and Morgan Stanley during the first quarter. The fireside chat website links will be posted on the Events and Presentations section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me, and have a great rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the BARK Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mike Mougias, Vice President of Investor Relations and FP&A. You may begin. Michael Mougias: Good afternoon, everyone, and welcome to BARK's Third Quarter Fiscal Year 2026 Earnings Call. Joining me today are Matt Meeker, Co-Founder and Chief Executive Officer; and Zahir Ibrahim, Chief Financial Officer. Today's conference call is being webcast in its entirety on our website, and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website. Before I pass it over to Matt, I want to remind you of the following information regarding forward-looking statements. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. We will also discuss certain non-GAAP financial measures on today's call. Reconciliation of our non-GAAP financial measures is contained in this afternoon's press release. And with that, let me now pass it over to Matt. Matt Meeker: Thanks, Mike, and good afternoon, everyone. Before we dive into the quarter, I want to briefly acknowledge the recent headlines regarding potential strategic proposals you may have seen. Given the nature of those proposals, we are unable to comment on them during today's call. Today's discussion will center on our third quarter results and how we're continuing to drive our business results. With that said, let's jump in. Our priorities throughout fiscal '26 have remained consistent, strengthening the business by improving profitability and operating with discipline in a volatile macro environment. Entering the second half of the year debt-free with a leaner cost structure and greater financial flexibility has helped us navigate tariffs and broader market uncertainty while continuing to invest thoughtfully in the areas that matter most. Turning to the quarter. Adjusted EBITDA was negative $1.6 million, within our guidance range and consistent with last year. We also generated $1.6 million of positive free cash flow, driven in part by inventory normalizing following a buildup in the first half as tariff rates came down. We plan to continue to optimize inventory levels to further support cash conversion in the near to midterm. Total revenue of $98.4 million came in below our guidance range, driven in part by a deliberate pullback in marketing spend. Marketing expense was approximately $11 million lower than the third quarter last year, reflecting our continued emphasis on bottom line durability and disciplined capital deployment. Nonetheless, we delivered a healthy 62.5% consolidated gross margin with both our direct-to-consumer and commerce segments showing year-over-year and sequential improvement. We've been deliberate about where we invest and where we don't, focusing investments on areas with clear returns rather than chasing short-term growth. One of the areas we've consistently emphasized this year is diversification, and we continue to see progress there. During the quarter, Air and Commerce represented approximately 23% of total revenue, up from 18% last year. Our Commerce segment generated $18.8 million of revenue with a gross margin of 46.4%. BARK Air also delivered $3.4 million of revenue, up 71% year-over-year. Together, these businesses are scaling, becoming a more meaningful part of our overall revenue mix and helping make the business more resilient as we navigate a changing cost and demand environment. In our direct-to-consumer business, we remain disciplined in our marketing investment, pulling back on promotions and reducing customer acquisition costs as evidenced by the 40% year-over-year reduction in marketing expense. Last quarter, total CAC was down 7% versus prior year and marked our most efficient quarter in nearly 3 years. As part of this approach, we are prioritizing the quality of customers we acquire over sheer volume. This has resulted in our subscriber base shrinking over time and therefore, pressuring D2C revenue, an outcome we are comfortable with as we focus on profitability and cash conversion. We expect this trend to continue in the coming quarters. Importantly, the customers we are acquiring today are of higher quality with stronger engagement and spending behavior, which we believe will support better retention and higher average order value over time. For example, our average order value reached $31.41 last quarter, our strongest quarter in nearly 2 years as more customers opted for Double Deluxe, extra toys and Add-to-Box options. One additional area of execution worth calling out is shipping. In the second quarter, we transitioned our last mile delivery to Amazon, meaning BARK products now ride on Amazon's Blue trucks. This should reduce shipping costs and get packages to customers quicker. Overall, I'm pleased with how the team has continued to execute in a dynamic operating environment. Despite ongoing tariff uncertainty, changes across our shipping partners and broader macro volatility, we've remained focused on protecting profitability and running the business with discipline. We are debt-free following the repayment of our $45 million convertible note in November, and we're beginning to see improvements in free cash flow conversion as we reduce inventory and continue to make the organization leaner and more efficient. Taken together, our recent results reflect our running the business with intention, balancing profitability, operational discipline and diversification while continuing to improve the underlying quality of our revenue. The actions we've taken throughout the year position us to exit fiscal 2026 on a strong foot and better equipped to navigate uncertainty while continuing to invest thoughtfully in the long-term growth of the brand. And with that, I will turn the call over to Zahir. Zahir Ibrahim: Thanks, Matt, and good afternoon, everyone. Let me provide some additional color on our third quarter results. Starting at the top. Total revenue for the quarter was $98.4 million. As Matt discussed, revenue came in below expectations, driven primarily by a measured pullback in marketing spend as we prioritize profitability and cash generation during the quarter. That said, we are seeing promising trends in our DTC business around the quality of customers we're acquiring. This includes higher AOV and improved efficiency across acquisition channels. Additionally, retention remains stable and the customers we're bringing in today are of a higher value than those acquired through more promotionally driven strategies of the past. This is encouraging given the challenging macro backdrop. Commerce delivered $18.8 million of revenue in the quarter, roughly $1.5 million below last year, partially driven by timing shifts. Overall, our Commerce segment remains a key part of the business from both a growth and a margin perspective, and we expect it to remain an important contributor to our overall revenue mix as we add new partners, introduce additional SKUs and expand distribution within existing retailers. Turning to gross margin. Consolidated gross margin was 62.5% for the quarter. From a segment standpoint, D2C gross margin, which includes Air, was 66.4%, 10 basis points above last year. Commerce gross margin was 46.3%, up 240 basis points year-over-year. The margin improvements we saw across the business last quarter not only reflect the quality of revenue, but also the important work the team has done mitigating tariff impacts through a variety of tactics, including alternative sourcing, packaging and in Commerce instituting a price increase. Turning to operating expenses. Total marketing spend was $16.1 million, down $11.3 million versus last year as we continue to prioritize premium customers CAC efficiency and profit performance. Shipping and fulfillment expense was $29.1 million, down nearly $8 million year-over-year, driven largely by lower volume in our D2C segment. G&A expense was $25.4 million, down $2.1 million versus last year, reflecting lower headcount and ongoing cost management initiatives. We remain focused on building a leaner organization while maintaining the capabilities needed to support future growth, and we continue to see opportunities to drive additional operating leverage and cash generation over time. As one example, we recently downsized our office footprint, moving from 120 Broadway to a more appropriately sized space in Brooklyn and generating more than $2 million in annualized savings. Looking ahead, we expect to realize further efficiencies through continued process improvements infrastructure optimization and disciplined cost management. Overall, while total revenue was lower year-over-year, we operated with greater efficiency with adjusted EBITDA of negative $1.6 million, in line with third quarter last year. We also generated $1.6 million of positive free cash flow during the quarter. Profitability remains our key focus, and we're pleased by our recent results given the challenging macro backdrop. Turning to the balance sheet. We ended the quarter with approximately $22 million of cash following the repayment of our $45 million of convertible notes in November. Inventory was $91 million, roughly $10 million down on the prior quarter. We expect inventory levels to continue to decline in the fourth quarter as we sell through the build accumulated earlier in the fiscal year. In summary, while revenue was impacted by deliberate decisions to prioritize profitability and cash flow, the underlying financial profile of the business continues to improve. We're seeing progress across margins, operating efficiency and diversification. And we believe these actions position us to exit fiscal 2026 in a stronger and more resilient position. Thank you for joining us today, and we look forward to providing additional updates in the future. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good afternoon. My name is Lydia, and I will be your conference operator today. At this time, I'd like to welcome everyone to BILL'S Fiscal Second Quarter 2026 Conference Call. [Operator Instructions] Thank you. I'll now turn the call over to Jack Andrews Vice President, Investor Relations. You may begin Unknown Executive: Thank you. Good afternoon, everyone. Welcome to BILL's Fiscal Second Quarter 2026 Earnings Conference Call. We issued our earnings press release a short time ago and filed the related Form 8-K with the SEC. The press release can be found on our Investor Relations website at investor.bill.com. Joining me on the call today are Rene Lacerte, Chairman, CEO and Founder; John Rettig, President and COO; and Rohini Jain, CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the future business operations, targets, products and expectations of BILL that involve many assumptions, risks and uncertainties. Actual results could differ materially from those expressed or implied by our forward-looking statements. In addition to our prepared remarks, please refer to the information in the company's press release issued today, our Q2 '26 investor deck and our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for a reconciliation of GAAP to non-GAAP and additional information regarding these measures. With that, let me turn the call over to Rene. René Lacerte: Thanks, Jack. Good afternoon, everyone, and thank you for joining us. During Q2, we continued to build on the strong momentum of Q1 and delivered a meaningful beat on both core revenue and profitability. Our consistent and disciplined execution against our strategic priorities drove 17% core revenue growth versus last year and an 18% non-GAAP operating margin in Q2. Additionally, we're seeing encouraging signs of SMB resilience with increasing spend volumes across the platform. Our innovation defines the broad category of how businesses manage their financial operations. We are introducing new products and partnerships that extend our capabilities and reach while delivering durable growth and expanding margins. Nearly 500,000 customers trust BILL and use our software solutions to run and grow their businesses with speed, confidence and clarity. More than 9,500 accounting firms rely on our platform and over 8 million businesses are now part of our proprietary B2B payment network. This unmatched scale enriches of data, gives us broad visibility across the SMB economy and positions us to both grow and expand the intelligent financial operations category. We are seeing our massive scale and the deep trust we've built across our ecosystem translate directly into value creation. By spanning the critical workflows our customers rely on every day, we are driving higher engagement and more transaction volume across the entire platform. We've also continued to strengthen our position with accounts, through new offerings such as procurement, multi-entity support and advanced reporting in the accountant council. These tools are increasingly important as AI reshapes accounting and more specifically, the accounting profession. As the profession adapts to a rapidly changing technology landscape, our foundational knowledge of the back office for SMBs and the accounts that serve them is unique. This capability, combined with the breadth of our platform is enabling firms to transform their mundane transactional work into high-value automated advisory services. We are deeply integrated across many of the largest firms and are best positioned to support this evolution by combining modern workflows, scale and continuous innovation. AI is prompting more firms to adopt and embrace automation so that they can provide more strategic value to their clients. With BILL already trusted by nearly 90 of the top 100 firms, we're leading this transformation through innovation by rapidly deploying new agentic capabilities to eliminate workflows for accounts and their clients. A significant part of the value we provide customers is through our world-class money moving capability. We are a regulated provider that moves over 1% of U.S. GDP and supports over a dozen payment modalities. Importantly, for customers, we also optimize payment speed as a direct result of our proprietary data models and risk engine. Our ongoing investment in integrating software and payments enables us to give businesses a unified real-time view of their financial health, while helping them maximize their capital and make better strategic decisions. As businesses increase their use of BILL, they unlock more from the platform. Our momentum with multiproduct adoption demonstrates this. The number of businesses using both AP/AR and Spend & Expense grew 28% year-over-year in Q2. These customers drive significantly more revenue per customer and become stickier as they realize more combined value from the platform. We leverage our world-class payment and risk management capabilities to give SMBs what they want, the ability to maximize cash flow. Invoice financing is a fast-growing emerging payment solution that provides flexible capital exactly when it's needed, addressing a critical operating need for many SMBs. In Q2, customers using invoice financing grew by nearly 50% year-over-year and the origination volume increased by more than 30%. We increased adoption while improving unit economics at the same time. This outcome is a direct result of our powerful AI models and our evolving capability to safely underwrite a wider range of suppliers. BILL cash account is another important extension of the overall value we create to help SMBs maximize cash flow. At the core, it is an integrated operating account that makes it easier for SMBs to optimize cash flow and gain greater control and flexibility over their financial operations. We see cash account as an opportunity to bring billions of dollars of monthly offline spend onto our network, increasing our wallet share. Early indications since launching in Q2 showed that more than 70% of cash account users have increased their spend volumes on our network. Our Embed 2.0 growth strategy continues to show great progress and potential. Last quarter, we announced new partnerships with NetSuite, Acumatica and Paychex and within 3 months, all are in market, demonstrating the strength of our platform and the ability to move quickly. Our Embed 2.0 strategy is purpose built to extend our reach with SMBs and complement our other go-to-market channels. It allows us to meet growing businesses inside the systems they already use, reduce friction as complexity increases and deliver a more unified technology stack. With these 3 partnerships alone, we've unlocked the potential to reach close to 1 million businesses, showing how embedded capabilities scale our ecosystem efficiently. As businesses grow, complexity compounds, Large enterprises solve that complexity by adding layers of people, processes and systems. But for the [ Fortune 5 million ] businesses that power the economy, growth too often means more manual work, more risk and more friction. That imbalance has defined this category for decades and is exactly what we are aiming to change. Agentic AI is live across our platform today. Agents are actively running core financial workflows, eliminating manual work, reducing risk and improving reliability and accuracy. To date, we have focused on 3 areas with unnecessary friction: Vendor management, transaction entry and operational efficiency and risk management. First, let me discuss vendor management. Running a business requires spend and spend requires vendors, yet managing vendors remains one of the most manual and fragmented parts of finance. BILL'S [ W9 ] agent and our new Smart Response agent autonomously collect tax documents and manage routine vendor communications, helping customers stay compliant, build trust and keep money moving without adding overhead. Since launching in Q2, nearly 10,000 customers have turned on the W-9 agent and 40,000 W-9s have been collected. We recently added new mobile capabilities, enabling real-time compliance control from anywhere and expect our W-9 agent to collect and automate 3 million W-9s by the end of the year, saving thousands of weeks of manual work for our customers. Second, turning to transactions. BILL sits at the center of how money flows for our customers and our agents are making those transactions increasingly touchless and intelligent. We are eliminating the manual work required to code, match and reconcile transactions. Leveraging RAI, our invoice coding agent can now fully code complex invoices, which reduces the steps required by 90%. We have also expanded our transactions agent with auto-generated receipts and [ gmail ] capture, improving visibility while further reducing daily friction. Third, operational efficiency and risk management is critical for both us and our customers. Secure financial operations are core to our platform and a key reason customers trust us to run their workflows. As businesses scale, risk grows alongside complexity. Our AI-powered fraud and risk systems apply deep domain expertise and network level intelligence to protect customers at scale while reducing operational burden. In the first half, our system stopped 5.3 million fraudulent attempts and reduced manual fraud reviews by 40%. We are also reducing operational complexity for our customers through the BILL Assistant agent. This agent provides customers with real-time automated support. Prior to its introduction, 13% of customer contacts were self-serve. For customers enabled with this new agent, self-serve rates have more than tripled and now represent 40% of customer contacts. We have unique capabilities to advance agentic Finance. We are embedded in the financial operations of nearly 0.5 million businesses. Our models are trained on insights from more than $1 trillion in payment volume and billions of processed documents. Our network gives us unmatched visibility into vendor behavior, transaction patterns and operational risk protection across millions of workflows. This combination of these assets positions us to significantly amplify time savings and efficiency gains for our customers. We're seeing strong early momentum. And as we continue to launch more agents, we believe the impact will compound from saving weeks and months of work to creating the capacity of entire finance teams. We're redefining how financial operations scale, enabling SMBs to expand capability and capacity without adding costs. This is the future we are building. So every Fortune 5 million business regardless of size can operate with the power of a full finance organization. BILL holds a leading highly advantaged position in a large and growing market. We built a deeply differentiated platform at scale, powered by proprietary data, established and expanding partnerships and mission-critical workflows that are difficult to replicate. We are simplifying the financial lives of businesses in a meaningful way. And as a result, we are capturing the economic returns of our differentiation. We are very excited about our future. We are executing and delivering against our commitments while proving the durability of our model. And with that, I'll turn it over to John. John Rettig: Thanks, Rene. Q2 results exceeded our expectations with strong execution, operational leverage and improving volume trends across our platform, all having a positive impact on performance. As a reminder, we outlined 3 strategic priorities for this fiscal year on our Q4 earnings call last August. They are drive growth from our integrated platform, expand and penetrate our addressable market and innovate with AI to create incremental value for customers and productivity for employees. We are making good progress against these strategic priorities. In Q2, we delivered accelerated growth from our integrated platform, most notably in the transaction revenue stream. We are providing highly differentiated payment offerings that customers and their suppliers are adopting. Here's one great example. Customers are leveraging our BILL Divvy card as an alternative to ACH and checks to make traditional AP payments and the adoption is growing rapidly. In Q2, volume for these AP card payments grew more than 160% year-over-year. The reason behind such strong growth is simple. AP customers are realizing more value from this integrated solution, including improved efficiency, enhanced reporting and better economics. This offering is also adding to our overall card portfolio growth. In addition, we continue driving awareness and adoption of Supplier Payments Plus, or SPP, from the largest suppliers in our network. Since its introduction 2 quarters ago, early adopting Suppliers have committed to approximately $400 million in annual TPV. Several of these suppliers are multibillion-dollar revenue enterprises, such as a Fortune 500 company that provides workplace and safety products and services as well as one of the largest waste management companies in North America. These enterprises adopted our SPP solution for 1 key reason. We enable automation at scale. Our large AP footprint gives suppliers a single connection into their SMB customer base, and SPP provides a secure, trusted and efficient payment receiving experience. We expect SPP volume to be an excellent complement to virtual card payments and also address a significant portion of our ACH volume over the intermediate term. Turning to our second priority, expanding and penetrating our addressable market. On the AP side, we scaled our multi-entity capability, so larger businesses can efficiently onboard and manage hundreds of subsidiaries within a single bill environment. We also saw encouraging signals of improving core ARPU among the most recent cohorts within our direct channel, which reflects our increased focus on larger businesses. As we continue to innovate and create more value from our integrated platform for customers, we are also implementing measures to better align pricing with the value our AP customers realize. As a recent example, we have implemented targeted subscription price increases for new and existing direct channel customers. On the spend and expense side, we're balancing market penetration with focus on customer unit economics. Our go-to-market execution drove consistent customer acquisition velocity and yielded a record high card spend per business of $148,000 in the second quarter. We believe the differentiated experience of our spend and expense software solution positions us well to win in our targeted segment. For example, we consistently hear positive customer feedback on the depth and flexibility of our 2-way sync capability, our strong controls to manage cards and types of transactions and the ability to track and categorize expenses. Moving on to our partner channels. We believe our established accounting firm channel and emerging Embed 2.0 channel are highly complementary to our direct go-to-market strategy. Today, we partner with more than 9,500 accounting firms, which collectively drive a material number of our quarterly APAR net adds. As we provide an expanded set of solutions to accountants, we believe together we can further unlock market adoption. On our Embed 2.0 channel, we're pleased the solution is live and available to customers for all 3 of our newly signed partners. Over time, we expect this channel to meaningfully expand our distribution footprint and enhance our overall Embed monetization through ad valorem payment option. To illustrate, one of these partners has recently activated both virtual card and instant transfer payment methods. Over the next several quarters, we are focusing on enabling and scaling these partnerships. Turning to our third priority, innovate with AI. In addition to customer-facing agents, we are investing and deploying a agentic capabilities to improve internal efficiency. We recently introduced a [ pay for you ] agent, which autonomously executes card payments based on each supplier's preferences. This is streamlining what was previously a multistep human workflow into a single agent-driven process. In transactions where the agent has been deployed, we are already seeing significantly lower per transaction costs. We believe this agent will also enable payments beyond cards, leading to a higher adoption of our ad valorem portfolio over time. In summary, we delivered a very strong quarter. We're concentrating our investments on the priorities that will meaningfully improve outcomes for our customers and drive durable value for BILL with clear strategic focus and strong execution, we're well positioned to deliver the next phase of profitable growth and expand the opportunity ahead. I'll now hand the call over to Rohini to provide details on our financial performance. Rohini Jain: Thanks, John. We are pleased with our business momentum in Q2. These results mark another step forward in growing Bill into a larger, more profitable enterprise. In Q2, we delivered $375 million in core revenue, growing 17% year-over-year, exceeding the top end of our guidance range. This represents an acceleration of 370 basis points sequentially, driven by broad-based strength across the business. Non-GAAP operating margin was 18%, expanding both sequentially and year-over-year. The efficiency initiatives we identified this year are yielding results. Let me share some key highlights of our Q2 performance. Within our integrated platform, growth in both Bill AP/AR and Spend & Expense accelerated in Q2. AP/AR core revenue grew 11% year-over-year. In Q2, we added approximately 4,000 net new customers. We expect this number to trend down slightly in the short term as we enhance our focus on larger customers and take steps to better align pricing with the value we deliver. Early indicators of these actions are positive as subscription ARPU grew 1% sequentially. AP/AR transaction revenue was $128 million, up 14% year-over-year. TPV per customer increased modestly, which was ahead of our expectations. TPV on the same-store sales basis grew 4% year-over-year, above the Q1 level. We saw continued spend strength in manufacturing and an uptick in construction, reversing the trend in recent quarters. Transaction monetization increased 0.4 basis points year-over-year. Spending expense revenue totaled $166 million in Q2, representing 24% year-over-year growth. The revenue upside was primarily driven by accelerated card volume growth and better-than-expected ind take rate. Card payment volume increased 25% year-over-year, driven by meaningful spend uptick in advertising, retail and health care services industry. Take rate was 255 basis points, driven by volume and higher interchange verticals such as advertising and health care services. Rewards rate as a percentage of payment volume was 133 basis points, up 9 basis points compared to Q2 '25. As the initiatives to optimize rewards started to kick in, we saw the rate of increase moderating this quarter. We have updated our go-to-market incentive plan to better align rewards programs with our unit economics. Additionally, we are evaluating the contribution margin across the portfolio at the spending business level, making deliberate trade-offs as appropriate. Moving on to profitability. Non-GAAP operating margin, excluding the benefit of float expanded 70 basis points sequentially and 290 basis points year-over-year. Discontinued margin expansion reflects our ongoing focus on driving operating efficiencies. Turning to the balance sheet. We remain well capitalized to fund strategic investments, while returning value to shareholders. During the quarter, we repurchased $133 million of stock as we pursue a disciplined approach to share repurchases. Now turning to guidance. As always, we would like to provide a few assumptions upfront that underpin our guidance. First, on the AP/AR side, we are now assuming modest growth in payment volume per customer in fiscal '26. We are reiterating our previous expectation for take rate to increase from the Q2 level in second half of fiscal '26. For the year, we are reiterating a 0.4 basis points expansion. Second, on Spend & Expense, we now expect card payment volume to grow in the low 20% range year-over-year. We continue to expect the take rates to be slightly above 250 basis points for the year. For fiscal Q3 '26, we expect total revenue to be in the range of $397.5 million to $407.5 million and core revenue to be in the range of $364.5 million to $374.5 million, reflecting 14% to 17% year-over-year growth. On the bottom line for Q3, we expect to report non-GAAP operating income in the range of $62.5 million to $67.5 million. We expect non-GAAP net income in the range of $60.5 million to $64.5 million and non-GAAP EPS to be between $0.53 and $0.57. Shifting to full year guidance. For fiscal '26, we now expect core revenue to be in the range of $1.490 billion to $1.510 billion, reflecting 15% to 16% growth year-over-year. This is approximately 170 basis points higher than our previous guide. We expect float revenue of $141.5 million, an increase of $7.5 million compared to prior guidance driven by higher expected yields on funds held for customers. We now expect total revenue to be in the range of $1.631 billion to $1.651 billion. Turning to the bottom line, we expect non-GAAP operating income in the range of $274.0 million to $286.5 million. This represents a non-GAAP operating margin of approximately 17%. Our updated operating income guidance implies a year-over-year margin expansion of more than 320 basis points, excluding the benefit of float. Relative to our initial fiscal '26 guidance, this updated outlook reflects more than 130 basis points of additional margin improvement. We expect non-GAAP net income in the range of $267.5 million to $277.5 million and non-GAAP EPS to be between $2.33 and $2.41. For fiscal '26, we now expect stock-based compensation expenses to be approximately $255 million, below our previous guidance as we diligently manage the use of equity to attract and retain talent. In closing, we accelerated core revenue growth and strengthened our margin profile, proving that our disciplined investment approach and improved execution are delivering tangible results. We are extending our differentiation across mission-critical financial operation solutions. This will enable us to both price to value and deepen customer relationships. The breadth of our platform and scale of our payments network reinforce our position as a trusted long-term partner to we are highly confident in our strategy to extend BILL'S category leadership and deliver a tearable attractive financial profile. And now we'll open up the call for Q&A. Operator: [Operator Instructions] Our first question comes from Chris Quintero with Morgan Stanley. Christopher Quintero: Congrats on a solid quarter here. I wanted to ask the main question I think all of us have been getting from investors recently is how at risk is BILL from AI disruption from your perspective, at a very high level, what is your competitive moat? And how is that defensible against AI startups? René Lacerte: Thank you, Chris, for the question. Always good to talk to you. Happy to talk about this. I think it's a little bit overplayed out there. The impact of AI and software really comes down to -- it's just another tool to accelerate the democratization of software development. I've been building software for SMBs -- financial software for SMBs now for over 35 years. And every evolving language, if you will, has just made more and more people able to develop software. And that's been a great thing. That means we have a lot more capabilities for customers today than we had before. . And so when we think about developing solutions to solve real pain points and real problems for our customers, it requires expertise combined with creativity. And so our understanding of the problem that SMBs face today is rooted in a deep level of expertise with technology. And so that foundational understanding of the financial operations underlying the transactions that we drive today for our business. The deep expertise that we have at BILL actually kind of comes through, obviously, in the fact that we've created a category. Nobody was thinking or talking about financial operations before BILL came along. And now we have this category that we continuously redefine and add agentic capabilities, and that means that AI can't replace that expertise instead it will bring it to life. We have and have built a unique company. We operate where software means money movement. We have married software and payments seamlessly, automating more B2B payments than anyone else. Our scale in B2B transactions is unmatched and we have an advantaged position that will continue to grow with agentic AI. And because of the 3 differentiating factors, I think, are really important for folks to understand, that's why I have this confidence. So first, I would say there's a large quantum of highly contextual data that we have. Nobody else has done $1 trillion in spend in payments across our network, hundreds of millions of transactions, over 1 billion documents that we've digested and supported our customers on. This gives us a unique data set to understand customer behavior and to build risk models around how you move money. And like I said, no one else has this. This is not something 5 guys in a garage can just build on their own. It takes time. You have to scale. You have to grow and build the asset to be able to make these capabilities come to life. The second thing that I think is differentiating for BILL is that trust, customers trust BILL. we talked about 9,500-plus accounts across the country, trust BILL to actually build their business off of us. It's a critical intangible that allows money to move freely and quickly in society. And I just want to pause and just make sure everybody understands how important trust is when it comes to moving money. I mean when the [ precision ] bar is 100%, which it is for money, the consequences of failure can be catastrophic for an SMB. And so anything less, we know they will be out of business. And our track record having moved more than $1 trillion speaks for itself. So we have this massive amount of data. We've got a large amount of trust. And the third area that differentiates us and really defines how we will move forward as the network effects. We have a unique set of 8 million entities on our network. No one connects and understands how buyers and suppliers transact better than BILL. And I want to be clear that our network [indiscernible] enables intelligence to cross an ecosystem, not just within a single business. And we will continue to leverage this to help businesses get done across the ecosystem. So to sum it up, our assets are scarce. They're unique. Our platform is at the intersection of both software and payments. It's carefully built, it's owned with expertise and these assets are not easy, and they may be even impossible to replicate, and that will allow us to create significant opportunities with the agentic AI. So I'm pretty obviously pumped about the depth of expertise and vigorous execution that we demonstrate, and I know that will unlock the power of SMBs going forward. Christopher Quintero: Awesome, super helpful, answer there, Rene. Maybe just as a follow-up to that, on the opportunity front with AI, I think your agent strategy is really interesting because it seems to be going after more specific use cases to ultimately just reduce the amount of work that SMBs are doing. So curious to kind of get your thoughts on that strategy? Why that's the right one? And what's been the feedback from SMBs? René Lacerte: That's a great -- another great question, Chris. So I think this is what happens when you have a foundational understanding of what drives the business. This is -- this business was born out of processing and managing payments in my family and my businesses. And that understanding means that we get to actually develop capabilities that haven't been thought of before. And so agenetic AI will allow us to dive deeper into the stack of transactional confusion, if you will, and simplify it. And so what we see is an opportunity to create essentially roles that manage the different transaction levels that business is at. So as an example of this that we've talked about a bunch so far is the supplier management, what we're doing with W-9s. Nobody was thinking about, okay, well, W-9s need to be collected. They need to be entered. They need to be stored. They need to then drive at 1099. We were thinking about that. We've built that agent. We did it before anybody else. Nobody else is thinking about, okay, well, coding an invoice actually is really hard. Well, that's why we have documents at the source of our platform. That's why we started with our inbox virtual assistant. But then now we've added our coding agent that can go and take 90% of the steps out of coding to bill. That's an incredible amount of time savings that we've been able to provide. Nobody else is thinking about the fact that SMBs need help, they need assistance, and they want to be able to do it on their time. And so our ability with the Bill Assistant agent that we just launched, it's just early, right? But what we've seen is we've gone from a 13% self-serve rate to over 40%. That means customers get back to doing what they love. They get their questions answered. They're able to kind of move quickly into what they love. And that's everything that we're about at BILL is just helping business get back to work, helping them pursue their passion. So I think that our approach to kind of understand the underlying foundational challenges that a business has that's going to be what differentiates us in the market, and we have a lot more to go on this. We're super excited about what AI is going to enable us to tackle. Operator: Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Yes, nice to see the growth acceleration and the upside to the guidance. I'm just curious, from an attribution standpoint, what would you assign it to in terms of what did a little bit better? I heard the improving volume. I've been getting questions around how much of that is macro versus using some of the return on the investments that you put in, for example? René Lacerte: Yes, I'll start, and then I'll have Rohini jump in. So I mean I think, Tien-Tsin, the first thing you're seeing is the results, just the durability of building a great business. I mean we are constantly focused on actually taking care of building solutions for our customers that deliver value for them in the long term. And we're also obviously have a strong pulse on how SMBs are kind of moving through the cycles. And so we definitely see the resilience of SMBs kick in. We see the opportunity for them to drive and grow their business with our platform. And we think that the innovation that we've been bringing is creating more stickiness with the platform and creating more value opportunities for the platform. So with that, I'll let Rohini add a bit more. . Rohini Jain: Yes, absolutely. Just to add, color, and I want to start by saying that if you have a strong platform, a robust business and the right product for the customers, when there is increase in spend, we will get the benefit of that. So to unpack that a little bit more as we have said the same-store sales on the AP/AR platform grew 4%, which actually was an acceleration from the last quarter of a point, grew from 3% to.4%. What was really encouraging is some of the foundational industries like manufacturing continue to do well as well as construction actually had a nice rebound on the AP/AR side, which we are very happy to see. And on the SME side, in particular, we had resurgence of spend going into the advertising and retail, which is like the discretionary verticals we have called out for a couple of quarters to be a little bit muted. So very encouraged to see some of those trends. So overall, we were seeing some green shoots as a combination of the execution of the GTM, the product strategy as well as the spend environment coming through. Tien-Tsin Huang: Good. No, that's encouraging. So maybe as my follow-up, I'll ask on spending expense as you mentioned it there. I'm just thinking growing 2x the market. There's been some consolidation in the space. 20% growth, I think you're calling out for the rest of the year. So I'm curious how sustainable, how visible that is, what's preventing you from maybe growing a little bit faster given the shift to larger clients and the big installed base you have there? Is there a change in the credit appetite, all of that? Rohini Jain: Yes. Sure. So the way I think about it is, we talked about the reversal of trends in some of the categories that you saw in this quarter play out, especially advertising and retail. So 3 months, not relying a lot on that trend and would love to see these encouraging signs play out for a little bit longer before we break in again as we think about the guidance. It's a range as we think about all the puts and takes. We'll continue to point you to the midpoint as our highest fidelity number, but that's why we give you the range of outcomes that could play out. Operator: Our next question is from Nate Svensson with Deutsche Bank. Christopher Svensson: I wanted to follow up on the AI question, maybe with regards to pricing. I know you've talked about kind of some of the targeted actions that you're taking. But just in the context of all the headlines around AI and LLMs for writing tools or creating their own software solutions, do you see any risk to the pricing algorithm over the long term? I think we get the picture in the near term, but just any thoughts on how to think about that over the long term. And I thought the answer earlier from Rene, just on the overall competitive [indiscernible], but just wondering more specifically with regards to pricing. René Lacerte: Yes. Thank you, Nate. First, I'll start off and then I think Rohini can kind of add some comments. But at the highest level, pricing comes from the value you create for your customers. And so what we see happening with AI is that it will continue to unlock the friction that maybe is the inertia behind why more businesses don't use our solution. And so we think there are lots of opportunities to create more value inside the applications that will attract more customers. And we also see opportunities to create more services that we can price for as well. In addition, we believe that AI will be a significant helpful partner, if you will, on how we drive more consolidation of the expenses, more efficiency across the business. And so -- we've seen some of that. We talked about the BILL Assistant Agent that's actually driving self-serve, and [ eliminating ] calls with higher satisfaction for customers. These are things that we will continue to do to kind of obviously drive both the top line and the bottom line. But Rohini, what else would you like to add? Rohini Jain: Yes, nothing much. But just to reiterate the point that if the pricing followed the value that you deliver to the customers, there is always potential for growth here, right? So again, to step away for a second, about 80% plus of our revenue comes from transaction-based businesses and a little less than 20% is subscription-based. . So the pricing that we're talking about here, I'm guessing is more around the subscription based and AI and the features that we are developing to remove friction for SMBs is really giving us that advantage to be able to price in a differentiated fashion for a premium product that we have. So we will be thoughtful about that. And some of the price changes that we have done, we have seen the progress on that and overall encouraging results from that. We don't -- we actually see less churn than we were expecting. We see the stickiness of the platform play out. And overall, very close to the benefit we were expecting [ in year ] within our guidance as well. I hope that answers your question. Christopher Svensson: That's super helpful. I appreciate all the detail there. That was great. I appreciate it, Rohini. The other oen that was interesting that stood out to me was the invoice financing metrics that were interesting, customers grew 50%, origination volume over 30%. You talked about some of that in your prepared remarks, but just interested to hear more where invoice financing you're seeing good product market fit, either with specific verticals or customer groups or maybe use cases that businesses are leading on the invoice financing for? And then maybe looking forward, where do you think adoption can go for that product and how it could impact the P&L going forward? René Lacerte: Thank you, Nate, for the question. I think it brings back a couple of things I mentioned with the durable assets that we built at BILL. So one is the data that we have and 2 is the network. And so when you think about invoice financing, we're opening up the 8 million entities in the network. We're giving them a chance to get their money faster. They actually get paid maybe 4 or 6 weeks earlier than they would have been paid otherwise. And that's a huge, huge impact on how they manage their cash flow. So there is definitely demand for it. We see repeat usage. And the only reason we're able to do that is because of the huge data asset that we have. And it really matters that we're able to look at these patterns over time to be able to look at the patterns of the network at this moment in time. And That's how we're able to drive the success. And so I would say that the overall particular verticals or what not that are picking the solution. It probably varies from month to month depending on the cycles that they're in. I don't think there's anything specific that I would say other than that, this is a product that does have demand, and we're excited to keep rolling it out. And John will kind of add a few comments here. John Rettig: Yes, that makes perfect sense. And the invoice financing product is a great complement to other payment products we have that enable suppliers to get paid quickly. So we're -- access to cash is an important driver. Typically, that follows the size of the business. So we see across our large network, the smaller suppliers who might have just a handful of customers that they're working with on either service based projects or things like that and needing access to invoice-based financing in order to meet cash flow needs. So we're seeing really good uptick there. It's a product that has, I think, significant upside for the business overall but it's 1 that we're managing in a measured way in order to continue to refine and perfect our underwriting and risk models and make sure that we're delivering not just a great customer experience, but also the right economics for BILL as we scale. . Operator: Our next question comes from Darrin Peller with Wolfe Research. Darrin Peller: Going back 4 or 5 months ago when you had different investors get involved and the Board changed a bit. We talked about more of a strategic process review and I guess I'd be curious to hear an update on what findings you've had since then, whether it's on the revenue side, the cost side or the stand-alone side or anything else for that matter? Where are we in that process? And maybe what do you see us headed on it? . René Lacerte: Thank you, Darrin, for the question. I'll start, and then I'll let John kind of take some points on some of the work he's been leading looking at the business more realistically. So I mean, first and foremost, when you build a durable business, you have lots of levers at your disposal, and you continue to add to those levers over time. And so I think if you look back 6 months like you were suggesting there was a point in time when we realized we needed to be activating more of the, I guess, the efficiency across the business. And so we've been focused on that. You've seen that in the results. We continue to drive growth while balancing obviously and growing the profitability across the business. And that's just because of the levers that we have. But there are some more opportunities for us. I'll let John kind of talk broadly to that. John Rettig: Sure. We -- over the first half of this fiscal year, we spent time looking at the business bottoms up, with the goal of optimizing costs over time. We've developed a series of focus areas with some outside consulting help, including geographical diversification, so geo location strategy for our employee base, AI-driven productivity, which includes developer productivity, internal teams via automation, even go-to-market customer economic optimization as well Rohini mentioned this earlier around rewards and optimization there. So we feel like we have a good road map of opportunities. This is going to be a multiyear effort. And we think the initial benefits will start to be realized in fiscal '27. So as -- given the time line there, there's no additional impact that we're expecting in fiscal '26, but we are planting the seeds for continued optimization.. Darrin Peller: Okay. All right, guys, just one more is on the move-up market. I just want to hear a little bit more on your view of your right to win in that space. You talked about I know a slight downtick on the [indiscernible] 4,000 APA or net adds based on moving upmarket to bigger customers, that makes sense. But how should we think about this showing up in other KPIs? And again, just more and more holistically, help us understand why you believe you can succeed there versus others. René Lacerte: Yes. Thanks, Darrin. I'll start and I'll let John or Rohini add more comments. So I mean I think the first reason we believe we can win is that we've got a unique differentiated platform. We built that platform from the beginning to kind of go square at the heart of business in America. So we have businesses that are small, we have business that are medium, and we have larger businesses. We're not focused on enterprise, but we do think that our solution, if you just look at our data, already suggests that larger businesses get more value out of the platform than even smaller businesses do. So that is where the conviction comes from. I think when you look at the go-to-market motion, one of the things we talked about this quarter is that we've been able to drive more adoption of both the core ATAR and the spending expense solutions together, driving 28% growth year-over-year in that. So a lot of opportunity to tell us that the platform as a whole is quite meaningful. And that is why we will be able to drive more adoption when we get to larger businesses. So I don't know, John or Rohini have anything else you want to add? . John Rettig: Sure. So we've definitely learned over time that the depth of our platform and our sophisticated workflows really resonate with more established small businesses and these lower mid-market customers. And as a part of the overall market, 6 million employers in the U.S. 2 million to 3 million of those fall into this target category for us. So it's a huge market opportunity. We've been rolling out new product capabilities in support of this segment, enhanced multi-entity features, expanded 2-way sync integrations, procurement, some of the things that you've heard over the last few quarters on our innovation agenda. And we've evolved our go-to-market strategies to reach these larger businesses. So we've got dedicated sales teams with channel partners, including pricing strategies. And we're starting to see good signals there. We talked about with in AR and improving core ARPU in recent cohorts. That reflects the increased size of businesses and slightly more multiproduct adoption. And then with SME 2 quarters in a row of record high card spend per business. We saw that in Q2 as well. So to your question about the metric side of things, over time, we would expect this to translate into higher ARPU, increased multiproduct adoption, increased customer and revenue retention. It will take a little time for that to materialize in the numbers just given the size of our customer base. And then as far as the rest of the market, we -- our Embed 2.0 strategy is a great complement to what we're doing with our direct efforts where we can reach those smaller businesses and large businesses to partner. So we think we're really, really well positioned, Guarantee your question about winning this slightly larger segment. Operator: Our next question comes from Scott Berg with Needham & Company. Scott Berg: I want to start, I guess, asking about the pricing impact for the core AP/AR solution. Obviously, you probably needed to allow it for some of the additional value that you've added. But early trends. I know Rohin said that we should expect slightly lower customer count going forward, partially due to that impact in your move upmarket to larger customers. But just want to get a sense on maybe what you're seeing around, I don't know, win rates or customer feedback around that pricing, if there's anything to know with the change? John Rettig: Yes. Thanks for the question, Scott. First, I'd say there's 2 moving parts as it relates to expanding ARPU. One is size of customers, their payment volume, number of users and we're seeing some positive signals there. And then the other is specific pricing strategies that we implement. And we're continuing to execute on the plans that we talked about earlier this fiscal year that involve some transaction and subscription pricing, targeted changes. This is relatively small in the grand scheme of the scale of our business in fiscal '26, but we're starting to more and more create alignment between the value we deliver and the value that BILL is achieving. And it also helps us attract and retain customers that are the best fit for our product. So the overall sort of pricing optimization strategy is a journey and we're developing that approach, incorporating AI and the impact that will have as well as the customer segments that we're most focused on. We would expect the more holistic pricing optimization to roll out in fiscal '27. But as I said, we have made some changes in fiscal . Rohini Jain: Yes. And those have been actually good learning opportunities for us since we haven't done pricing for almost 3 years in terms of the customer reaction stickiness and all of that, and we are very optimistic seeing the early results. And -- just to bring it back into context for the year, we had laid out some plans at the beginning of the year incorporated into our guidance. and we are doing well, executing on that plan. So the range is still incorporating all the actions that we had committed to. . Scott Berg: Understood. Helpful. And then as a follow-up perspective, you all ton-wise sound much better on the spending on the platform, especially with Spend & Expense in the quarter. Now we've seen some volatility around that the last couple of 3 years as sentiment around the macro certainly kind of bounce up and down. . I guess your confidence or at least your tone seems to indicate this is a little bit more sustainable. Any help to maybe see here what you're seeing in Q3 so far that kind of accentuates that confidence, I guess, I think we're trying to all understand if this is something that really can continue into the balance of the calendar year. . Rohini Jain: Sure, I could take that one. So strong -- very strong quarter in Q2. When you look at the Q2 results, there are some trends that we feel really confident about that are enduring, that are continuous. So you see that even though we beat our guidance by about $11 million. We are flowing through a material portion of all of that trend into the back half as we cautiously optimistic, continue to look at certain verticals in coming back from a spending perspective. So we feel good about the early trends that we are seeing in this quarter, and that has gone into how we think about the guidance as well. So the range we provided feels solid. Operator: Our next question is from Andrew Schmidt with Key Corp. Andrew Schmidt: If I could just dig into Embedded for a moment. That saw some nice growth, and that came online much faster than we had anticipated. So it's great to see that materialize pretty quickly. Maybe talk about the sustainability of that growth, it seems still very early. And then just looking out next couple of years, how the embedded distribution compares from a scale perspective versus sort of the other channels accounting direct, et cetera. Rohini Jain: Yes. Let me start by just talking about the Embed channel revenue performance. And just to clarify, the revenue numbers you see at Embed are related to our original Embed 1.0, as we may call it. The 2.0 very nascent, [indiscernible] really early days as we announced and then took to market the products with these partners. So each one of the banks that we have in our initial version of Embed have their own revenue schedules and there is some change quarter -- on a quarter-to-quarter basis. That is showing up in the numbers -- for Embed 2.0 early days, and we really expect the numbers to start to show up closer to next year. René Lacerte: Ken, just to add to Rohini's comments, the Embed 2.0 is just now getting to market with the 3 new partners, the NetSuite, the Acumatica and Paychex. We're super excited about the pace that we've been able to launch this. It was only 6 months ago, whatever that platform was ready and we launched signed 3 partners and within a quarter to have all of them alive and in market. And just as a comment, I was up that Acumatica's Annual Conference last week and John Case, CEO, mentioned us in his keynote address. But the thing that was super motivating for me was just to actually talk to the VARs that they serve and work with the customers. And these are large, mid-market customers, some of them are in the construction vertical, if you well. And there is demand and interest about what it is that we're doing. And so I think the broad strategy with Embed 2.0 proving itself out. We have to go execute on the go-to-market now. but there is an opportunity to reach both larger customers, as John said, and smaller customers like [ [indiscernible] with Paychex. So we're super excited about it and a lot of opportunity going forward. Andrew Schmidt: Got it. I appreciate those comments. That's helpful. As we think about -- a lot of comments on sort of the sustainability of growth, and I'll kind of throw 1 more in there. As we think about just the base of growth, the core -- the base of growth for sort of core revenues, is this the right way to think about it, sort of how FY '26 is trending Obviously, there's a lot of other opportunities when we think about getting into FY '27, distribution, pricing, et cetera. But just curious to understand whether this is just sort of a a nice base to kind of work off here if there's other considerations we should be taking into account. Rohini Jain: That is correct. This is the right set of metrics that we provided initial early guidance on as inputs into our guide. So you should rely on that to build out your models and your assumptions for the year. . Andrew Schmidt: Okay. I guess we'll get into more of the out-year sort of Sustainability Analyst Day, which we look forward to. Operator: Our next question is from Kenneth Suchoski with Autonomous. Kenneth Suchoski: I wanted to ask about SPP. I mean you talked about early adopting suppliers having committed $400 million in annual TPV. It's really good traction for just a couple of quarters. I'm curious how we should think about the ramp in those commitments over the next year or 2. I mean is this initiative that you can get to, say, $5 billion, $10 billion of volume in a couple of years? And then anything you could share on the monetization rate of that volume, meaning how does it compare to other payment types like virtual cards? I'm just trying to quantify how much this initiative could impact the AP/AR take rate and the transaction revenue there? John Rettig: Yes. Thanks for the question, Ken. SPP, Supplier Payments Plus, is a really important solution that we brought to market. It adds significant breadth to our payment portfolio and it's a really nice complement to virtual card payments for large suppliers and then also a much better experience than vanilla ACH payments given enhanced reconciliation tools, more data, more efficiency. So it actually brings down the cost of payment acceptance. For suppliers, and that's part of the important value proposition here that also sets up. This is, I think, a long-term growth ad val product for us. So we feel good about the initial traction we have. As you said, it's just 2 quarters into the commercial side of things and selling. But I think that experience to date has proven our thesis that we started with, which was that at least for the contracted volume that we've seen so far, SPP is a great solution for a large suppliers. So we're optimistic about where we can take this. It's an enterprise sales motion, which is a new motion for Bill. We've been building that over the last few quarters, a little bit longer sales cycle than the SMB base. So I'd say it's going to take a while to move the needle overall for our metrics, but we did want to share some of the good early signs of progress. And I think as it relates to the multiyear impact we'll leave that to Investor Day in terms of the actual numbers. But given the size of ACH volume in our business today and even that amongst the largest 10,000 suppliers in our network, we're talking -- it's a really big opportunity for us, but it will obviously take some time to play out. Operator: We're now out of time for any further questions. So I'll pass you back over to Rene for any closing comments. René Lacerte: Thank you, Lydia. Okay. Thank you for joining us today. I want to thank our team for their focused execution during the quarter, and we delivered accelerated growth and expanded margins and reflecting the strength of our operating model and the compounding advantage of our platform. We believe this positions us well for sustained profitable growth over the long term. And thank you. Hope you have a great evening. . Operator: This concludes our call today. Thank you very much for joining. You may now disconnect your lines.
Operator: Good day, and welcome to the Arrow Electronics Fourth Quarter and Full Year 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Nelson, Arrow's Vice President of Investor Relations. Please go ahead. Michael Nelson: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen. William Austen: Thank you, Michael, and good afternoon, everyone. We appreciate you joining us for a discussion of our fourth quarter and full year 2025 results. I've been serving as Arrow's interim CEO for the past 5 months, and I've also had the privilege of serving on our Board since 2020. In both roles, I continue to be impressed by the depth of talent, operational discipline and commitment to our suppliers and customers around the globe. I want to thank all of our dedicated colleagues globally who continue to deliver for Arrow. Starting on Slide 3. We delivered a very strong fourth quarter and with solid execution across global components and ECS, I'm pleased to share that revenue increased 20% year-over-year and non-GAAP EPS increased 48% year-over-year, both ahead of expectations. In global components, demand continues to gradually recover from a prolonged cyclical correction. And in ECS, we delivered record gross profit and operating profit in the fourth quarter. The fundamentals of the business are strengthening. Raj will dive deeper into our financial performance, but I'd like to spend a moment touching on a few metrics we are particularly pleased with. First, our leading indicators continue to improve book-to-bill and backlog are increasing, lead times are incrementally extending, visibility continues to be cloudy, but we remain disciplined in how we interpret these data points. Our strategic priority to purposely shift our mix is translating into higher quality results as value-added offerings and ECS continue to perform well, supporting margins, cash generation and positioning Arrow for profitable growth as the cycle continues to gradually improve. Turning to Slide 4. While we are pleased with how we finished the year, we remain focused on how we are positioning to grow profitably as the cycle continues to gradually recover. Our investment thesis is unchanged. We are actively executing on our strategy, and our fourth quarter results demonstrate the momentum we are building. We will continue to focus on executing through a gradual recovery while continuing to improve the quality and durability of the business. There are 4 key pillars of our investment thesis. The reasons why Arrow is unique, respected and a compelling investment opportunity. First, Arrow holds a leading position in large and expanding markets. Arrow operates at the intersection of electronic components and enterprise IT serving 6 large end markets, including industrial, transportation, aerospace and defense, medical, consumer electronics and data center, all with long-term secular tailwinds. We are well positioned in each of these end markets. As we saw in the fourth quarter, demand trends and ordering behavior improved sequentially with leading indicators gradually strengthening across regions. Second, Arrow has differentiated capabilities driving profitable growth. A key part of our strategy is growing our higher-margin value-added services, which deepen customer engagement and improved returns. These offerings such as supply chain services, engineering and design, and integration services extend our role from fulfillment to embedded partnership as we become an extension of customers and suppliers product development, supply chain and go-to-market efforts. Our distribution capabilities around semi, IP&E and demand creation remain a fundamental part of what we do and our value-added services are a natural extension for Arrow. As we saw in the fourth quarter, value-added offerings continue to gain traction and adoption, which is helping to improve our margin profile reinforcing that this is not a future ambition but an active driver of profitable growth. The contribution of value-added services as a percentage of total operating income has grown over time, historically, value-added services accounted for less than 20% of total company operating income. In 2025, that mix has grown to roughly 30% and reflecting both strong demand and an intentional shift in our portfolio towards margin-accretive offerings. Looking ahead, we are focused on further increasing this mix to drive profitable growth. The secular growth in cloud, AI and data center demand is creating tailwinds for both our components and ECS businesses, particularly in areas like AI infrastructure build-out, where our supply chain services are increasingly critical. Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates leverage in the P&L expands margins and provides reinvestment capacity for growth. Our efforts to date have focused on simplifying operations, consolidating resources and realigning geographically. We have more work to do, but our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates operating leverage and reinvestment capacity in the business. Third, we have a diversified business model, which provides financial flexibility. Arrow's combination of global components and ECS creates balance, resilience and consistent cash generation through cycles. Our diversified model allows us to participate across the full technology life cycle from design and planning to deployment, management and support. This diversification is especially valued in this recovery as it provides resilience on both the income statement and the balance sheet supporting long-term value creation. Our ECS business is a nice complement to our electronics business as it is a critical growth engine for Arrow. ECS is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions such as cyber security, data protection, virtualization and data intelligence, much of which is on ramp to AI. In ECS, we are also moving beyond transactional distribution toward higher-value, more strategic engagements. We are driving channel enablement through our ArrowSphere digital platform, which supports cloud and AI scale and acceleration. I'm proud to share that Arrow was recognized as Microsoft's 2025 Distributor Partner of the Year for its ArrowSphere AI offerings, including ArrowSphere Assistant, that help channel partners drive sustainable growth through agenetic selling and insight-driven execution. This demonstrates the differentiated innovation we are bringing to the market. In addition, strategic outsourcing recurring revenue models and digital enablement are expanding our role in the ecosystem and improving earnings quality. Many of the solutions we are providing are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes now roughly 1/3 of our total ECS billings. Additionally, 3/4 of ECS billings are software and services, the remaining 25% of billings consists of hardware solutions related to storage, compute and networking. The fourth quarter confirmed our strategy is progressing with continued momentum in backlog, recurring revenue and cloud and AI related demand, our diversified model provides balance through cycles, which is particularly important in a recovery environment like the one we're in today, ultimately positioning Arrow to deliver sustainable long-term growth margin improvement and increasing shareholder returns. And fourth, we have a focused capital allocation strategy designed to maximize shareholder value. We will reinvest in organic growth opportunities that strengthen our differentiated capabilities, expand our value-added offerings and position the business for profitable growth as markets recover. We will pursue strategic and financially disciplined M&A that enhances our competitive position, deepen supplier and customer relationships and delivers attractive long-term returns and we will continue to return excess capital to shareholders. In Q4, we repurchased $50 million in stock. And since 2020, we have returned approximately $3.6 billion to shareholders through share repurchases, reflecting our confidence in the durability of our business model and our commitment to shareholder value creation. As we evaluate all the uses of capital, we remain focused on deploying capital where we see the highest long-term risk-adjusted returns while preserving an investment-grade credit profile and the flexibility to continue investing in the business. Turning to Slide 5. We are very proud of what we accomplished in 2025. We ended the year with strong execution delivering a solid fourth quarter while continuing to operate in what remains a gradual recovery across our markets. We are improving our execution, and we are seeing tangible evidence that our strategy is delivering. The continued growth of higher-margin value-added offerings across both global components and ECS is improving the quality and durability of our earnings. Looking ahead, we remain cautiously optimistic as the cycle gradually recovers. We anticipate having the opportunity to drive profitable growth through a measured recovery in 2026, and we'll continue to manage the business with discipline. We believe Arrow is well positioned for the long term with a diversified business model, improving profitability and a focused capital allocation strategy that allows us to invest through the cycle and create sustainable shareholder value. With that, I'll turn it over to Raj to dive deeper into our financial performance. Rajesh Agrawal: Thanks, Bill. On Slide 6, consolidated revenue for full year 2025 was $30.9 billion, which was up 10% versus the prior year or up 9% versus the prior year on a constant currency basis. The growth was driven by an 8% increase in global components revenue and an 18% increase in ECS revenue or 7% and 15% versus the prior year on a constant currency basis, respectively. Non-GAAP diluted EPS for the full year increased 4% to $11.02. I would like to provide color to some of the key drivers to our 2025 performance. During the year, margins experienced headwinds from our regional mix and customer mix in global components, offset by growth in our accretive value-added services and continued productivity initiatives. We are seeing gradual improvements in both Western regions and mass market customers. Additionally, we continue to execute our strategy of increasing the mix of our value-added services while driving operating leverage in the business. Now turning to our fourth quarter results. On Slide 7, sales for the fourth quarter increased $1.5 billion year-over-year to $8.7 billion, exceeding our guidance range and up 20% versus the prior year or up 16% versus the prior year on a constant currency basis. Fourth quarter consolidated non-GAAP gross margin as a percent of sales of 11.5% was down 20 basis points versus the prior year, again driven primarily by regional and customer mix in global components. Our fourth quarter non-GAAP operating expenses increased $53 million sequentially to $669 million. The increase was driven by higher variable costs to support top line sales growth as well as normal seasonality within the ECS business. Importantly, our ongoing cost savings initiatives have supported a lower OpEx as a percent of gross profit, which declined 700 basis points sequentially and 100 basis points year-over-year to 67%. We believe there is ample opportunity to drive efficiencies in how we operate and increased operating leverage in the business model. In the fourth quarter, we generated non-GAAP operating income of $336 million, which was 3.8% of sales. Margins improved sequentially due to normal seasonality within our ECS segment. Interest and other expense was $44 million in the fourth quarter as we benefited from lower average debt levels throughout the quarter, and our non-GAAP effective tax rate was 23%. And finally, non-GAAP diluted EPS for the fourth quarter increased 48% to $4.39, which was above our guidance range, driven by a number of factors, including favorable sales results, a higher mix of our value-added services and lower interest expense. Turning to Slide 8. Let's take a closer look at our global components business. Global components sales increased $1.1 billion year-over-year and $326 million sequentially to $5.9 billion in the fourth quarter, above our guidance range and up 6% versus the prior quarter. Our results in the fourth quarter illustrate our belief that the cyclical recovery remains on track for a gradual upswing as our business continues to build momentum. Several of the key data points that we've previously highlighted improved again in the fourth quarter. Our book-to-bill ratio has improved further in all 3 regions and our above parity. Our backlog continues to see healthy sequential growth and has increased for the last 4 consecutive quarters. All 3 of our operating regions performed better than seasonal trends. Our sales growth was underpinned by strength for both semiconductor and IP&E components. Demand trends across many of our core markets, such as transportation, industrial and aerospace and defense remain healthy and are showing activity levels higher than 1 year ago. Our inventory is turning at a more normal pace compared to historical trends. Stated lead times in the fourth quarter began to modestly expand indicating improving demand levels. Taking all of this together, the market environment has incrementally improved over the last 90 days, reiterating our view that the business is in the early stages of a gradual cyclical upturn. Importantly, our focus remains on driving profitable growth. Within these efforts, a few dynamics are at play that I'd like to touch on. First, we are closely monitoring the mix of our business, both from a regional and customer standpoint. We are seeing incremental improvements in both Western regions and mass market customers, but continue to expect a gradual recovery. Second, we are making a measured shift toward an increased mix of higher-margin value-added offerings, namely supply chain services, engineering and design services and integration services. These offerings are a natural extension for Arrow, building upon our core semi, IP&E and demand creation capabilities, which remain an important piece of our business. Our lens is focused on how we can best help the customers and suppliers position for growth, remove complexity and get to market quickly. Lastly, operationally, we are focused on efficiency. We are continuing our efforts to rightsize our cost structure, freeing up capacity to reinvest in accretive areas of the business. Taking a closer look at each of the 3 regions. In the Americas, sales saw healthy sequential growth underpinned by strength in aerospace and defense, industrial, transportation and networking and communications. In EMEA, we are seeing a healthy backlog build across verticals, which is a sign of the market improving. And finally, in Asia, we once again saw broad-based sales growth, highlighted by strength in compute, consumer and continued EV momentum in the transportation sector. Global components non-GAAP operating income increased approximately $20 million sequentially to $219 million, up 10% from the prior quarter. Non-GAAP operating margins increased sequentially by 10 basis points. Turning to Slide 9 and our global ECS business. In the fourth quarter, global ECS sales increased approximately $400 million year-over-year to $2.9 billion, above the midpoint of our guidance range and up 16% versus the prior year or up 11% versus the prior year on a constant currency basis. Total ECS billings were $7.1 billion, up 16% year-over-year. Our global ECS business continues to differentiate on the more complex end of the IT spectrum, where we are experiencing strong secular demand trends behind hybrid cloud, infrastructure hardware and software, cybersecurity, data protection and data intelligence for AI-driven workloads. Our global ECS technology mix, regionally diversified presence and critical role in the middle of technology providers and channel partners have driven over 75% backlog growth year-over-year finishing 2025 at another all-time high. Looking ahead and building off our foundation of enabling technology providers and supporting channel partners, we're expanding our global ECS addressable market opportunity by going beyond the role of a traditional distributor. Through this new motion, Arrow becomes the exclusive go-to-market partner for a supplier taking on all or part of their commercial activities and gaining the ability to sell software licenses and software subscriptions on behalf of the supplier's brand. These agreements are a key strategic pillar for our ECS business and position us well as more suppliers look for partners who can simplify and scale their go-to-market motions. Over time, they are expected to be meaningfully margin accretive once at scale. Turning to the balance sheet on Slide 10. Net working capital grew sequentially in the fourth quarter by approximately $180 million, ending the quarter at $7.4 billion to support the business for growth. Importantly, the financial metrics we monitor improved with return on working capital up 170 basis points year-over-year to 18%. Likewise, return on invested capital increased 190 basis points year-over-year to 11.1%. Working capital as a percent of sales declined in the fourth quarter to approximately 21% and our cash conversion cycle decreased year-over-year by 7 days. Relatedly, inventory at the end of the fourth quarter was $5.1 billion, and our inventory turns improved, reflecting disciplined working capital management. Cash flow from operating activities was $200 million. Full year cash flow from operating activities was $64 million. Gross balance sheet debt at the end of the fourth quarter declined sequentially by $44 million, finishing the year at $3.1 billion. We repurchased $50 million in shares in the fourth quarter and $150 million in 2025. Now turning to Q1 guidance on Slide 11. We expect sales for the first quarter to be between $7.95 billion and $8.55 billion, representing an increase of 21% year-over-year at the midpoint of the range. We expect global component sales to be between $5.75 billion and $6.15 billion, representing sequential growth of 1% at the midpoint. In enterprise computing solutions, we expect sales to be between $2.2 billion and $2.4 billion, which is up approximately 13% at the midpoint year-over-year. We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $2.70 and $2.90. Details of the foreign currency impact can be found in our earnings release. As we look ahead to 2026, our view of the market is relatively consistent. We believe demand levels are incrementally improving in many markets highlighted by the leading indicators that we mentioned. We are pleased with the momentum that we are building. However, a few factors are leading to a more gradual recovery. Inventory normalization throughout the supply chain is still in progress. Macro and geopolitical instability is creating uncertainty, and overall market complexion can vary by region and market and customer type. As you build your 2026 models, I would highlight a few items that will impact the linearity of our financial results. In Q1, we are expecting global components to perform above seasonal trends in all our regions, while Q2 is expected to be seasonally strong for Asia. Q1 we'll have 4 additional shipping days that will result in 4 fewer shipping days in Q4, which primarily impacts the ECS business. We will provide you with updates in the quarters to come. With that, I'll now turn things back over to Bill for some closing thoughts. William Austen: Thanks, Raj. Turning to Slide 12. Looking forward, our key priorities are clear. We remain focused on executing with discipline in an environment that continues to improve gradually, while recognizing that the recovery remains different by region, end market and customer type. Our priority is to accelerate profitable growth as we continue to manage mix, costs and working capital carefully and align investment levels with the pace of demand. We recently made several internal organization changes to better align our go-to-market teams in a way that creates greater focus on our growth initiatives. The changes will enable Arrow to continue to excel in traditional distribution while sharpening our focus on higher-margin opportunities with deep technical engagement, value-added services and differentiated solutions. In our global components business, we appointed Chief Growth Officers across global classic distribution, global services and global IP&E distribution. In our ECS business, we appointed a Chief Revenue Officer integrating sales, marketing as well as vendor and customer success to deliver optimal results across all regions. The direction is clear. We will continue to expand our higher-margin value-added offerings across both global components and ECS, deepening customer relationships and improving the quality and durability of our earnings over time. We remain confident in Arrow's strategy, differentiated capabilities and diversified business models while planning thoughtfully for a measured recovery as we move more through the year. We will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders. Finally, on leadership, the Board's search for a permanent CEO remains ongoing. We continue to evaluate candidates, all of whom bring varied experience across complex environments. We will update the market when the process is complete and the Board is ready to make an announcement. With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call to questions. Operator: [Operator Instructions] Your first question comes from the line of Will Stein with Truist Securities. William Stein: Congrats on the good results and outlook. I was hoping you can comment on billing linearity through the quarter, was there anything unusual in terms of timing relative to what you would typically deliver on sort of a month-to-month basis? And then as a follow-up, I'd like to ask the same question about billing -- pardon me, booking patterns through the quarter, whether that sort of followed a different than typical pattern. Rajesh Agrawal: And Will, you're referring to the fourth quarter, I assume right? The... William Stein: Yes. During the fourth quarter, month-to-month trend in both what you billed and what you booked. Rajesh Agrawal: Got it. I don't think we saw anything unusual. I think it was largely aligned with our expectations. Obviously, ECS has its largest quarter in the fourth quarter, and that played out as we had thought it would play out, and we continue to see building momentum within our components business, but nothing unusual. All 3 regions performed ahead of normal seasonality and components. So that's one call-out I would say, and that's going to continue on into the first quarter as well as we said in our prepared remarks. So I would say nothing unusual from either a billings or bookings standpoint. William Austen: Yes, nothing was pulled forward. William Stein: So above seasonal, above the normal pace, but it didn't improve or slow down through the quarter? Rajesh Agrawal: No. No. In fact, I would just say that based on our guide that we gave for the first quarter, momentum has continued into the first quarter. So we're seeing a lot -- we're seeing more of what we saw in the fourth quarter as we've now entered into the first quarter. Operator: Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu Bhattacharya: In global components, you saw strong sales in the Americas region and looks like in the ECS segment, you saw strong revenue growth in EMEA. Can you give us some more details on what drove that. And do you think the strong growth sustains into the second half of '26? Just wanted to clarify, I think you said there was no pull-in of demand. Was that in both the components and in the ECS segment? And should we expect this level of demand to sustain in the second half? And I have a follow-up. Rajesh Agrawal: Do you want to take it, Bill? Or... William Austen: No, go ahead... Rajesh Agrawal: Yes. I think in terms of demand, I would say there wasn't anything in particular to call out within the different regions. We continue to have a pretty healthy backdrop in our key vertical segments within components, transportation, aerospace and defense and industrial as well. And I think that demand trend we've continued to see into the first quarter. As we said, the Western regions are starting to come back. So it's a better mix overall. And we're also seeing the mass market come back. Rick, do you want to add anything to the component side? Richard Marano: Yes, I would just add, Raj, to what you said, again, very gradual, consistent build in backlog. And again, very tied to what we're seeing around industrial, mil/aero. In particular, those markets are coming back in a nice fashion. William Austen: Yes. And the only thing I would add to that is what the guys have already said, Ruplu, is that if you remember from our last call and what we've talked about in the third quarter, we didn't see the industrial markets in the West coming back strong. Not that they're coming back strong, but we're seeing more industrial activity in the West as we went through the fourth quarter. Ruplu Bhattacharya: Okay. Can I -- for my follow-up, I'm going to try and sneak 2 parts of the question in. In the ECS segment, 25% of billings are hardware. Can you talk about like what you saw strength in what particular categories? And then you talked about these value-added services. I was wondering if you can talk a little bit more about that. What type of customers are using your value-added services? I think, Bill, you mentioned AI infrastructure. And so if you can just talk a little bit more about what you guys do in there, what type of customers are using it? And how high as a percent of operating income do you think over time, these type of services can get to? William Austen: Eric, why don't you take the ECS hardware piece? Eric Nowak: Yes. So yes, hardware is 25% of our revenue. The other 75% are mostly software, cloud and services. Of course, this second part is growing faster due to the extra growth that we have in AI and cloud. In the hardware side, it's mostly storage, compute, of course, networking and security because security is a mix of software and hardware. So that's where the 25% comes. The highest growth in these segments come, of course, from the networking and security part. William Austen: Rick, do you want to take the value-added services on components? Richard Marano: Yes, sure. Thanks, Bill. The only thing I would say on that is -- Ruplu is what we're doing in value-added services is an extension of what we do in our existing business today. We're very confident in our capabilities and the product offering that we serve from an overall standpoint there, and we're just extending that offering further and further. It's across multiple vertical markets. It's not tied to a specific vertical market or what we do in our service offering. Rajesh Agrawal: Yes. Ruplu, the last part of your question was what percent can it become? I don't think we have a projection for you here, but it's going to depend, obviously, on the rest of the business. So even though it's a faster growing, higher margin part of the business, as we get growth in the rest of our business, it does have an impact on the overall percentage of operating income. William Austen: I think what we've said in the past, Raj, is it's usually 2x gross margin. Gross profit of our normal business would be -- it could be up to 2x. Rajesh Agrawal: It's at least 2x, I'd say, some are higher, some are lower, but it's a very profitable side of the business. But if we have the rest of the business growing much faster, the mix percentage is going to vary based on that, but it's going to be a strong contributor, regardless. Operator: Your next question comes from Melissa Fairbanks from Raymond James. Melissa Dailey Fairbanks: I just had, kind of, a quick one. Normally, at this point in the cycle, we saw -- we would normally see a really big step-up in investment in working capital. We did see inventories increase during the December quarter, I'm assuming, to support future growth. But actually, we've had 2 quarters in a row now where your interest expense -- or 3 quarters in a row now, where the interest expense has come in meaningfully lower than what your expectations were. I think last quarter, that was due to some of the timing of that working capital investment. I see that you've guided to $60 million interest expense in the March quarter. Just wondering how we should think about working capital investment, how that flows through to the interest expense line and what to think about that in the near term? Rajesh Agrawal: Yes. Melissa, that's a really good observation. The interest expense level was, I'd say, much lower than we were expecting. Sometimes the cash flows and the timing of the cash flows have an impact that is not as predictable. And -- but we also -- we like the fact that we were sitting on a little bit more cash. We were able to pay down some debt in the short term. It is ultimately the same reason why, which is the timing of working capital and how that ramps up. Because we have another growth quarter here in the first quarter, we do believe that we're going to use more working capital as we always do when we're growing. And so the interest expense forecast is based on our best view at this stage. But obviously, if that changes, we'll have to let you know. But right now, that's where we are. Generally, as rates have come down, we have a fair amount of debt that's short term in nature. And so that's also helped interest expense, and that was also a factor in the fourth quarter. Short-term rates are at least 100 basis points lower than they were in the prior year. And so that's also having a mitigating impact on overall interest expense. Melissa Dailey Fairbanks: Okay. Great. That's very helpful. I just had one quick follow-up about seasonality in some of the end markets. You did give us some insight into Asia seasonality in the June quarter. At this point, in a "recovery cycle," would we expect to see above seasonal results in some of the Western markets because they have been so challenged recently? Or is the visibility still just not there yet? William Austen: Well, let me start the backside of that question first, visibility. Visibility, Melissa, is not as clear as we would like it to be. It's getting better. Our backlogs are extending. We feel good about that. But visibility beyond 90 days is still a little bit cloudy. And then your question about seasonality. Q1, we're above -- we think we said in Raj's notes in his script that we're above seasonal in Q1 in all 3 regions. So we're seeing that, and we'll see that as we go forward. Operator: There are no further questions at this time. I will now turn the call back to Interim President and CEO, Bill Austen for closing remarks. William Austen: Thank you, operator. Let me close with this. Industry fundamentals are improving across all regions and in many verticals. We're pleased with how our strategy execution is playing out because it's centered on growth and margin expansion, but we're not yet satisfied as there's more work to do. So we'll see you in another 90 days, and we'll talk to a lot of you in the next day or 2. Thank you for joining. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Coursera's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] And this call is being recorded. [Operator Instructions] I would now like to turn the call over to Cam Carey, Vice President of Investor Relations. Mr. Carey, you may begin. Cam Carey: Good afternoon. Thank you for joining us for Coursera's Q4 and Full Year 2025 Earnings Conference Call. Today, I'm joined by Greg Hart, our President and Chief Executive Officer; and Mike Foley, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our earnings press release was issued after market close, and it is available on our Investor Relations website at investor.coursera.com where this call is being webcast live and reversions of today's materials, including our quarterly shareholder letter have been published. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today's earnings press release and supplemental materials. Please note that all growth percentages discussed refer to year-over-year change unless otherwise specified. All statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. Actual results and events could differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties. Please refer today's earnings press release, shareholder letter and SEC filings for more details on our forward-looking statements. With that, I'll turn it over to Greg. Gregory Hart: Thank you, Cam, and good afternoon, everyone. We appreciate you joining us. Coursera delivered a strong fourth quarter. Over the past year, we've been focused on a clear set of priorities to build a more durable foundation for long-term growth, sharpening our execution refining how we operate and embedding faster AI native product innovation and data-driven decision-making across the business. 2025 marked the early phase of this work. As the year progressed, we began to demonstrate tangible progress reflected in our results. For the full year, we grew revenue to $757 million, an increase of 9% year-over-year and more than double the 4% growth rate we shared in our initial April outlook. We generated record free cash flow of $78 million, up 32% from the prior year and we extended our track record of delivering growth with increased financial leverage, expanding annual adjusted EBITDA margin by 240 basis points year-over-year to 8.4% and while continuing to invest in the next generation of product experiences. Our results reflect a more focused, disciplined company, one that's translating strategy into faster execution. I'm proud of the early progress our team has made, and I'm equally clear that we must and will continue to move faster. In December, we announced an agreement to combine with you to me, a company and team we have long admired. This transaction is an important step in accelerating our strategy. By bringing together 2 highly complementary platforms, operating models and cultures, we meaningfully increase our collective ability to invest, innovate and execute at scale. Just as importantly, this combination reinforces the direction we have been taking all year, building a more agile, more focused and more capable company and evolving beyond a content catalog into a leading technology platform for skills. More broadly, the environment around us continues to underscore why this moment matters. Skill requirements are changing quickly across nearly every industry. Organizations are under pressure to reskill and upskill their workforces at scale and individuals around the world are increasingly seeking learning that is more personalized, job relevant and clearly connected to advancing their career goals. Together, we believe we can execute at greater scale and speed, share product and data investments to accelerate our road map and be better positioned to address the global skilling and talent transformation opportunity. Our companies are progressing through the regulatory and shareholder approval processes, and we look forward to providing updates in the coming months as our integration planning advances. In the meantime, we are not slowing down. Coursera's ecosystem and the infrastructure that powers it continues to expand and evolve to better serve our learners, customers and instructors. Throughout 2025, we strengthened Coursera's position as a trusted platform for career-relevant learning, supported by a growing and increasingly differentiated global ecosystem. At the center of that ecosystem are our learners. Over the year, we added more than 29 million new registered learners, growing our total cumulative learner base by 17% year-over-year. In Q4, we welcomed a record 6.8 million new learners, the highest fourth quarter additions in Coursera's history. Learners come to Coursera with a clear purpose. To build skills that help them advance their careers and adapt in a rapidly evolving labor market. Our platform combines data and product innovation with a broad selection of branded credentials and curated career pathways taught by more than 375 universities and industry leaders. These world-class instructors enable us to deliver a wide range of learning needs from foundational technical and human skills, to job relevant credentials that span every stage of career progression. By year-end, our platform offered more than 13,500 courses, expanding our catalog by over 45% year-over-year. The fastest pace in the past 5 years. As job requirements continue to evolve rapidly, demand for career-focused learning remains strong, including the accelerated demand for AI-related skills. In 2025, learners enrolled in our generative AI catalog at a rate of 15 enrollments per minute, up from 8 enrollments per minute in 2024. Many of our most popular courses and certificates are created by leading technology companies, including long-time partners such as Google, deep learning.AI, AWS, Microsoft, Meta and IBM. In November, we launched our first courses with one of our new partners, Anthropic, designed to give learners hands-on experience with [ Claude ] while building the skills needed to collaborate effectively with AI. Coursera is now collaborating closely with many of the leading AI companies serving not only as a platform of choice for distributing high-quality content, but also as a partner on product innovation, including new approaches to search discovery and learning in the flow of work. We also see that demand for these essential skills extends well beyond technical roles. Earlier this week, we announced new AI courses encompassing an increasingly broad range of careers from nursing and health care to business, legal and communications roles. Many of these new skills are being taught by leading universities, including Vanderbilt, the University of Colorado Boulder and Macquarie University in Australia as well as organizations with deep expertise in a specific industry or field, including health care. In January, we welcomed Cleveland Clinic, one of the world's largest health systems to Coursera. Their initial launch includes courses focused on applying AI in clinical settings and using machine learning techniques to analyze medical images. It's one example of how our expanding ecosystem continues to strengthen Coursera's role as a critical platform for skills development as AI reshapes how we live, learn and work across industries worldwide. Now let's turn to our product updates. First, we continue to refine the learner journey on Coursera, making focused improvements across search, discovery and merchandising designed to better attract and convert learners. The scale and data of our platform create powerful opportunities for more personalized and contextual guidance, allowing us to tailor content, language and recommended pathways to support the career needs of learners across regions, roles and levels of mastery. Over the past several months, we've made continuous enhancements. We redesigned our homepage to make it easier for learners to get started and navigate Coursera. We also launched new geo pricing, marketing and promotional capabilities to better serve our growing international learner base resulting in early gains in paid conversion and Courseras adoption. In Q4, we continued experimenting with features like natural language search, AI-powered discovery and learner motivation using rapid testing and iteration to improve relevance and drive stronger engagement over time. While much of our product innovation starts with the learner experience, it's equally important that we continue to strengthen the value and choice we provide to enterprise customers who manage workforce learning at scale. We are focused on delivering a more intuitive, data-driven enterprise experience that helps customers assess skills, drive engagement and translate learning investments into more measurable workforce outcomes. A key area of progress this quarter has been the redesign of our enterprise admin home. Admins rely on this view as their primary interaction with Coursera and customers want it to be more actionable, role-based and clearly connected to outcomes. In pilot deployments, the redesigned home delivered improvements in admin led engagement, reinforcing our belief that clearer insights, targeted nudges and contextual assignments can influence learner behavior and skill development at scale. Based on these early results, we began rolling it out more broadly in January. Beyond the admin home, we continue to invest in enterprise integrations and workflow improvements designed to embed Coursera more deeply into customers' existing technology ecosystems, positioning learning closer to the flow of work where skills can be applied, measured and reinforced. For example, our product priorities for 2026 include verified skill pathways, MCP based discovery capabilities and deeper integrations with HR and LMS platforms as well as an expanding set of AI and collaboration tools. These initiatives reflect a broader shift towards making Coursera not just a catalog for learning, but a central system of record for skills development, helping organizations engage learners more proactively, benchmark talent and enable workforce transformation at scale in an increasingly dynamic labor market. Now turning to today's final product update. Over the past several years, we have been investing in building a faster, more agile content model, one that preserves the value of our trusted brands while evolving beyond the static catalog into a skilling platform designed to keep pace with real-time learner and business needs. To support this evolution, we have introduced a platform fee designed to establish a more sustainable model to fund ongoing investment in Coursera's AI native platform capabilities. As Mike will discuss, we expect the financial impact of this change to be gradual. Effective January 1, the platform fee will apply to eligible new sales across our consumer subscriptions and courses as well as our enterprise offerings. The fee is not retroactive, and pricing for learners and customers remains unchanged. While we expect this to provide a structural benefit to gross margin over time, our primary objective is to support continued investment in our AI native capabilities and enhance the value of our platform for all users. For learners, this enables more personalized and adaptive experiences from AI-powered role play simulations to coaching and career guidance. For customers, it allows us to expand our skills infrastructure and tools to better measure talent and align learning to business outcomes. And for instructors, it provides access to AI-enhanced tools and new authoring capabilities that help them create, augment and deliver more impactful learning experiences at a global scale. When I stepped into my role a year ago, I was clear that product-led growth would be central to our strategy and the foundation for Coursera's next chapter. As we look to 2026, we intend to push further. Our goals extend beyond simply keeping pace with technology. We are innovating on behalf of learners, customers and instructors to build a more dynamic AI-enabled skilling platform that is designed to help them succeed in a rapidly evolving skills landscape. With that, I'll turn it over to Mike to walk through our financial performance and provide more detail on our initial outlook for 2026. Mike please go ahead. Michael Foley: Thank you, Greg, and good afternoon, everyone. Coursera finished 2025 in a position of financial strength. We delivered double-digit year-over-year revenue growth for the last 3 consecutive quarters, expanded our gross and adjusted EBITDA margins and generated strong cash flow while continuing to invest in strengthening the long-term fundamentals of the business. These investments are focused on building platform capabilities that learners and customers increasingly require as skills change more quickly. The results I'll discuss today reflect how we're managing and planning the business on a stand-alone basis. I'll begin with our fourth quarter results and then walk through our guidance and outlook assumptions for the first quarter and full year 2026. In the fourth quarter, we delivered total revenue of $197 million, up 10% from the prior year period, driven by growth across both our Consumer and Enterprise segments. Please note that for the remainder of this call, I will discuss our non-GAAP financial measures unless otherwise stated. Gross profit was $109 million, up 12% year-over-year, representing a 55% gross margin, an expansion of approximately 90 basis points from the prior year period. Margin expansion was driven primarily by continued improvement in our consumer segment, reflecting higher learner engagement with newer content created under more favorable production arrangements. These arrangements typically feature lower revenue share and content costs, reflecting the growing role our technology and authoring capabilities play in enabling high-quality learning experiences at scale. Additionally, as we deliver faster innovation cycles and our reach continues to grow, we will continue to explore structural opportunities to improve unit economics over time. including the platform fee Greg mentioned earlier, which took effect at the start of 2026. This structure better aligns economics with the value our technology delivers, while supporting continued investment in innovation. I'll share more detail on the expected margin impact with our outlook. Total operating expense was $103 million or 52% of revenue. Consistent with the prior year period as we paced ongoing investments in R&D and go-to-market capabilities expected to drive sustainable growth and improve long-term operating leverage. Net income for the fourth quarter was $11 million or 5.6% of revenue, and adjusted EBITDA was $11 million or 5.7% of revenue. For the full year, Net income was $67 million or 8.8% of revenue, and adjusted EBITDA was $64 million, representing an 8.4% margin. As a reminder, we began 2025, targeting 100 basis points of adjusted EBITDA margin expansion to 7%. We later raised that target to 8% as our execution and visibility improved and ultimately exceeded both delivering 240 basis points of year-over-year expansion. We achieved this while deploying targeted growth investments across product, content and go-to-market initiatives, with quarter-to-quarter flexibility provided by our annual margin framework. In a year defined by rapid technological change and a refined operating model, that flexibility was critical enabling us to deliver meaningful margin expansion while continuing to make long-term decisions on behalf of our learners, customers and broader stakeholders. This balance remains central to how we operate the business. Now turning to cash performance and the balance sheet. As Greg highlighted earlier, we generated a record $78 million of free cash flow in 2025. A clear signal of the earnings potential in our model. This included a use of $2 million in the fourth quarter, driven by seasonal working capital dynamics related to receivables timing of our revenue share catch-up payment as well as $3.8 million in cash payments for M&A transaction-related costs. For additional clarity, these costs have been footnoted in the financial tables of today's press release. Moving to the balance sheet. We ended the year with approximately $793 million of unrestricted cash and cash equivalents with no debt. This strong financial position gives us the capacity to invest in growth moved quickly in a fast-changing landscape and create additional opportunities for shareholder returns. As we discussed on the December announcement call, this includes our anticipated execution of a sizable share repurchase program following the close of the proposed transaction with Udemy. Now let's discuss the fourth quarter performance of our operating segments, starting with Consumer. In Q4, we delivered consumer revenue of $132 million, up 12% year-over-year. Growth was driven by acceleration in our core consumer subscription and courses category powered by enhanced marketing, localized pricing and subscription capabilities with Coursera Plus. These capabilities help learners discover, develop and validate skills more effectively as labor market needs evolve. This strength was modestly offset by the anticipated fourth quarter decline in our degrees product category previously disclosed with our decision to integrate Degrees results into our consumer segment at the start of 2025. As Greg mentioned earlier, we added 6.8 million new registered learners in Q4, the highest number of fourth quarter additions in Coursera's history despite the seasonal softness we typically see in our fourth quarter top of funnel. Consistent with regional trends observed over the past several quarters, a growing proportion of new learner traffic continues to come from international markets. This global demand underscores the importance of product innovation that improves relevance, localization and value across regional labor markets and in effect supports monetization of our funnel over time. Consumer segment gross profit was $81 million, up 15% year-over-year and 62% of consumer revenue, up from 60% in the prior year period. As I mentioned earlier, this margin expansion reflects increasing learner engagement with content produced with more favorable revenue share economics. Overall, our consumer momentum reflects renewed execution and the early investments we've made across product, content and marketing over the past year. In 2026, we plan to build on this momentum, delivering faster innovation cycles, more engaging experiences and greater value through our large and growing subscription offerings. Turning to our Enterprise segment. Enterprise revenue was $65.4 million up 5% from a year ago. Growth was driven by our campus and business verticals with demand trends and spending priorities varying by customer, region and use case. The total number of paid enterprise customers increased to 1,730, up 7% from a year ago, and our net retention rate for paid enterprise customers was 93%. The improvement in net retention was driven by Coursera for campus as well as a large government expansion. However, we remain focused on driving sustained improvements in retention and expansion across a broader set of enterprise customers over time, particularly within Coursera for business. Segment gross profit was $46 million, up 7% year-over-year and a 70% gross profit margin. This was an improvement of 130 basis points from the prior year period, driven by content engagement trends similar to those benefiting our consumer segment. Overall, our expectations for the enterprise segment remain largely unchanged as we remain focused on the long-term growth opportunity. As organizations increasingly prioritize skills transformation, they're looking for platforms that combine relevance, agility and measurable outcomes. We plan to continue investing in product features and tools to better meet those needs, recognizing that progress in this segment is typically more measured given the nature of the revenue cycle. Finally, turning to our financial outlook. As we enter a new year, we're providing additional detail on the composition and pace of the business underlying our guidance. This includes onetime segment-level growth estimates as well as other modeling considerations. Importantly, today's guidance reflects Coursera's expectations on a stand-alone basis and does not take into account the proposed transaction with Udemy. We expect the transaction to generate meaningful operating efficiencies, including anticipated annual run rate cost synergies of $115 million within 24 months of closing primarily through optimized go-to-market motions and streamlined G&A expense. We are confident that a majority of these run rate synergies can be achieved within the first year post close. And we look forward to providing updates as we progress through the regulatory and integration planning processes in the months ahead. With that context, for the first quarter of 2026, we expect revenue to be in the range of $193 million to $197 million, representing growth of 8% to 10% year-over-year. For adjusted EBITDA, we're expecting a range of $11 million to $15 million, which reflects our typical seasonality and our focus on deploying growth investments early in the year. For full year 2026, we anticipate revenue to be in the range of $805 million to $815 million, representing growth of approximately 6% to 8% from the prior year. From a segment perspective, this anticipates consumer segment growth of more than 10% over the prior year, reflecting the performance improvement we continue to drive in our subscription and course offerings. Slightly offset by an anticipated 100 basis point headwind from our degrees product category. For our enterprise segment, we expect 2026 growth in the low single digits year-over-year and have not assumed any material change in the current macroeconomic environment. For adjusted EBITDA, we expect to deliver in the range of $70 million to $76 million or an adjusted EBITDA margin of approximately 9% at the midpoint of the revenue and adjusted EBITDA ranges. This initial target is designed to extend Coursera's strong track record of delivering operating leverage through annual EBITDA margin expansion while continuing to make targeted investments in growth initiatives that enhance learner and customer value over time. While we did not manage the business to optimize adjusted EBITDA for any single quarter, we expect our 2026 bottom line performance to be weighted to the second half of the year for 2 reasons. First, our focus on deploying investments early in the year to support our most productive growth opportunities. Second, we expect to begin seeing the early financial benefit of the platform fee on gross margin later in the year. As Greg outlined, the 15% platform fee only applies to new sales across eligible consumer subscription and courses and enterprise offerings. There is limited or no impact on certain product categories with structurally higher margins today such as Coursera produced content and degrees. The financial effect is expected to be gradual as we begin to recognize revenue from new sales over time. We anticipate seeing some initial expansion in Consumer segment margins in the second half of 2026, followed by enterprise segment margin improvement in 2027 given the multiyear contract structure and revenue recognition dynamics in enterprise sales. Finally, in a standard year, we would continue to expect free cash flow performance to largely track at or above adjusted EBITDA and excluding the impact of cash payments related to the proposed transaction. For additional visibility today, we wanted to provide our first quarter forecast of approximately $14 million of cash payments related to the transaction fees and planning expenses. This does not factor in additional costs contingent upon close or any post-close integration expenses. We look forward to providing more detailed expectations in future updates. To close, 2025 marked meaningful progress across several fronts. We delivered solid growth, expanded margins, generated strong cash flow and strengthened the foundation of the business. We entered 2026 with a disciplined operating plan, a strong financial position and clear set of priorities focused on long-term value creation. With that, let's open up the call for questions. Operator: [Operator Instructions] Our first question comes from Stephen Sheldon with William Blair. Stephen Sheldon: First, I wanted to ask about the platform fee that sounds like you introduced in January. I guess can you just give a little bit more color on the structure of that? How much of a lift do you think that could be to gross margins over time? And I guess, as you've kind of pushed that out there and communicated it, has there been any pushback in the system that you've seen regarding the fee? Gregory Hart: Maybe I'll start and then Mike can add on. Thanks for the question, Stephen. So a couple of us. First of all, the intent of the platform fee, as was indicated in the scripted remarks is to enable us to invest in an ongoing way in continuing to improve the platform. And by doing so to deliver better outcomes for our learners and for our content partners as well. . They've obviously been pleased with the growth that we've shown, particularly over Q2 through Q4 with 10% growth in each of those quarters. And the intent of the platform fee is to enable ongoing investment and product initiatives that will help further that growth. They're obviously curious to get better visibility into what some of those investments might be and what our 2026 road map looks like. As Mike mentioned in his scripted remarks, the impact of the fee on gross margin because of the nature of the fee and the nature of our revenue recognition with an increasing percentage of our consumer business being related to our subscription Coursera Plus. And so the revenue gets recognized over a longer time period. The same is obviously true in our enterprise business as well. And so that's a little bit of color behind what Mike referenced in more impact will be reflected in our financials in the back half of the year. Mike, over to you. Michael Foley: Yes. I would just add in terms of gross margin overall, we do expect to continue to make improvements in progress on gross margin in the aggregate the platform fee is a significant component of that in 2026, along with continued investment in Coursera produced content. . Of course, we also have offsetting that, the mix of revenue, our fastest-growing business in our consumer subscription is our lower margin business. and enterprise growing slower as our higher-margin business. So there's a mix shift to offset that from an overall gross margin percentage basis. But it is a meaningful uplift in the platform fee for the second half of the year and definitely into 2027. Stephen Sheldon: Got it. Yes, that makes sense. And then following up -- can you just dig a little deeper on where you're making incremental investments in the business as you thought about the 2026 budget? Are there specific areas where you're reinvesting more than you have historically? Just given some of the comments in the prepared remarks, it sounds like you have a lot of product ambitions. But just any color on where you're kind of pushing the pedal a little bit more than you historically have. . Gregory Hart: Yes, I can take that. So we'll continue to invest in our sales and marketing to drive new leaner acquisition. We've seen significant improvements in efficiency over 2025. In that spend, we expect to see more efficiency in 2026. The other area, as Greg alluded to, is in R&D, and we are expecting to invest more in R&D this year. Part of that is hiring that we've already done and part of that is continued investment in software tools and more engineering and product into 2026. So those will be the 2 areas I'd highlight. G&A would just grow modestly this year. Operator: Our next question comes from Josh Baer with Morgan Stanley. Josh Baer: I was hoping you could talk a little bit about some of the proprietary data sets that you have that would make it hard for an LLM or a new entrant to create learning content and more broadly, like the platform that you have that can enable skilling and reskilling and facilitate workforce transformation. So some of the data or competitive moat there. . Gregory Hart: Yes, I'll start on that one, Josh. Thank you for the question. So a couple of thoughts on that. First of all, we ingest a lot of data from external third-party sources. That data is presumably also some of it available to some of our other participants in the space, whether there's LOMs or others. It's what we do with that, that I think is a bit unique. And so what we are trying to do, 86% of the learners who come to Coursera come to grow their careers. And what we're really focused on doing is delivering a mapping of the skills that they need to do so in whatever particular career they might be pursuing to the courses on Coursera that deliver those skills. And then specifically, the modules within those courses that deliver those skills and then how we verify those skills at scale. We just actually rolled out the launch of our verified skills path across a number of different career groupings for our enterprise partners, which has been something that we've been working on since September. The goal is to continue to innovate on that. And obviously, we use all of the data that we have on our platform from within the learning experience from within courses, within given modules, of course, is about what is driving engagement, what is driving true mastery of those skills and how do we double down on that. It's one of the ways that we actually use Coursera produced content as a test bed to figure out which optimizations drive the highest learner engagement, the highest course completion rates the most correlation with skill mastery and development. So we do think that we have a differentiated set of data across both how we use external data how we map that to the skills that we build on our platform for our learners and then how we use the learning experience itself, which is very different on Coursera than it might be in a chat environment. In an LLM to deliver a far better outcome for those learners. And we just released our learner outcomes report about 2 or 3 weeks ago. One of the things we see is that 46% of learners on Coursera report a salary increase since enrolling in their course or program on Coursera. So we believe there's a strong correlation between the input of learning on Coursera and the output that learners are coming to Coursera to achieve, which is to grow their career. Josh Baer: Great. And just wondering, just a little confused on the platform fee. Like is there a difference between the platform fee and a pricing increase for new customers? . Gregory Hart: Pricing for customers is not impacted. There is no change to consumer pricing or enterprise pricing for that matter. Operator: Our next question comes from Ryan MacDonald with Needham. Matthew Shea: Congrats on a nice quarter here, guys. This is Matt Shea on for Ryan. Wanted to touch on international. It seems like it's been a real bright spot the last couple of quarters. 2-parter here. Maybe first, on the translation side, you achieved your goal of 100 courses with AI doing across 5 languages. It seems like this has been particularly helpful in unlocking international learners. I guess given that success, how much more translation could be in store for 2026? And how immediate is that benefit? And then maybe second, geo-based pricing was a big topic last quarter that seems to be bearing fruit. How has that evolved? And any plans to roll out incremental geo-based pricing to new countries in 2026? Gregory Hart: Great question, Matt. So a couple of thoughts on that. First of all, yes, we are absolutely going to continue to expand the number of courses that we have translated both through AIW, but also just through machine translation of text. We believe that -- and the data shows that learners are far more likely to engage in courses that are in their native language and ideally in that native language through verbal audio, not just through text. So we're going to continue to invest in that area. It's also something that our enterprise customers will often ask for in certain geographies to make sure that they get the right content for their workforces in those native languages. It's also one of the reasons just sort of stepping back and thinking a little bit about the combination with Udemy, that's really interesting for us because Udemy has 85,000-plus instructors from around the world, creating content in a huge range of languages. And so we believe that will be a fantastic addition to better serve learners around the world. The other thing that you mentioned about geo pricing. So we're definitely pleased with the results that we've seen from geo pricing. We think there is further opportunity to keep looking at that type of change to our pricing model just to make it more responsive to actual purchasing power in different countries around the world. And so I do expect that over the course of 2026, we'll continue to look at that and make sure that we're fine-tuning that in the right way. Ryan MacDonald: Got it. I appreciate that color. Maybe one on the combination with you to me. At the time of the announcement, it was a bit early to gauge feedback from the instructor base, but now assuming you've had a chance to connect with partners, how do your university and enterprise partners feel about this combination and conversely, to the extent you can share, I guess, any additional feedback from outman structures about how they feel about the combination? Gregory Hart: Well, I'll start by saying that we firmly believe that the combination will provide far better outcomes for every participant in our value chain. So from a content creator perspective, Coursera has now 197 million registered learners. Udemy has 82 million plus registered learners so approaching 300 million with the combination. . Then from a -- and obviously, 300 million registered learners on the consumer side of the business is a massive audience that any content creator, whether that's a university partner of ours, an industry partner of ours. -- or a subject matter expert in structure from Udemy's network can reach through this combination. And so we believe that will absolutely expand their capacity to tap into new audiences and deliver effective learning for them. For learners, obviously, they benefit from more content they benefit from all the content being created, not just by Courseras 375 different university and industry partners, but from the 85,000 plus subject matter experts on the Udemy side. And then finally, for enterprise, we have 1,700-odd enterprise customers, Udemy has 17,000. And so that is a huge audience, again, the content creators can develop content for and serve and a real opportunity to grow their business through that. I would say that the feedback that we've had has really been how is this going to work, which is a logical and completely fair question. And we have to think through that really carefully. The last thing we would want is to simply have a content soup of content from all of these different instructors and institutions. And so we want to make sure that we do a good job of developing the right experience. We will develop that with feedback from those audiences. Obviously, we can't really do that right now when we're pretty close. But as we get post close, getting input and feedback from those audiences as we build out the integration into a single platform is going to be an important part of our plan. Operator: Our next question comes from the Nafeesa Gupta with Bank of America. Nafeesa Gupta: Am I audible? Cam Carey: Any so we can hear you. Nafeesa Gupta: My question is on -- firstly, in terms of Udemy merger, any potential time lines for it? I know it was mentioned second half of the year, but any updates on that? And is there any regulatory hurdles that you see in that process? Michael Foley: Yes. This is Mike. I can take that. Yes. So no real updates to that yet. We're moving forward with the regulatory filings and shareholder and SEC filings with good pace. Our guidance continues to be the second half. But frankly, there's a wide range of potential outcomes there. There's a theoretical path to being side than the second half of the year. or it could be later than that. So no real update at this point in terms of timing. I'm sorry, the second half of your question? Nafeesa Gupta: The second question I have is on your traffic from AI platforms. You partnered with OpenAI and Gemini and then -- you also talked about MCP based discovery capabilities for 2026. So what kind of traffic are you seeing from these ad platforms? And what do you expect going forward? Gregory Hart: At a high level, it's still very early days in terms of the integration with OpenAI and chat GPT. We continue to collaborate with them on building out and improving that experience, but still really early days, so nothing substantive to share at this stage. I think what you're seeing more broadly is that we get a different type of traffic from the than you would have historically seen from search. And so you see higher intent on traffic coming through from the ALM. And so we're pleased by that. But it's still very early days in terms of the actual integration that we have with ChatGPT . Nafeesa Gupta: Got it. And if I may, one last one. On the platform fee, is that like a onetime fee for any new subscription on consumer or enterprise? Or is that like an ongoing monthly fee? Or like how does that work? And could you also remind us what percentage of your consumer is in subscriptions? Gregory Hart: Yes. The platform fee, it applies to new revenue in 2026 on related to eligible content. So not all of our content categories as noted earlier, and it effectively is 15% that comes, if you like, off the top before we calculate the revenue share payments to our content partners. So that's how it works, and it's an ongoing fee. Michael Foley: And again, there's no change to consumer pricing or enterprise pricing connected with the platform fee. Operator: Our next question comes from Brian Peterson with Raymond James. Unknown Analyst: This is Jessica on for Brian. In your commentary on your guidance, if I see consumers agented to grow over 10%. Even you consider potential headwinds you're expecting from the Greece segment, what are the main drivers of the strengths that are expected in consumer? Like are we considering a subscription continuing a higher mix of the revenue? Or is that you're continuing to bring in more learners or just converting learners are just like a higher price points. So what -- how should we be considering all the factors involved here? Gregory Hart: Well, at a high level, I'll start and then Mike can certainly join in our subscriptions and courses piece of our consumer business continues to be the fastest-growing piece of our consumer business. And we expect that to continue to be true in 2026. We are pouring more energy into that, both on the external marketing side, from a paid marketing perspective, but also within the platform. It is, by far, the best value from a learner perspective. And so it makes the most sense for people to subscribe to Coursera plus either monthly or annually depending on their learning goals. So you should expect that to increase. The other investments that we are making, Mike referenced the fact that we'll continue to invest in sales and marketing and driving that efficiently, which we've done over the course of 2025, and we also anticipate that continuing. Mike, do you want to add some more color? Michael Foley: No, I think that's right. The only thing I would add is one of the things that gives us confidence here around that rural is the momentum that we had in Q4 around subscription and courses and not just the monthly subscription, but real strength and momentum in our annual subscription. So that gives the continued fast growth of our annual subscription gives us increasing confidence against the delivery of the number for 2026. So the combination of product-like growth improvements. We've seen an uptick in retention in Q4. So we'll get various signals that give us confidence in the outlook for '26. Unknown Analyst: It's really great to hear. And a follow-up then also in your enterprise segment, NRR is like inflected back to 93% this quarter. As we're thinking about the rest of this year, while it's crores, but also potentially following the Udemy merger, what are the main priorities you're still considering within the segment? And how like are you thinking about leading with pad development? Or what other aspects are you considering to be improving the segment and continuing driving its performance. Michael Foley: I'll start with the NRR comment, and hand to Greg for the priorities. So yes, we're pleased to see the uptick from 89% previous quarter to 93%. But overall, we're not pleased with the number. We won't be happy with our number until it's frankly above 100%. So we've got -- we know we have a lot of progress to make there. A number of the changes that we made operationally in our enterprise business and have been, I think, very positive. We have a relatively new general manager and enterprise be here around 4 months, made a number of significant changes to just how we go to market there that I think are going to bear fruit. But based by the nature of that business, we would likely see the impact of that. until probably the back half, if not into 2027. But I'm confident that we'll see improvements just operationally there. the uptick for this quarter was really driven by one large expansion at least half of that uptick was one large expansion in our government business in Asia, and that sort of was a fairly needle-moving deal on that front. And so that was a positive. But we don't as yet see sort of trend of continuous improvement in that number for this year until we start to see the fruits of both product led growth as well as the improvements in the operations that I mentioned earlier. Gregory Hart: And then maybe just to speak a little bit to the question that you had, Jessica, about the combination with Udemy and their enterprise business. So their enterprise business is obviously much larger than ours. They are roughly 2/3 enterprise, 1/3 consumer, and we are the inverse of that, 2/3 consumer, 1/3 enterprise. The combination will give us a company with pro forma revenue of $1.5 billion roughly that is roughly 50% consumer, 50% enterprise. They are, frankly, ahead of us on a number of things with enterprise, not just from a revenue perspective, but also from a product perspective. That's one of the things that's really appealing and interesting about the combination in the same way that we are ahead of them in many ways on the consumer side of our offering from a product perspective, not just a revenue perspective. And so the opportunity to bring all of that under 1 roof and 1 platform and offer that to both consumer and enterprise customers is really appealing and to do that in a way that helps on the consumer side. Do an increasingly better job of delivering -- helping learners find the right skills that they need to grow their careers enabling them to more easily learn and master those skills and demonstrate through verified assessment of those skills, that ability to potential employers. On the enterprise side, the ability to do all of those same things from an upskilling and reskilling perspective, but also to do that within the flow of work through MCP integrations and really deep integrations directly into enterprise systems. And so we are very excited about the opportunity that this combination creates to do all of that Operator: We will take our final question from Devin Au with KeyBanc. Devin Au: And congrats on a strong quarter. When I look at the first quarter guidance at the midpoint of the revenue guide, I think it's contemplating sort of a greater decline quarter-over-quarter in growth than prior years. I know you've kind of called out around 100 bps of headwind from degrees, but is there any other kind of factors that's worth highlighting and driving the larger sequential decline? Michael Foley: I would just point to -- on the enterprise side, we continue to have good momentum with Coursera for campus. The largest part of that business, of course, is Coursera business. And we're just taking a cautious outlook there for the remainder of the year. We'll see what happens in the year. There's -- the macroeconomic environment remains uncertain as it did through 2025. So I would just say that we're taking a cautious view on how that -- how the year plays out on the Coursera business, just with the lack of visibility that we have on how that plays out over the next 4 quarters. That would be the only real thing I would point to. Gregory Hart: The one other thing I might just build off Mike's response is, as we see more of our consumer revenue come from Coursera plus subscriptions. And as we see increasing success in Coursera Plus annual subscriptions, the revenue recognition of that plays out, obviously, over a far longer time horizon than a normal a la carte course purchase or Cs monthly. And so that's also a factor as you think about what happens in Q1 specifically. Devin Au: Got it. I appreciate the context. And just a quick follow-up question. Looking at the kind of net new enterprise accounts that you've added in the quarter, kind of a step down in terms of net add. If you look at the past couple of quarters or a few years, can you maybe unpack that a little bit? Have you seen any kind of deals kind of pushed out in 2016 that would explain that? Just any color would be helpful. Gregory Hart: Well, every quarter, you also have deals that push out that you don't want to. I wouldn't say it was necessarily any worse in this quarter on that particular dimension than it is on others. I think I would just echo sort of what Mike said a little bit earlier about some of the macro trends that we're seeing play out in the C4B segment. C4C, we've had some good strength in that. We continue to be uniquely positioned to serve that. particular segment really well, but it's a smaller piece of our enterprise business. And then C4G has natural sort of lumpiness in that particular part of the business just because you have typically annual government contracts versus multiyear deals. And so you see that kind of move up and down, and we've seen that historically as well. Cam Carey: That wraps today's Q&A session. A replay of this webcast will be available shortly on our Investor Relations website. We appreciate you joining us. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to IREN Q2 FY '26 Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mike Power, Vice President, Investor Relations. Please go ahead. Mike Power: Thank you, operator. Good afternoon, and welcome to IREN Q2 FY 2026 Results Presentation. I'm Mike Power, VP of Investor Relations. And with me on the call today are Daniel Roberts, Co-Founder and Co-CEO Anthony Lewis, CFO; and Kent Draper, Chief Commercial Officer. Before we begin, please note this call is being webcast live with the presentation. For those that have dialed in via phone, you can elect to ask a question via the moderator after our presentation. I'd like to remind you that certain statements that we make during the conference call may constitute forward-looking statements and IREN cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company. Listeners shouldn't place undue reliance on forward-looking information or statements and I encourage you to refer to the disclaimer on Slide 2 of the accompanying presentation for more information. And finally, during the course of today's call, we will refer to certain non-GAAP financial measures as a reconciliation schedule showing the GAAP versus non-GAAP results in the presentation. With that, I'll now turn over the call to Dan Roberts. Daniel Roberts: Thanks, Mike, and thank you, everyone, for joining us today. Fiscal Quarter 2 was an important quarter for IREN as we made meaningful progress as a vertically integrated AI cloud platform. Let me start with the highlights. Firstly, we secured underwriting commitments for $3.6 billion of GPU financing at an interest rate of less than 6%. Together with customer prepayments, this provides funding coverage for approximately 95% of the GPU related CapEx supporting our $9.7 billion AI contract with Microsoft. . Importantly, this financing package provides greater clarity to also advance a broader set of customer discussions. In that regard, customer demand remains very strong and we are continuing to sign and negotiate contracts for both new and prior generation GPUs. We have multiple advanced negotiations underway for larger-scale deployments and are also seeing hyperscalers and AI enterprises increasingly focused on air-cooled GPUs given the faster deployment time lines. Operationally, execution is tracking well across the portfolio, and we expect to deliver 140,000 GPUs by the end of 2026 positioning us to deliver $3.4 billion in annualized run rate revenue. Construction across Horizon 1 through to 4 is progressing to schedule. And in British Columbia, we continue to expand our AI cloud footprint with just under $0.5 billion of ARR now under contract for Prince George. Finally, we extended our growth runway again by securing a new 1.6 gigawatt site in Oklahoma, taking our total secured power to over 4.5 gigawatts. This reflects the strength of our internal development team in securing gigawatt scale sites in a power constrained market and supports continued conversion of capacity into customer contracts over time. So that's the quarter in summary. Those outcomes reflect the assets, capability and execution discipline we've built over time, which I'll cover next. Over the past 7 years, we've built a strong platform grounded in real assets, power, land, data centers and just as importantly, human capital. That foundation is what gives IREN a durable competitive moat. We have secured more than 4.5 gigawatts of power, stood up 810 megawatts of operating data centers signed billions of dollars of AI customer contracts and assembled a team of over 2,000 people to execute on them. These assets and capabilities are not easy replicable. They are the results of years of hard work. As a founder-led business, we have been fully committed to building a platform with lasting value. And Will and I are deeply invested in this platform along with the rest of the management team. That mindset matters as it shapes how we allocate capital, how we partner with customers and how we think about long-term value creation. In an industry moving at extraordinary speed, this combination of real assets, operational capability and founder led commitment is what sets IREN apart and positions us for AI cloud leadership. So the way we think about scaling the business is through what we call the 3 Cs capacity, customers and capital. The reason we focus on these 3 is simple. They reinforce each other. Capacity creates opportunity customer commitments shape the pace and scale of our investment and capital gives us the ability to execute. What's encouraging today is that we have all 3 working in parallel. First, on capacity. We have 810 megawatts of existing data centers that can be immediately leveraged for AI cloud deployments. In addition to the 3.6 gigawatts of greenfield data center sites and a 2,000-plus team to design, build and operate them end to end. Second, on customers. As I mentioned, we are in multiple about negotiations. And at this point, demand is not the constraint for us. The focus is on choosing the right long-term partnerships that support durable platform level growth. And thirdly, on capital, we continue to diversify our sources of capital to support capacity growth and customer deployment. We have multiple financing pathways underway that allow us to scale our data center and GPU footprint in a disciplined manner, while importantly, maintaining balance sheet stream. This includes additional GPU financing, data center financing and selective corporate initiatives, which Anthony will delve into. So when you step back, the picture for us is pretty clear. We have delivered capacity. We have strong customer demand, and we have expanding capital options, all moving together, which puts us in a position to continue scaling IREN into 1 of the world's largest AI cloud platforms. With that, I'll now hand over to Kent to walk through updates to our capacity and our customer work streams in a bit more detail. Kent Draper: Thanks, Dan. Vertical integration is 1 of IREN's most important competitive advantages. We design, build and operate our own data centers, supported by in-house engineering, procurement, construction, technology and operations teams. This structure gives us direct end-to-end control of our cloud offering and the ability to manage cost, time lines and service quality with far. Many of the constraints that we see across the industry today, whether it's long lead time procurement or skilled labor are areas that we've addressed in the past. So they're manageable for us and not disrupting our execution. That's why we remain on track against our plans today. And on that note, we continue to see strong, steady progress across our site portfolio with construction milestones being delivered on schedule. At Prince George, the data center fit-outs for air cooled NVIDIA B 200 and B 300 GPUs and and now complete and awaiting the delivery of the remaining GPUs on order. At Mackenzie and Canal Flats, our teams are actively preparing the sites for AI cloud expansion. There, we're leveraging the exact same playbook we successfully executed at Prince George. ASICs are coming out of those data centers and GPUs are going in. At Childress, construction across Horizons 1 to 4 is also progressing to schedule to meet Microsoft's GPU deployment time lines. and that Sweetwater procurement activities and civil works are now underway for the first phase of data centers to be constructed. Overall, what this demonstrates is an ability to consistently take large complex projects from planning through to execution. That delivery capability underpins everything we do and is 1 of the key reasons we have a license to engage with the largest technology companies in the world. The other factor that strengthens our position with customers is a scale of our secured power. As Dan mentioned, we have secured a new 1.6 gigawatt data center campus in Oklahoma. Further strengthening what is already 1 of the most differentiated power portfolios in the sector. The 2,000-acre Oklahoma site is a strong addition with low latency connectivity to major network exchanges and ramp schedule commencing in 2028. As with Sweetwater, the megawatts for this new site in Oklahoma remains secured, which enables commercial discussions to progress meaningfully anchored on firm deliverable capacity. It's also worth noting that this site is a result of work that has been underway for years. It reflects the depth of our internal development capability and our team's ability to consistently source and secure gigawatt scale grid connections in a power constrained market. Importantly, this new site does more than just add capacity. It broadens our U.S. data center pipeline beyond ERCOT into a market that's attractive to hyperscalers at a time when AI demand continues to outpace supply. As Dan mentioned, we're advancing multiple active negotiations with a range of hyperscale and non-hyperscale counterparties. And what we consistently see is that customers are focused on partners who have secured power can deliver full data center infrastructure on a defined time line and who can grow with them and scale over the long term. In other words, time to data center has become the key decision point in many of these commercial discussions. That dynamic plays directly to our strands. Our vertically integrated model combining in-house delivery capability with secured power gives customers a high degree of certainty on execution. We're also seeing hyperscalers and leading enterprises actively pursue both liquid and air cooled GPU deployments as they work to accelerate rollout. The increased focus on air cool deployments aligns extremely well with our existing footprint of 810 megawatts of already operational air cooled data centers. Importantly, all the demand and engagement that we're seeing is translating directly into contracted revenue. Today, we have approximately $2.3 billion of annualized revenue run rate under contract, including around $0.4 billion at Prince George which we expect to increase over the coming weeks as we finalize negotiations for the remaining capacity there. Based on capacity already contracted and the strong customer engagement for new deployments in Mackenzie and Canal Flats, we're on track to reach our targeted $3.4 billion ARR by the end of 2026. What's worth emphasizing is that demand is not the limiting factor for reaching this milestone. The market is extremely deep and engagement remains strong across hyperscalers and enterprises. Our focus is on selecting the right partners and structuring long-term relationship to create lasting value for IREN and as I alluded to earlier, we have the track record and capacity to drive customer acquisition. The takeaway from this next slide is the amount of runway that we have ahead of us. Our $3.4 billion ARR target for the end of calendar 2026 reflects utilization of only around 10% of our 4.5 gigawatts of secured grid-connected power capacity. That means the vast majority of our portfolio remains available to support additional deployments. With demand continuing to build that secured capacity gives us the ability to keep engaging customers on new large-scale opportunities and to extend growth well beyond the 2026 target. I'll now hand over to Anthony to give an overview of our Q2 results and discuss our strategy for financing our continued growth. Anthony Lewis: Thanks, Ken. Q2 financials reflected continued progress in the transition from Bitcoin mining to AI Cloud with capacity increasingly allocated to higher-value AI workloads and AI cloud revenues accelerating as deployments ramp. Total revenue was $184.7 million, down 23% on the prior quarter, primarily on account of lower bitcoin mining revenue, driven by a reduction in bitcoin mined. This was as a result of the AI transition, which lowered operating hashrate against the backdrop of an increasing global hashrate, together with lower average Bitcoin prices over the period. This was partially offset by growth in AI cloud revenue in line with commissioning of new GPUs at our Prince George side. On SG&A, that decreased $37.6 million. Primarily resulting from higher accelerated stock-based amortization recognized in the prior period and associated payroll tax accruals. As expected, adjusted EBITDA declined primarily on account of the lower Bitcoin mining revenue mentioned just now, partially offset by the lower payroll tax accruals and lower power costs. EBITDA and net income were also impacted by several significant noncash and nonrecurring items this quarter. These included unrealized losses on prepaid forwards and cap calls associated with our convertible notes following significant gains in the prior period as well as a onetime debt conversion inducement expense in connection with the equitization of a portion of our 2029 and 2030 convertible notes. Together, these amounts totaling $219.4 million. In addition, we recorded $31.8 million of mining hardware impairment associated with the transition to AI cloud versus $16 million in the prior period. These impacts were partially offset by an income tax benefit of $192.5 million, primarily reflecting the release of previously recognized deferred tax liabilities relating to the unrealized gains on financial instruments. Overall, these results reflect the ongoing transition of the business to AI cloud and we expect subsequent quarters to reflect a growing AI cloud contribution consistent with our ARR targets. Now turning to capital and funding. At our last update, we indicated an intention to raise secured finance of at least $2.5 billion to fund the GPU-related CapEx for the Microsoft contract. As Dan has highlighted earlier, we have now secured a $3.6 billion delayed draw term loan financing package from Goldman Sachs and JPMorgan. The financing has a number of attractive features. It is delayed draw to align with our CapEx profile. It matches the profile of the underlying contract, amortizing in full over the 5-year term and will be secured against the underlying GPUs and the contracted cash flows from Microsoft, which supports a strong credit profile and an attractive interest rate expected to be less than 6%. When combined with Microsoft's $1.9 billion in prepayments, this package covers 95% of the GPU related CapEx for Horizons 1 through 4 allowing us to now focus our efforts on funding further growth across the platform. Now turning to our capital strategy more broadly. Our capital strategy is designed to support continued rapid growth while maintaining a resilient balance sheet. We ended January with a strong cash position of $2.8 billion, and we continue to deepen our access to diverse sources of funding. Financial year-to-date we have now secured $9.2 billion from customer prepayments, convertible notes, including the $2.3 billion issued in December, GPU leasing arrangements and the dedicated GPU financing for the Microsoft contract. This diversity of capital sources allows us to scale with confidence. Looking ahead, a key priority will be to continue that work and expand our access further. This will include looking at efficient financing for our data centers, such as Horizons 1 through 4 when they come online. These will be extremely valuable long-term assets, which are currently being funded by the balance sheet and construction financing to support our broader development pipeline. As well, we'll also look at select corporate level facilities when aligned with our cost of capital and balance sheet management priorities. Of course, as we scale financing activities, we'll remain focused on an appropriate balance between debt and equity to ensure we maintain that balance sheet resilience. With that, I'll turn it back to Dan for concluding remarks. Daniel Roberts: Thanks, Anthony. So to recap, our strategy is straightforward, and it comes back to the 3Cs capacity customers and capital. We secure a large-scale, low-cost power and build quality data centers to create capacity. We pair that with long-term customer demand. and we support it all with disciplined, well-structured capital arrangements. That framework has guided our decisions for years, and it continues to shape how we scale today. Over the past several quarters, we've made meaningful progress across all 3 of those dimensions. We've removed a significant amount of execution risk by locking in capital for our largest deployment to date. We've expanded our power footprint. Sorry technical issue my screen just cut off, I can't see anyone -- and we've continued to deepen relationships with some of the largest technology companies in the world. What's important to emphasize is that we're still at an early stage of monetization relative to the size of our platform. With more than 4.5 gigawatts of power and only 10% required to support the $3.4 billion in ARR, we have a clear pathway for continued growth. With capital access now demonstrated at scale, we're able to engage customers with greater flexibility on how and when we bring new capacity to market while maintaining discipline around pricing and partner selection. That scale allows us to pace growth responsibly be selective in the customers we partner with and structure contracts and financing in ways that support durable long-term value creation. In summary, after more than 7 years of founder-led execution, IREN is now a scaled AI cloud platform with significant opportunity ahead. With that, we'll open the call for Q&A. Operator: [Operator Instructions] First question comes from Darren Aftahi from ROTH. Darren Aftahi: Congrats on the continued progress with Oklahoma. Two, if I may. There's a lot of noise around ERCOT. I'm sure people on the phone kind of want to know. But any change in those kind of amended rules with batch processing in terms of how that would potentially impact Sweetwater for you guys? And then I've got a follow-up. Kent Draper: Yes. Happy to jump in there, Darren. So the short answer is with respect to Sweetwater it is likely to be included in the batching process, and we believe that both SweetWater 1 and 2 would be included in batch 0, which would mean that the full 2 gigawatts of power is secured. So that's obviously a key important point there is that security of power in addition to that, there are other projects in our portfolio that are potentially also included in batch 0. So 1 of the advantages of, obviously, having a large internally developed portfolio is that we do have a number of projects that are going through this process. . Darren Aftahi: Excellent. I appreciate that. And then secondarily, so economics on colo have continue to creep up. I know you guys initially signed this cloud deal with Microsoft. Any kind of real-time thoughts on as you move forward with plans for Childress, Sweetwater, any other sites your views on AI cloud versus colocation? Kent Draper: Yes. I mean, as we've said before, we continue to be open-minded about how we allocate our megawatts and continue to observe what's happening in the market. We are observing, as you mentioned, what's happening in the colocation market but also seeing continued strength in demand on the cloud side as well. And I think when we look at the overall portfolio, Power is the scarce resource today. And so it's absolutely vital that you are maximizing the value of each of the megawatts within the portfolio. And today, we still see AI cloud as doing that in a more meaningful way than colocation. It's higher up, obviously, in the value chain than colocation, and you can capture materially better dollars per megawatt through cloud versus pure co-location. And obviously, at this point, we've demonstrated the capability and execution to be able to stand up these large cloud customers. And as we spoke about at length during the call, also seeing the capital side come together. So all the elements are there within the portfolio to allow us to continue to take advantage of what we have on a cloud services basis. Daniel Roberts: Maybe just to add to what Ken said, it is something we continue to evaluate. But 1 of the knocks on GPU Cloud was the capital intensity of GPUs. So with the announcement today of the GPU financing, we've now secured 95% of the cost of the GPUs at an average interest rate of around 3% when you factor into the prepayment. So we essentially got the GPUs for next to nothing. So I think in terms of capital intensity, it ticks that box. To further to Ken's point, time to power is critical, but time to data centers is actually the more limiting factor. And when you've got scarcity around how many data centers you can physically bring on live, every incremental 200 megawatts can deliver either $300 million-ish through a co-location or multiples of that in the billions under a cloud contract. So when we look at the monetization opportunity for our platform, and growth for shareholders and creating value, the cloud opportunity creates a lot more upside as we see it. And in terms of co-location versus cloud, we believe that AI is going to continue. We believe that data center demand is going to continue to compound. So recovering capital back in short order and mean out to compound those returns as distinct from holding effectively a bond exposure against the hyperscaler is the area we want to play. And if investors want bond-like exposures, they can buy colocation companies, they can buy bonds in the hyperscalers but we believe we are offering a high conviction for very well-managed risk exposure to the sector through this AI cloud business. Now again, we're not dogmatic. Things can change quickly. We get a compelling colocation deal. We will absolutely pursue it. But right now, AI Cloud, it's very compelling for all those reasons. Operator: Next question comes from Paul Golding from Macquarie. Paul Golding: And congrats on the additional site and all the progress. I just wanted to ask, as we think about the Oklahoma site and power market. I guess anything specific to call out about how that factors into the demand picture for HPC compute from a location perspective. Aside from, I know the low latency already mentioned, are there favorable power reliability dynamics or power pricing dynamics or just geographically relative to Tier 1 availability zones? And then I have a follow-up. . Kent Draper: Yes. So we think that site there has favorable characteristics on a number of levels. I did mention that low latency as you referred to earlier. It's a very large site, which gives us flexibility as we build out the capacity, it's located in Southwest Power Pool, which is a different market to ERCOT. So it provides us with some jurisdictional diversity. We think Southwest Power Pool is a very attractive market on the power side, a large penetration of renewables, low cost of power. We know that it's an area that is attractive to hyperscalers because there have been a number of hyperscalers that have been active in Southwest Power Pool more broadly, but also Oklahoma specifically. So overall, it exhibits all the characteristics that we would look for in terms of an attractive data center campus. Paul Golding: And then maybe a follow-up on the questions that have been asked around cloud versus colo or maybe more specifically about cloud. As you roll out these 2 different approaches to cloud even right with your British Columbia clusters versus the Microsoft clusters. How should we think about your software approach looking at the neo cloud space software is a topic that comes up quite a bit. I guess how should we think about your software offering for certain clusters where there's on-demand or smaller contracted deals versus, of course, the bare metal deals and how that development and the uptake from customers has progressed. . Kent Draper: Yes. Today, we're still seeing the bulk of our demand coming from hyperscalers, the largest enterprises, extremely advanced technology firms within the AI space, all of which are still looking for bare metal access. They want full ability to be able to take control of the GPUs, layer on their own software stack, set up the compute in exactly the way that they want to operate it and that is where the vast majority of our demand is coming. And as we referred to in the call, our ability to scale with them over time is 1 of the key elements. And I think the largest customers are those bare metal customers whereas the software really is typically more useful for smaller enterprise customers. that are looking for an easy user interface and easy single spin up, spin down, service but that is a small proportion of the overall compute demand that we're seeing out there today. It may well grow over time, and that's something that we continue to monitor as we look to our software strategy. But we continue to think that it is likely to be 1 of the areas in this space that gets commoditized, the fastest. It is relatively simple in comparison to finding power building data centers, setting up GPU clusters at scale and likely to be an area where you're going to see third-party offerings and commoditization, that we may well be able to take advantage of. So in short, continue to monitor that part of the market and what makes sense for us. But today, it is not a major driver for us because our demand is coming from bare metal customers . Daniel Roberts: And maybe just to give you some additional comfort around the way the world might go here, Paul, is we do have an internal software capability. I think we probably downplay it a bit, partly in response to the market seeming to overplay it, but we've got that capability. And to give you additional comfort, 1 of the contracts we are negotiated at the moment is a multibillion-dollar contract where we need to bring a software solution. So it is not holding us back. It will not hold us back. But the reality is exactly is what Ken said, you are dealing with the largest technology companies in the world to pretend that you can be better at software and jam something down their throat when that is their competitive moat and that is their expertise, it's just not on growth reality. Operator: Next, we have Michael Ng from Goldman Sachs. Michael Ng: I just have to First, as a follow-up to the question earlier around the ERCOT batch study processing. It was encouraging to hear that the IREN site slightly will be in batch 0. I was just wondering if you could provide an update around the SweetWater 1 and SweetWater 2 energization dates and whether the batch process has affected your ability to negotiate and sign contracts with customers for those sites and what that progress looks like. And then I have a quick follow-up. . Kent Draper: Yes. Thanks for the question. In terms of the energization date for Sweetwater 1, we're still on track to energize in Q2, and that's a full bulk substations. So that's capable of the full 1.4 gigawatts of power capacity at that site. So energization very much on track. Construction is well advanced, both with the on-site substation as well as the utility substation there. As it relates to customer engagement moving forward on those sites, obviously, very early since this matching process has been announced. But if anything, we would actually expect it to be helpful to us. We've said numerous times in the past. There are a lot of megawatts that are put out there into this market that are made up and I think what this process is going to do is really uncover, which megawatts are real and which are not real. And for us, we expect that to actually lead to better discussions with our customers over time. Michael Ng: Great. Wonderful. And I wanted to ask about the $2.3 billion of ARR, which I guess, the Microsoft contract plus the $400 million at British Columbia. When should we expect those revenues to start being recognized and commencing in the P&L? Is it kind of more ratably through the year? Is it more in '27? Just would love to get any thoughts about that? . Kent Draper: Yes. So at Prince George, we've obviously had capacity operating there for a while and continue to install new capacity and we'll do over the upcoming weeks. So a decent proportion of the $0.4 billion of contracted revenue that we talked about is already operational there. As it relates to the Microsoft contract, that will come online progressively over the course of the year, commencing we expect Q2 in terms of initial revenues flowing through Operator: Next, we have Brett Knoblauch from Cantor Fitzgerald. Brett Knoblauch: Congrats on all progress throughout the quarter. I'm curious in your conversations with customers relative to maybe the first big deal that you guys signed with Microsoft, what you are seeing from a pricing environment, I think we have a lot of data points on the colo pricing may be improving out there. But I'm curious if you guys are seeing something similar when it comes to the cloud deals. Kent Draper: Yes. We're seeing very strong ongoing demand, as we referred to earlier. And I think that is flowing through in a number of potential areas. We're seeing demand for longer tenures, I think the customers that are out there in the market realize that this may be a long-dated supply-demand imbalance moving forward. And there's certainly an openness that we're that we're seeing to longer tenures than we have in the past. Another factor that we mentioned earlier, we are seeing an increased interest in air cooled capacity. And that is primarily because that can feel immediate needs, especially within our portfolio because we have existing operational data centers on an air core basis that are capable of hosting GPUs in relatively short order with relatively minimal capital upgrades. We continue to see the ability to get prepayments from customers over time. So I think all of that leads us, as we said, to see a very strong demand picture and it is flowing through in some elements of the terms that we're getting under these cloud services contracts. Daniel Roberts: And I think also to add, to that. Price is 1 dimension of a commercial negotiation. There are other factors, as Kent alluded to, whether it's tenure and prepayments, but also the quality of the underlying contracts. We do manage risk very carefully. It's a founder-led business. This is our money. This is our platform. And we're not here to optimize revenue in the next 4 weeks compared to building something that's durable and long-term value. And to highlight what that means in tangible terms, look at the GPU that we did on the Microsoft contract. So to step back, $5.8 billion of GPU costs to deliver $9.7 billion in revenue over 5 years of the $5.8 billion the nature of the contract is in the quality of the underlying contract, the quality of the credit, the tender and the prepayments allowed us to get $5.5 billion out of the $5. 8 million financed at an average cost of 3%. And like that is not specifically linked in a GPU hour price, but that is specifically tied to value creation on the platform. Brett Knoblauch: Awesome. Very helpful. And then maybe just 1 more, ERCOT related question. I think you guys had using your words here that it's likely included in batch 0, whether that's A or B. I guess is there a time of when we would expect to know if it's included in batch 0. I know there's a meeting on the 12th and maybe on the 20th, but is that the time line that you guys are looking forward as well? Kent Draper: Yes. I think ERCOT will make announcements over time, Exact timing may change and whenever ERCOT makes announcements with respect to this, they do acknowledge it is in the works at their end, and they're actively working through it. So hard for us to put an exact date on it, but we do expect ERCOT to make public disclosures at some point in the relatively near future . Daniel Roberts: But to be clear on this guy, like crystal clear, that 2,000 megawatts is secure. Like none of this batch stuff, none of the market chatter is influencing whether or not this 2,000 megawatts is available. We've got the signed interconnection agreement. It was signed in 2023, it's been there for years. It's been built and commissioned in Q2 this year. There is no indication that 2,000 megawatts is absolutely secure. The only thing that this is likely to amount to is maybe working with utilities around load ramp. But the reality is we don't have 1,400 megawatts of Sweetwater 1 of data centers in April this year to energize. So in practical terms, it has very little if no effect on our business. The 2,000 megawatts is secure. We cannot reiterate that enough. . Operator: Next, we have Nick Giles, B. Riley Securities. Nick Giles: Good to see all the progress here. I like the concept of the 3 Cs capital is one. I think this is mainly around financial capital, but there's a growing narrative around the human capital requirements to ultimately bring data center capacity online. So are you seeing any constraints in terms of skilled workers? Or can you just speak to any advantages you may have from having EPC partners in place. Kent Draper: Yes. I mean the fact that we've been building continuously for the last 3 years means that we've built up not only a large existing labor pool at Childers, but also those relationships and the relationships extend not just across construction contractors and labor but also across equipment, procurement and supply chains. So that is 1 of the major advantages that we have and having done this for so long and having been continuously constructing is that we are in a position where we're able to call on those relationships we're well positioned with those partners in the sense that they are looking for continued steady work. And when they look at us and see a secured power portfolio with construction that is going to extend over a multiyear period, they're extremely willing and active in terms of helping us and making sure that they're serving our needs. And similarly, on the supply side, because we're continuously in the market and continuously procuring long-lead equipment, we get a very good read on where the constraints are in supply chains where the areas are that are tight, and that enables us to respond to those and be able to act well in advance. So that long lead items don't become a constraint for us in terms of our data center build out. So I think all of that history, the internal expertise we have is extremely important. And it's not just talk. I mean this is consistently delivered capacity against the targets that we've announced historically. Daniel Roberts: Yes. And again, just to add to exactly what Ken saying, like, this has been 7 years in the making of building a data center and technology platform, the very first data centers we built are now being used for NVIDIA GPUs for an AI cloud. We signed an MOU with Dell was at 5, almost 6 years ago to bring out diverse workloads to our British Columbia facilities in these data centers. So we've had a very long runway in terms of accumulating that human capital. And yes, there is more scarcity and more demand for human capital today, but we've been able to build that platform over a very long period of time and get the right people in the right roles. . Operator: Next, we have Joseph Vafi from Cannacord Genuity. Joseph Vafi: Terrific progress once again. Awesome to see it. Just revisiting the ARR number for the year, you clearly -- IREN is always want to overpromise and under-deliver and throwing that number out on top of revenues that would be coming from Microsoft kind of feels like you've got a pretty good line of sight on things just wanted to drill down on that a little bit on those customer ramps. And maybe is there a potential on some of these other customer ramps to also see maybe some prepayments to help fund their own GPU buys? And then I have a quick follow-up. . Kent Draper: Yes. Thanks, Joe. I hope you were referring to under promising and over delivering rather than the other way around. Yes. So as I mentioned earlier, Prince George, we already have a lot of operating capacity there and expect over the upcoming weeks to continue to install equipment, allowing us to get to the $0.5 billion annualized revenue run rate at that side. Mackenzie and Canal Flats the the works and our end in order to be able to accommodate GPUs, very well advanced. We would expect capacity to ramp progressively over the year there. . In terms of the additional 40,000 GPUs, which equates to around $1 billion of annualized revenue run rate. And then the Microsoft contract, as I referred to earlier, we expect to ramp progressively over the year. In terms of the 40,000 additional GPUs that we're expecting at Mackenzie, That, as I referred to the customer conversations before, we are still seeing customers very willing to make significant prepayments with respect to that. And there are a number of other areas of financing that we're looking at with relation to that, which Anthony, you may well want to touch on some of the options there as to how we can finance that. Anthony Lewis: Sure. We've obviously I guess, over the financial year-to-date proven access to both leasing-based sources of capital for GPU financing and obviously, the dedicated GPU financing that we recently procured for Microsoft. So there's a number of different pools of capital, which will obviously depend on the nature of the customer and the opportunity, but we feel well placed to continue to fund that growth efficiently. Joseph Vafi: And then just circling back on SweetWater, obviously, energization coming up here very quickly. And a lot of your peer companies would have likely announced at least there was colo, a tenant at that site by now Obviously, it's really big. There's a lot going on and not asking for a date on anything. But just getting in your mind maybe a little bit, Daniel, is it -- is it just getting your feet more wet in the GPU business and holding back there, waiting for better terms on colo maybe a multitude of things, just your thought process there on pulling a trigger on some of the sweetwater capacity. . Daniel Roberts: Sure. So I mean we've had an ongoing dialogue on that site for 12, 18, 24 months with various parties. And as we've tried to reiterate, it needs to be the right deal. And I think to date, our patience and conviction has been rewarded with the deals that we have been signing. If we look back to some of the structures being floated early in this kind of AI market narrative, where we are today, seems to be pretty objectively a better position. It is all about the 3 Cs and bringing those together and doing it in a way where you are maximizing the opportunity for shareholders. And there's only so much capacity that you can bring online that time to data center narrative. So there's a real opportunity cost of signing a bad deal. And that is relative, right? -- as relatively good. It's still probably a good deal colocation, but can you get better given that you're constrained by how quickly you can build out data centers. And that's why those 3 Cs are a really good framework because for any business trying to operate in this space, you have to bring those 3 Cs together to sell reinforce each other. If you haven't got the power and the capacity and the ability to execute, you're going to struggle to be a player. If you haven't got the access to customers and their faith and belief in you as an execution machine, it's going to be tough. And if you haven't got the capital, then you kind of get continue to be on 0. So sequencing all of that having not reinforce each other is really important. And I think that's why we're really pleased around the GPU financing result because it's kind of ticked that box. We're now on to the next one, and it also helps catalyze a lot of these other customer negotiations were having an advance into the next phase because we need capital and you can't build without capital. So the GPU financing is now done on to the next one. We've got the capacity, we've got the customers and the demand of the negotiations underway. And as Anthony said, we've got what we see is really good access to capital at the moment. Operator: Next, we have Michael Donovan from Compass Point. Michael Donovan: As on progress. So following up on questions around Sweetwater, assuming the batch process goes smoothly and getting the 3 Cs together, how should we think about ramping up phase for construction. Would this follow children's 50-megawatt tranches? Or do you have different plans? . Kent Draper: Yes. So in relation to that, yes, look, it's going to be a phased build out. It's a very large. That is a large amount of power and what we're continuously doing across all of our 4.5 gigawatts of secured portfolio is aligning customer discussions, availability of capital and our ability to build out data centers and that will influence how we actually build out. But as Dan referred to earlier, likely at the moment, the constraint is the actual pace of construction and ability to construct rather than power availability or capital availability at our end. So we'll be a phased approach, and we will continue to triangulate with the levels of customer demand that we continue to see. Michael Donovan: Appreciate that. And then on Oklahoma, can you provide some more color on what assets are currently there? And then what long-term lead assets are needed for the site build-out and what additional permitting or studies are or needed at the Oklahoma site. I appreciate it. Kent Draper: So we mentioned the 200 acres of land earlier. So all of that land is secured. The land is immediately adjacent to a major utility substation, which is where we will be connecting to the transmission grid. On the power side, the full 1.6 gigawatts there is secured. So all of the key elements as it relates to a data center campus are there. Over the upcoming months, we'll continue to work on the various development items, which include master planning, more detailed local permitting et cetera. But with power availability there from 2028, we feel extremely well placed with where we're at today. Operator: Next, we have John Torado from Needham. John Todaro: Congrats on the progress. I just have one, it relates to kind of these credit backstopping that you might see from NVIDIA. Just how do you think the competitive dynamic changes on the cloud side? You guys obviously have a ton of power but if some of these neo calls are able to get more kind of an NVIDIA back stop, they could get more contracted power as well. Just I guess how are you thinking about that? Kent Draper: Well, I'm not necessarily sure an NVIDIA backstop helps them secure more power. I mean, power and more pointedly to Dan's point earlier, data center capacity is the constraint. Now having a backstop can allow you to finance the build-out of a project, but you still need that access to power and unlinking necessarily the backstop sort of help with that. That is an entirely separate process relating more to development. And as we've spoken about before, that is becoming increasingly challenging as you move forward now for new projects. So 1 of the advantages that we have of having been doing this internal development of projects for years is that we got in early and we have secured what we think is an extremely differentiated portfolio on the power side, and that's something that can't be easily replicated and certainly not something that can just be bought if you somehow get access to a credit back stop. So I think credit backstops can be helpful in other context, but I don't think it's going to give people necessarily faster access to power or data center capacity. Daniel Roberts: And just to add to that, I think it would be very dangerous to assume that we haven't got the same access and conversations around all these different structures in the market, whether it's equity investments, whether it's credit back stops, whether it's offtake agreements to assume that we're not having those conversations that haven't been having those conversations. Yes, I'd be careful about that. . John Todaro: That's exactly what I was getting at, Dan. That's helpful. So I guess the takeaway from us is would Core and some of these others are having with NVIDIA, we should think you guys are right there in the same boat, right? You're right there with them? . Daniel Roberts: Yes. I can't obviously comment specifically on counterparties, but generally, the sector is a very small sector. We are a player. We've got a $10 billion contract with Microsoft. I would encourage it to be a safe assumption that we are having very similar, if not exact same dialogue with all these different counterparties about different structures. . Operator: Next, we have Mike Colonnese from H.C. Wainwright & Co. Michael Colonnese: Dan, congratulations on all the great progress you guys have made in the past couple of quarters. First 1 for me, and I'm sorry if I missed it, juggling a few calls here. Looking at the CapEx projections for the year versus the total amount of additional financing, we did to complete the full 140,000 GPU deployment. Can you just give us an update on that? I know you secured the $3.6 billion in GPU financing covers. It covers most of it. But how should we think about the progression of CapEx spend this year and the remaining amount of financing needed to get to your target? Anthony Lewis: Sure. Thanks for question.I'll take that one. So I guess, we guys, as you know, we've got the $5.8 billion CapEx on the compute for Microsoft. We've got the approximately $3 billion CapEx for the Verizon data centers, a material amount of which has been incurred or committed to today. And we've obviously raised the recent GPU financing package in addition to sources of cash on balance sheet. So I think we can -- effectively, that's all of the Microsoft related CapEx for the compute and DC spoken for. When we think about the CapEx required for the rest of the ARR growth target to the $3.4 million. We've previously talked about the CapEx required for that expansion at PG and Mackenzie. So taken together, that's about circa using round the circa $3 billion of CapEx a material amount of that, which has been incurred to date and financed through the lease-based financing that we've announced to date. But the focus for financing activities going forward will be obviously that residual amount for the expansion across BC and opportunistically as we look at further growth across the platform. Operator: Our last question comes from Ben Sommers from BTIG. Benjamin Sommers: You made a comment earlier about strong demand for older generation chips. I was just kind of curious, maybe is there a different kind of customer mix for older generation GPUs versus newer generation GPUs. And I guess kind of like how long do you see the tail going on to continue generating revenue off kind of older generation ships? . Kent Draper: Yes. I think in general, you tend to see newer generation chips being used more for training. Typically, in training scenarios somebody is training a model to actually get a product out to market and speed to market is important. So generally speaking, they want the highest power chips in order to speed up their production times. What we see as the chips get older is that the use case can shift more to the inference side. Now that's not to say they're not useful for training. You can absolutely still do training on older generations. But often, they are used more and more for inference over time. And inference continues to become a larger and larger portion of the over pine. I think we'll continue to do so over time. In terms of the second part of your question around economics and longevity of these chips, I mean, we still see very strong demand for older generations of chips. So I think you've got to think about the demand picture in aggregate and overall, it's still very clear that there is an undersupply relative to demand. And so what that means is people will take compute as it is available. And if that happens to be older generations of chips that they can get their hands on and they're absolutely willing and not only willing, but requiring that capacity. And if you look more broadly across the industry, if you think of A100, A100s, those are more than 5 years old and more than 3 years old, respectively, now those chips are still effectively 100% utilized across the industry and still earning very good rates of return against their original capital costs. So we continue to believe that these chips will have a long economically useful lifetime in excess of the contract length that we are signing, even the Microsoft 1 at 5 years. Operator: I see no further questions at this time. I will now turn the conference back to Dan for closing remarks. Daniel Roberts: Thanks, everyone, for joining. More than 7 years of execution has built IREN into a scaled AI platform grounded in real assets, delivery capability and disciplined capital structures with capital access now available at scale and strong customer demand, we're well positioned to bring on new capacity on terms that make sense economically over time. Importantly, having now absorbed the capital requirements associated with our Microsoft deployment, we're able to focus on converting a broader set of advanced customer negotiations into contracted revenue. When we discuss secured power, we mean fully secured. Power is not a constraint for us. And the ERCOT process is providing greater transparency around which projects are genuinely deliverable. That clarity reinforces the scarcity of firm megawatts and helps customers focus on capacity that can be brought to market with certainty. And IREN we remain focused on execution and on converting our capacity into high-quality customer contracts, and we look forward to updating you as we continue to deliver. Thanks again for your time and continued support. Have a good day. . Operator: Thank you for joining us today. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2025 Illumina Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Head of Investor Relations, Conor McNamara. Conor McNamara: Hello, everyone, and welcome to Illumina's Fourth Quarter 2025 Earnings Call. Today, we will review our financial results released after the market close, and provide prepared remarks before opening the line for Q&A. Our earnings release is available in the Investors Relations section of illumina.com. Joining us on today's call are Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will start with an update on Illumina's business, followed by Ankur's review of the company's financials. We will be discussing certain non-GAAP financial measures on today's call, and a reconciliation to GAAP can be found in today's release and in the supplementary data available on our website. Please note that unless otherwise stated, or when referring to end markets, all year-over-year revenue growth rates discussed in our prepared remarks are presented on a constant currency basis, excluding the impact of foreign exchange fluctuations. In addition, all references to China refer to our Greater China region, which also includes Taiwan and Hong Kong. This call is being recorded, and the replay will be available in the Investor section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the SEC, including our most recent forms 10-Q and 10-K. With that, I will now turn the call over to Jacob. Thank you, Conor. Jacob Thaysen: And good afternoon, everyone. I'm pleased to announce that our Q4 results exceeded expectations capped off with 20% growth in our clinical consumables revenue ex-China, reflecting execution across the organization as we closed out 2025. We made tremendous progress throughout the year, and the momentum we have built going into 2026 gives me high confidence that the strategy we put in place in 2024 to return to long-term growth is working. Highlights of our 2025 achievements include, we return to growth in 2025, with ex-China revenue growth of 2% for the year and 7% in Q4. An acceleration in clinical consumables revenue growth throughout the year with mid-teens growth in the second half and Q4 growth of 20% ex-China. We achieved our high throughput transition milestones we set out to achieve. We advanced our portfolio beyond core sequencing into multiomics and data software and AI, and we expanded non-GAAP operating margins by 180 basis points and grew non-GAAP EPS by 16% year over year. We generated strong free cash flow and returned approximately $740 million to our shareholders through share repurchases. All of this was achieved in a rapidly evolving market, and our team members stayed ahead of many of the dynamic developments we saw throughout the year. Our success in 2025 is a testament to the strength of the Illumina team, and I want to recognize their ongoing commitment to our customers through innovation and execution. Now, I want to expand on our success we are seeing in our clinical business where revenue growth accelerated throughout 2025. The strength we are seeing in clinical consumables, including 20% ex-China growth in Q4, is being driven primarily by two factors. First, adoption of sequencing-based diagnostic tests is increasing. As customers launch new assays, and expand reimbursement coverage in areas like minimal residual disease, and early cancer detection testing. Second, we are seeing broader demand for comprehensive genomic profiling and whole genome approaches in oncology and genetic diseases, both of which require greater sequencing intensity and benefit from the power and consistency of the NovaSeq X. As customers scale more data-intensive applications on a more powerful platform, the elasticity dynamics we've discussed in previous quarters continue to take hold. This is driving strong instrument sales. Q4 represented the second highest quarter placement since launching the NovaSeq X in 2023, while also accelerating consumables demand supporting durable growth in our core sequencing business. Next-generation sequencing remains vastly underutilized, and we are positioning our business to capitalize on growth as the market evolves. One example of this is the recent addition of Dr. Eric Green as our Chief Medical Officer. Eric brings extensive experience in genomics and healthcare policy, most recently serving as director of the National Human Genome Research Institute at the NIH. His leadership in the field will be a catalyst for driving continued adoption of genomics and multiomics toward standard of care for patients. I now want to talk about how our long-term strategy is working. In 2024, we set out three strategic growth pillars: core sequencing, scaling multiomics, and expanding our service data and software capabilities. Our continued execution on each of these pillars drove strong 2025 results, positioning the business for 2026 and beyond. Let me walk through examples of our progress for each of these strategic pillars. Our first pillar is core sequencing, anchored by the NovaSeq X. As mentioned earlier, clinical remains our primary growth driver, and higher testing volumes with more sequencing-intensive applications reinforce demand for high throughput, high-quality sequencing on the NovaSeq X. In research, conditions continue to be measured. Customers remain cautious with their purchasing decisions, though we are seeing signs of stabilization, including greater clarity around US policy and the funding environment. Longer term, we believe our research business can return to healthy growth, but for now, we assume similar end market dynamics in '26 as we saw in 2025. Our second pillar is scaling into Multiomics, where we're building a comprehensive set of integrated solutions that extend the Illumina sequencing ecosystem. This includes both internally developed capabilities and selective acquisitions where we see technologies that can meaningfully expand our long-term growth opportunity. As an example, we recently completed the acquisition of Somalogic, an important milestone that builds on our long-standing partnership. I want to formally welcome the Somalogic team to Illumina. We're excited about what we will build together as we further integrate our combined capabilities. Somalogic's Aptima-based affinity proteomics platform allows researchers to generate significant insight with high sensitivity, high throughput, and with thousands of protein markers in a single experiment. Our combined proteomics offerings will provide deep insights into protein function, interactions, and modifications at scale, helping to accelerate understanding of complex biology and human health. Proteomics is the frontline in multiomics, and with Somalogic now part of Illumina, our position in this key growth market is significantly stronger. By applying the scale of NGS to proteomics, we can accelerate innovation by reducing the time and cost of protein analysis. Across genomics, proteomics, single-cell, and epigenomics, these capabilities are now being brought together through our recently launched Illumina Connected Multiomics. This software addresses a long-standing challenge in the field: integrating and interpreting data across different data types by simplifying multiomics analysis and making workflows more scalable and easier for customers to use. Looking ahead, we remain on track to introduce our spatial transcriptomics solution in 2026 along with our Constellation MAP Read technology over the same time frame. Together, these advances extend our ability to deliver integrated end-to-end workflows that support customers as multiomics moves further into both research and clinical settings. Our third strategic pillar is expanding our services, data, and software capabilities. In the fourth quarter, we launched BioInsight, an important step to expand how Illumina supports discovery and drug development through data, software, and AI. For the first time, four key enabling capabilities are converging: sequencing at scale, tools to perturb biology using CRISPR at genome-wide levels, dedicated compute power to analyze it, and AI to build predictive biological models. BioInsight brings together our leading capabilities in these four areas to fundamentally change drug discovery. Instead of relying on years of iterative wet lab experiments, pharma and biotech companies can increasingly build, test, and refine biological models digitally, accelerating timelines and improving success rates. Last month, we introduced BioInsight's first data product, the Billion Cell Atlas, which will be the most comprehensive map of human biology for drug discovery. Built using single-cell approaches, CRISPR-based perturbation, and AI, the Atlas helps partners better understand disease mechanisms and improve target validations. This Billion Cell Atlas was met with strong interest from biopharma partners, and we announced initial collaborations with AstraZeneca, Merck, and Eli Lilly. We continue to see growing engagement from additional partners as data-driven approaches gain traction in drug discovery. Taken together, BioInsight expands how customers generate and act on biological insight and strengthens Illumina's position in biopharma, a growing segment of our research end markets. The next opportunity for our customers to see how our strategy and innovation come together will be later this month at AGBT. As this year's gold sponsor, we will be joined by customers and key opinion leaders who will share how our new platform enhancements and genomic and multiomics assays are being applied in real-world research and clinical settings. A key theme we will showcase is the value of our complete end-to-end solutions for our customers. The conversations we are having with customers have shifted from cost per gigabase to the total cost of workflow, from sample preparation through analysis and interpretation, where integrated workflows and data quality matter most. This approach, continuing to innovate as the market evolves, gives customers confidence in the long-term durable value of our flagship sequencing instruments while supporting them where the field is headed, including deeper adoption of genomic and multiomics approaches. Now let's turn to our 2026 outlook. Building on the momentum we saw in 2025, we expect organic revenue growth of 2% to 4% in 2026, excluding China, with overall demand similar to what we saw in 2025. Clinical consumables grew approximately 16% ex-China in the second half of the year, and we expect robust growth to continue into 2026. Our outlook assumes double-digit to mid-teens clinical growth in 2026. We expect no fundamental change in the academic end markets in 2026, resulting in mid to high single-digit revenue declines in our research and applied consumables revenue. Instruments are expected to be roughly flat to slightly down, resulting in a total company revenue of $4.5 to $4.6 billion, representing reported growth of 4% to 6%. Operating margins are expected to be 23.3% to 23.5% in 2026, up approximately 130 basis points excluding the acquisition impact. EPS guidance is $5.00 to $5.20, including $0.18 of dilution from the Somalogic acquisition. Excluding dilution, this represents year-over-year growth of 10%. Before turning it over to Ankur for more details on our Q4 results and 2026 guidance, I just want to say that I'm confident that our long-term strategy is working, reinforced by the progress we made in 2025 and where Illumina stands today. Over the past year, we have advanced the strategy we laid out in 2024 and delivered meaningful progress across the business, entering 2026 with very encouraging momentum. We proved resilience, and we are a stronger company today, and we remain on track toward achieving our long-term financial targets for 2027. I want to thank our employees for their commitment and performance this past year. I'm very proud of the Illumina team for staying focused through a dynamic year and delivering for our customers and the patients they serve. With that, I'll turn it over to Ankur to walk through the financial details before we move to Q&A. Thank you, Jacob. And good afternoon, everyone. Ankur Dhingra: I will give you an overview of our fourth quarter financial results, provide more color on revenue, expenses, earnings, and updates on our balance sheet and capital deployment, and then discuss our outlook going forward. Before I get into the details of the financial performance, let me provide a high-level view of how the fourth quarter played out. During the fourth quarter, Illumina's revenue of $1.16 billion came in above our expectations, driven by strength in our clinical consumables revenue, better-than-expected NovaSeq X placements, and outperformance in China. We also saw a small benefit from some year-end budget purchasing. The higher revenue resulted in margins and EPS both coming in ahead of our guidance while also reflecting the benefits of the cost actions we took earlier in the year. Now let me provide you the details. During the fourth quarter, Illumina's revenue of $1.16 billion was up 5% year over year on a reported basis and 4% on a constant currency basis. Greater China revenue of $55 million was ahead of expectations and represented a $25 million decline from 2024. Excluding Greater China, Illumina revenue was up 7% year over year. Sequencing consumables revenue of $755 million was up 8% year over year and up 11% excluding China. High throughput volume growth drove the strength in consumables as customers across research and clinical ramped utilization of their NovaSeq X instruments. More broadly, the clinical market maintained its momentum, growing 20% outside of China, driven by broader adoption of NGS-based testing and customers converting current assays to ones that require significantly more sequencing data, such as transitions from whole exome to whole genome sequencing in oncology and genetic disease. Consumable sales in research and applied markets were roughly flat year over year in the quarter, a notable improvement versus Q3, but still below historical levels due to continued uncertainty in the funding environment. Roughly 80% of the volumes and year-over-year pricing dynamics related to conversion to the X. As of Q4, 55% of the revenue has transitioned to the NovaSeq X. The research transition is nearing its end, as now roughly 90% of the high throughput sequencing volumes for these customers have transitioned to 2026. Clinical volume is now more than two-thirds converted to the X, and we believe pricing dynamics going forward will be tied more to new applications like whole genome sequencing adoption, which drives higher volumes. Given these two dynamics, near-complete conversion within research, clinical volume growth driven by X, we expect the conversion to be substantially complete by 2026. On sequencing activity, total sequencing GB output on our connected high and mid throughput instruments grew at a rate of more than 30% year over year, driven by robust strength in clinical, but more muted growth among our research customers. Sequencing instruments revenue of $154 million was approximately flat year over year in Q4 and up 3% ex-China, driven by strong placements of NovaSeq X and the 100. Similar to our consumable mix, over 60% of X systems placed in Q4 were to clinical customers. In Greater China, our instruments business was down 55% due to export restrictions. Globally, we placed over 100 NovaSeq Xs, including about five on rental or lease contracts, bringing our total active installed base to 890 instruments. Sequencing service and other revenue of $157 million was up approximately 3% year over year and up 4% ex-China. Strategic partnerships and the timing of data deals have been lumpy in 2025, and we were pleased to see a return to growth in Q4. Moving to the rest of the P&L, non-GAAP gross margin of 67% for the fourth quarter was down 40 basis points year over year, primarily from the tariff impact of 205 basis points. Excluding tariffs, gross margins improved by 165 basis points sequentially. Q4 margins reflect the typical instruments non-GAAP operating expenses heavy quarter in Q4. Operating expenses were $502 million, down 5% or $24 million year over year, reflecting the results of the multiyear cost reduction programs and prioritization of key growth investments. Non-GAAP operating margin was 23.7% in Q4, expanding 400 basis points year over year. Operating profit grew approximately 26% year over year, reflecting increased operating leverage from the improved cost structure. Looking at our results below the line, non-GAAP other expense, which is largely comprised of net interest expense, was $16 million, and the non-GAAP tax rate was 19.5%. We continue to assess long-term tax structure optimization to balance US R&D benefits with efficient credit utilization across jurisdictions. Our average diluted shares were approximately 154 million, 6 million lower than '24, reflecting share repurchases throughout the year. Altogether, non-GAAP EPS of $1.35 per diluted share grew approximately 42% year over year and came in above our guidance range and was higher than our initial estimate disclosed in January. Moving to cash flow, balance sheet, and capital allocation items for the quarter. Cash flow provided by operations was $321 million for the quarter and $1.1 billion for the year. Capital expenditures were $54 million, and free cash flow for the year was $267 million for Q4. CapEx was $148 million, and free cash flow was $931 million. In Q4, we repurchased 337,000 shares of Illumina stock, approximately $42 million at an average price of $124.12 per share. At quarter end, we had $643 million remaining on our share repurchase authorization, and we intend to continue to repurchase shares opportunistically. Subsequent to the end of Q4, we closed the acquisition of Somalogic on January 30, for an upfront payment of $350 million plus potential royalties and milestone payments subject to customary adjustments. We funded the upfront payment with cash on hand. We ended the quarter with approximately $1.63 billion in cash, cash equivalents, and short-term investments, and gross leverage of approximately 1.6 times gross debt to last twelve months EBITDA. So recapping the full year 2025, starting with revenue. We returned to growth ex-China in Q3 and grew sales about 4% in the second half of the year. I'm extremely proud of the whole Illumina team for navigating through a very dynamic year to end the year on a high note. Through disciplined execution and cost optimization, we were able to expand margins nearly 200 basis points in 2025 despite approximately 200 basis points in macro-related headwinds. And finally, grew EPS by 16%, and our 2025 EPS of $4.84 came in above the original guidance we gave at the start of the year. The way we closed out 2025 gives me confidence about the progress we are making towards our long-range targets, and I'm excited about our momentum going into 2026. Now moving to guidance for the year 2026. Starting with revenue, we're expecting revenue of $4.5 billion to $4.6 billion, representing ex-China organic growth of 2% to 4%. Organic growth excludes the impact of currency, which is expected to add roughly one point to our reported growth, and revenue associated with the Somalogic acquisition, which is expected to add 1.5 to two points of revenue growth in 2026. China sales are expected to be a one-point headwind to total company revenue growth. On a reported basis, overall revenue is expected to be up 4% to 6%. For the rest of the world, organic sequencing revenue growth, we're expecting low to mid-single-digit growth in consumables, with clinical growing double-digit to mid-teens driven by continued strong volumes from our clinical customers. We're excited about the significant progress our customers are making with growth in their on-market tests and new sequencing-intensive whole genome approaches. We expect research declining mid to high single digits. Recent NIH budget announcements are a welcome development, and as fund flow resumes, could provide a more favorable environment relative to what we are assuming in guidance. Instrument sales are expected to be down low single digits to flat year over year, and we believe our goal of placing 50 to 60 NovaSeq X instruments per quarter on average will continue through 2026. Our pull-through assumptions by platform can be found in our earnings presentation. In China, we expect sales of $210 to $220 million with little or no step-up in instrument sales in the first half of the year. We will revisit our assumptions as we work with the government about our ability to import instruments into the country. Moving to operating margins, excluding Somalogic, we are guiding for operating margins to expand 130 basis points next year, at midpoint. Somalogic is expected to have a 100 basis point impact on margins. All in for 2026, we are expecting operating margins of between 23.3% and 23.5%. We've made significant progress in improving Illumina operating margins and remain focused on achieving our 2027 targets. Now moving to EPS. Excluding Somalogic, we're projecting EPS to grow 10% at the midpoint. Somalogic is expected to be dilutive by $0.18 at midpoint. Hence, total Illumina 2026 EPS guidance is in the range of $5.00 to $5.20. For Q1 2026, we're expecting rest of world organic revenue growth of 1% to 3%, equating to between $1.06 and $1.08 billion. We're expecting Q1 EPS of $1.02 to $1.07, including $0.04 of dilution. Rest of the details of our Q1 and 2026 guidance can be found in our earnings presentation. One housekeeping item: Starting in January 2026, we changed the geographical reporting segments to better align with the respective commercial organization structure. Beginning in Q1, we will report our new geographical segments and will provide historical financial reconciliation for the new structure. In closing, I want to once again express my sincere appreciation to the Illumina team for their continued focus and disciplined execution throughout the quarter. We enter 2026 with a lot of momentum, and I'm extremely encouraged by the progress we've made in returning Illumina to long-term sustainable revenue and earnings growth. Thank you for joining our call today. I will now invite the operator to open the line for Q&A. Operator: Hi. If you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. To give as many analysts as possible the opportunity to ask a question, please limit yourself to one question. If you have additional questions, please raise your hand again to be put back into the queue. We will now pause a moment to assemble the queue. Thank you. Our first question will come from Doug Schenkel with Wolfe Research. Your line is now open. Please go ahead. Doug Schenkel: Hey. Good afternoon, guys. And I'm just going to ask a couple of financial questions, and then I'll get back in the queue. First, on operating margin. Does guidance embed an assumption that you essentially end the year at 26% to 27% operating margin? And building off of that, is there any change to your 2027 margin target factoring in Somalogic? And then the second topic is really on capital deployment. The balance sheet is really clean at this point. You're generating about a billion dollars of free cash flow. Clearly, the business has stabilized. How are you thinking about capital deployment? And specifically, what is your M&A criteria and priorities? Thank you. Jacob Thaysen: Thanks, Doug. And let me start by addressing your first question, which I believe is around our long-term targets. And we feel definitely still great about those targets. Just as a step back, in '24, we were out there presenting that we would bring the business back to high single-digit growth by '27 and also delivering 500 basis points as you bring us to 26% operating margin. We feel really good about what we have done the last year. We have stepped ourselves into growth, and we believe we are in the right direction to deliver on the high single-digit growth in '27 in our core business. We also are seeing that we have moved substantially on our operating margins with 200 basis points last year in really a tough environment where we had approximately 200 basis point headwinds from tariffs and other things. And now we are committing to another 130 basis points. So we are well on that trajectory. Obviously, now with the acquisition of Somalogic, it will be, as we mentioned also, it's dilutive as a starting point. We are working through the opportunities for synergies, and we will get as close to the 26% operating margin as possible in '27 also. But more, we will keep you updated on the way. We are doing everything we can. Ankur Dhingra: So this is Ankur. So, Doug, your premise that next year, excluding Somalogic, that the exit rate operating margin for 2026 is higher than the average is that's usually our cyclicality in the business. So our full-year guide is 24.5%, and the exit rate in Q4 generally tends to be higher than that. Operator: Your next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: Hey, guys. Thanks for taking my question, and congrats on a nice sprint here. Maybe one on guidance here. Jacob, or Ankur for you guys. The organic for Q4, when you look at clinical performance, ex-China 6.5%, overall company 3.5%. Your guidance, you know, ex-China basis for fiscal '26, you're looking at 3%. And what drives that step down from 6.5% exit rate in Q4? You know, when you Q4, clearly, clinical was standard. Was there anything one-off about Q4? Any pull forward of revenues, etc., that perhaps calls for some moderation in '26 outlook? Thank you. Jacob Thaysen: Hey, Vijay. So thank you. First and foremost, we are super excited about how we ended out the year. Clearly, 2025 was a challenging year. So the momentum we started to build up here in the second half is really encouraging. And we truly believe that momentum is continuing into '26. As you could see, we ended out the year with very strong performance on clinical with 20% clinical consumables growth in Q4 in '25 here. And we expect that momentum overall from the second half to continue. So we believe that what we're building in is that we have high mid-teens growth for our clinical business. But we also continue to see the channeling in the research academic environment. It is definitely a good step forward that we are now seeing a line of sight to the NIH budget. But if you dig a little bit deeper, there's still a lot of uncertainties for the institute for how grants are being distributed and who's actually getting these grants. So that's what we see. There's still a muted environment, and I think during the year we will hopefully see that come out better, which could continue performance or improve our performance. But we're not seeing any substantial step down. We know Q4 is always a strong quarter, and therefore, we feel good about how we're guiding at this point. Ankur Dhingra: Vijay, let me just frame the 2% to 4% China when we approach the guidance. As Jacob said, we're not seeing any change in the momentum, especially in the clinical business. Our customers continue to do very well, both from the adoption of the on-market test as well as working on bringing new tests to the market. The way we have approached the guidance is to look at the half of 2025 as we played out during our Q3 earnings call. Within Q3, our growth was 2% ex-China. In Q4, it's ramped up to 7%. And so we took the average for the second half to bracket our overall guidance. The 2025 is what we're using as the low end. Right, where clinical still grew in the double-digit rate. The research was dying down in the high single-digit rate. As kind of a framework towards the low end. And then if research does improve, that certainly provides an upside. Q4 just one quarter didn't feel like using as a base for a full-year guide per se. But momentum's momentum's. Operator: Your next question will come from Puneet Souda with Leerink Partners. Puneet Souda: Yeah. Hi, guys. Thanks for the question. On the instrumentation, can you provide how the split was with research versus clinical? I appreciate the momentum you're seeing on the clinical side, but on the research side, can you provide a little bit of context and, you know, how are you thinking about the overall competition just beyond the academic pressure that we have seen in the market? How much of that is baked in just on the research side, both on the mid throughput end and the high throughput end? Jacob Thaysen: Yeah, Puneet. Thank you. And we're very pleased with the performance we had in Q4 with more than 100 instruments placed on the X instruments. And as expected, more than 60% of those placements were related to clinical. And we expect that to be the case, that the dynamic to continue into '26 where clinical will be the majority of the placements of instruments. So we continue to see that customers building their assays on the X instruments, and we are not seeing any slowdown in that part of the business. As you mentioned also, we have a mid throughput business. That has been more, as we talked about before, had been more challenged by some of the macro trends where some of our customers may be more conservative in how they have spent their funding over the past years also in the research and academic market. So I think that market is still a little more muted than but not really a change from what we have seen in '25. So that's how we think about the business right now. Ankur Dhingra: From a competitive perspective, Puneet, no. We didn't see much in Q4. As Jacob said, very strong instrument placements quarter overall across clinical and research as well. We're getting very good interest in the new launches. We've launched the five base. Our spatial is in early access. And the demand and the interest on the research side looks very good. Our thinking on the research from 2026 perspective is more based on the funding environment and the evolution of the funding environment per se. Operator: Your next question will come from Tycho Peterson with Jefferies. Tycho Peterson: Hey. Thanks, guys. A couple quick ones. Just on clinical, Jacob, you know, you talked about growing use of whole genome, whole exome. Can you just talk on, you know, delineate how much of the growth is, you know, mixed versus maybe volume? So that's kind of the first question. Second is on Onso. Just curious if you can touch on that. And you know, thought process, how quickly could you incorporate that technology, if you're planning to? And then, maybe just lastly on adjacencies, a little bit more color on, you know, what you're baking in for spatial constellation and five base. Jacob Thaysen: Okay. So no. Thanks for that, Tycho. And if you look at the opportunity with the X and what our customers are using it for, clearly, we continue to see a you can see, many of our clinical customers are, of course, seeing a significant uptake in volume. Many more physicians are starting to use genetic profiling for the cancers, but also for monitoring disease. So that is a strong momentum. But we're also seeing that our customers are choosing to make larger and larger panels. As you mentioned, some of them are going from exome to whole genome. That's more in the genetic space. But we're also seeing that customers are building larger panels for therapy selection. And the next thing here is to expand the panels for MRD. So we see all that. We're not spreading it down into the pieces at this point in time, but I would say over time, I think, actually, the intensity meaning the larger panels, is going to be the main growth driver going forward. We see a lot of opportunities there. For the acquisition of the IP from PacBio, we saw that as a great opportunity to strengthen our portfolio. We're very bullish about our SPS technology, so we believe there's a lot of options in that still. But we felt it was a great way to keep optionality. And then I think the last one you had was on how much we built in for the five base. And for Constellation and others. This is still early days. We have seen a very, very strong interest for the products we brought to market already. I don't think it's going to be meaningful here really in '26, but it will start to be meaningful as we talked about before in '27 and beyond where we believe one or two basis of growth one or two percent growth will come from our new assays in multiomics, both multiomics and our data the BioInsight business. Operator: Your next question will come from Michael Ryskin with BofA. Michael Ryskin: Great. Thanks for taking the question, guys. I want to dive into some of the pieces of the 2020 in terms of the sequencing consumables, sequencing instruments. You know, a little bit surprised that you got them as close. I would have thought that sequencing and consumers would've been a little bit better as you're, as you said, as you're moving past some of the headwinds from the price transition. At the same time, sequencing instruments, I thought it could have been a little bit worse. So if you could just dive into some of the moving pieces there, you know, are you expecting something similar in terms of NovaX placements next this next year in, in the, you know, mid to high 200s range? And just maybe talk about some of the other platforms that make that up, you know, the NextSeq, the mid throughput platforms, the NovaSeq 6K. Just we'd love to get more color on the moving pieces there. Thanks. Jacob Thaysen: Hey, Mike. So thank you for the questions. And I would say, first and foremost, on the high throughput consumables, especially in the clinical, as we mentioned, we continue to see very strong performance in that. So we don't think that is going to change. We actually think that potential upside in that, obviously, if the market continues to be as strong as we have seen in the last part of the year. We do see, of course, in the consumables, if you blend consumables that both for the research segment but also for the mid throughput, there's still some headwinds in that space. So that's why you see the blend is where it is. I would put it this way. If you think about it, the low end of the guide in the consumables is probably what we saw in Q3, and then we started to see momentum. So there's probably more in the higher end of the guide that we expect us to be for. So that's how to think about it. On the instruments, I mean, we continue to see a lot of momentum in instruments. Right now, we are guiding 50 to 60 placements, but many of our clinical customers continue to expand their placements. So we continue to believe that there are strong moment opportunities here. Ankur Dhingra: Mike, on the instrumentation side, as I mentioned in my script, for Xs, yes, about 200 to 240 for the year. Said on average, 50 to 60 a quarter is still quite good. The Q4 placements were phenomenal. We got quite a few multipack orders. We do look at several of our customers trying to expand their fleets, sometimes thinking about tens of Xs scenario. So good instrument demand. As you all know, we made a major software upgrade into X in 2025. The performance there has been running above the spec for a very large part of our customers. So X is performing at an extremely high level. For our clinical customers, and the research customers are super excited about some of these new multiomic technologies that get enabled the next. So very pleased and quite good so far. Operator: Next question will come from Kyle Mikson with Canaccord. Kyle Mikson: Hey, guys. Thanks for the questions. Congrats on an impressive fourth quarter. The clinical side, especially. On that note, I know you're not splitting out clinical into the applications, but could you just speak a bit just for some context, it looks like oncology was just under $1.2 billion. Then you have genetic, which was just under $500 million. So which of these will, I guess, grow faster in '26? Just help us frame the different drivers split it out just a bit more for us. Then just secondly, you spoke to some of the multiomics aspects before, maybe BioInsight. Is that a needle mover this year? Thanks. Jacob Thaysen: Yeah. Thanks, Kyle. I think overall, we, of course, are very pleased with clinical. And from the highest level, clinical is growing from all dimensions. Both on the different type of applications, but also from the different regions and different customer types. So a really broad-based performance in clinical, and we expect that to continue as we've mentioned a few times here. We are still seeing that oncology is the main driver and the main growth driver. But the rare diseases are definitely also growing at a healthy speed. So I do think that over the next year, also oncology will be the main growth driver for us and for our customers. Operator: Your next question will come from Dan Arias with Stifel. Dan Arias: Hi, guys. Thanks for the questions here. Jacob, I wanted to ask about messaging the customers as we get ready to head down to AGBT here. You guys have talked pretty consistently about the fact that the labs really should focus on full workflow and that when you look at it that way, it becomes advantageous to use Illumina products. The question is really when and where should we look to see that in action? Will you be able to lay out for people, you know, how the economics of using Fluent plus the NovaSeq plus Dragon gives you a better outcome? Or do people just sort of have to figure that out for themselves? Because if the idea seems logical, but I don't get the sense that customers can see it or that they can do the math that has them arriving at that conclusion. Is that something that we should expect to change here? Jacob Thaysen: Yeah, Dan. I think, actually, this is the conversation we have with our customers. We are looking forward here also to the AGBT conference coming up in a few weeks where, as I mentioned also in prepared remarks, we have the gold sponsorship, which gives us a great platform to speak to, not only us, but also key opinion leaders to speak to the usage of the different technologies and how to think about them from the highest quality insight with the lowest end-to-end. Obviously, a part of that is to also show that you can actually do this in a more cost-efficient way, but also creating the highest insight. So it depends a little bit on the different assays. If you think about our Constellation MAP Reads where you have really no hands-on on the workflow upfront and you receive a lot of insights with very little workflow, you know, hands-on on the workflow. So I think that is an element where you can start to eliminate the cost of library prep out and also getting much more insight out. So it's a good example of how you can think about that where you will actually have great transparency on the pricing from our end because it's really just the cost of sequencing where others have to also do library prep and other things. So that's one example, and we'll talk more about that at AGBT. But the same goes now with the Somalogic business we have just acquired where we will go out there and present the cost per sample, the cost per experiment, which I think will be another one that is going to be very important. So those conversations are already happening with the customers. We will continue to educate all of you on that also. Operator: Next question will come from Jack Meehan with Nephron. Jack Meehan: Thank you. Good afternoon, guys. Hey, Jack. Wanted to build on Dan's question there. Just continue on the path of AGBT. It seems like on the competitive front, you know, at least one competitor's talked about the $100 price point per genome. Understand you're trying to change the conversation around that, but I was just curious like, you know, investors see headlines like that what does that mean for you? I'm not sure how we know your list pricing, but you're you know, there's discounts to that. Like, you know, can you just talk about what that would mean for Illumina if we start to see those headlines? Jacob Thaysen: Yeah. I think we are we're looking forward to AGBT. I think that it will be the conference, of course, that all our competitors will put their best foot forward. We will do the same. As I've mentioned, our customers are thinking way beyond just one parameter, one feature. They are more sophisticated than just looking at one element. So I think you will see also us really highlighting some of the things that our customers are really excited about from the whole workflow perspective. That said, I would say that we feel we have the portfolio. We have the pipeline. We have the capability to compete on all parameters. So I feel really good about where we are and what we can do. Obviously, if there are opportunities for us to address market segments with a different price point where there's a significant number of elasticity, we all fought, and we have those conversations with our customers on a regular basis. And we continue to do so. Operator: Next question will come from Casey Woodring with JPMorgan. Casey Woodring: Hi. Great. Thank you for taking my questions. So I guess you said you would revisit your China assumptions as you work with the government on. Maybe just walk us through how conversations are going there and the range of outcomes. And then, you know, my follow-up is just on BioInsight. I was hoping you could elaborate on some of the comments you made earlier there just given how much airtime AI is getting currently. You know, curious how you plan to monetize these capabilities over time. The level of enthusiasm you're seeing from pharma customers, and any sort of way to quantify the revenue opportunity over the next few years? Thank you. Jacob Thaysen: Yeah. Thanks, Casey. So for the first for the first thanks for the questions on China here. So we as just a reminder, it's still less than 5% of our business. I'm actually very pleased with what Jenny and the team have been able to do, our general manager in China. And the Chinese team have been able to serve our customers over the past year and continue to do so. As we have also updated all of you on over the last period of time, we have had great conversations and collaboration with the Chinese regulators to ensure that we can continue to run our business in China. But we're still on the UAL. We feel good about our relationship and how we can work through to be able to import or export the instruments back into China. Now, of course, when you for a long period of time, have not sold an instrument, it takes time to build up a funnel again, and I think that's more the reflection of what we are seeing right now. But as Ankur mentioned also, we have a target for China, but I think if there's a way to get off the list or improvements in that, I think there's upside to the China business. But we do believe that we have good line of sight at least to '26 at this point. If you think about the BioInsight business, we are very excited about the opportunity. It's still in the early days. But as we came out presenting the Billion Cell Atlas last year at JPMorgan, and it was very well received. As I mentioned also, there has been a lot of conversation with pharma companies that want to get access to the Cell Atlas. It provides deep insight for the drug discovery for them to choose the right targets to work on. So we clearly see momentum in that space. As we mentioned also earlier, we do believe that this will, together with our multiomics business, start to create at least a 1% to 2% growth in '27. But if you think that that relaxes be an accelerating momentum at this point. Ankur, maybe you have more to share? Ankur Dhingra: Yeah. On BioInsight, a couple more things as Jacob was saying. We do think our intention on BioInsight is to work directly with our pharma customers and effectively adding a third customer base here. And we think we take a five-year view. That's a very meaningful opportunity. The Billion Cell Atlas has been received very well, and the interest since the conference has been tremendous. So we're very pleased with some of the early steps that we've taken here. Monetization strategy here would be in two or three different ways. One is around very specialized data and AI tool constructions. And then over time, we see significant subscription-based models where we can help pharma companies both on the discovery as well as on the development side of things. But that's a multiyear opportunity there. Operator: Your next question will come from Dave Westenberg with Piper Sandler. Dave Westenberg: My bad. So you can hear me now. Right? Alright. Perfect. Yes. Perfect. Alright. Can you discuss the conversations you're having with Academic Core Labs in terms of investments in instruments? I have to imagine you were they weren't the biggest buyers of instruments in 2025. What is the assumption in your guidance for academic both consumables and instruments? And you did hire Eric Green. So is there anything he can do to spur kind of confidence in your academics? I know the NIH is slightly up. Are they gonna actually believe it? And sorry. They're gonna tag one more on to Jack and Dan's question on pricing versus competitors. You are seeing much better specs, I believe, which means more output. That is a direct cost reduction to a lot of your customers in terms of cost per gigabase. Right? So even if they're getting 25 gigabases at $200, they're actually getting less than that because the output has been greater. It might just wanna ask if that assumption is correct. Thank you. Jacob Thaysen: So, Dave, thank you for your one question. Let me start with the first one here. We have, I think, the last eighteen months, really built out our relationship with the academic core labs and really focusing on ensuring that we can support them also, of course, in a very tough environment. So, obviously, though they have been challenged with, of course, the impact from NIH funding and other types of funding. But we have done a very good job, I think, and that's also the feedback we're getting from them to support both from when they have opportunities to acquire instruments. We have made sure that we can place Xs in those types of labs also so they can get all the benefit from the Xs. And I do think now with Dr. Eric Green on board here, there's more opportunities to help them and navigate all through a challenging situation. As we said, and you also mentioned, you know, at least now we have better line of sight to NIH funding, but there's still some in the details still things that need to get into place before we really start to see the different institutes, different core labs continue to move ahead. You are right that if you look at we have, and this is our we have a tradition for going out and delivering on power better than our specs. This is something we're proud of, and something that our customers know from Illumina is that we're not chewing on and commit to something we can't keep. We will actually keep it and also outperform. And I think that is something that many could learn from. So we will continue to do so. And in the meantime, customers are enjoying those benefits. Operator: Your next question will come from Subhalaxmi Nambi with Guggenheim. Subhalaxmi Nambi: Hey, guys. Thank you for taking my question. It appears that 6,000 pull-through is holding up a lot better than expected. Has that leveled off moving forward, or is that still a material headwind? And then my separate question is, there has been a lot of focus on US clinical strength for good reasons. But can you speak to how Europe and Asia might look this year from a growth perspective? And are there any differences you would expect from the US market throughout this year? Thank you so much. Jacob Thaysen: Yeah. So, Subbu, let me start on the 6Ks. And what you are seeing is that we've spoken to that before that many of our customers that are transitioning are either building their new assays on the X platform, and then they keep the NovaSeq 6K for their traditional assays that are already built, they have already validated, and they want to keep that. So that's also what you're seeing the customers that have decided to stay with assays on the platform. Keep running those assays on that platform, and that's why we continue to see a pull-through. There's, of course, customers that have shifted away from the 6Ks, and it's now moving on to the X, and they are seeing substantial growth on the X platform. So that's why we're seeing the pull-through continue to be sitting up there. But we still believe, of course, that there will be fewer and fewer 6K customers over time. Ankur Dhingra: Subbu, on the 6Ks, and the transition, as you know, we've substantially on the research side, the transition's substantially complete. And clinical is now moving into the latter part of the transition here. Our expectation is by the time we get to the end of 2026, the 6K transition should be mostly substantially done. From a volume perspective similar to the trends that we have been seeing. So that's how we're looking about it. Jacob Thaysen: Geography. Yeah. I mean, Europe has done tremendously well. I think, holding up very nice growth over the past years, and we continue we expect that to continue here into 2026. And we also expect that our APAC region, MER meeting will rebound somewhat. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to Conor McNamara for closing remarks. Conor McNamara: Thank you for joining us today. A replay of this call will be available in the Investors section of our website. This concludes our call, and we look forward to seeing you at upcoming events. Operator: This concludes today's call. We thank you for your participation. You may disconnect at this time, and have a great day.
Tiffany: Good afternoon, everyone. This is Tiffany, and I will be your conference coordinator today. Welcome to Roblox Corporation's Fourth Quarter and Full Year 2025 Earnings Call. All lines are on mute. After the speakers' opening remarks, if you would like to ask a question, during that time, simply press star then the number one on your telephone keypad. Now I would turn the call over to Jamie Morris, Roblox Corporation's head of investor relations. Jamie, thank you. Jamie Morris: Good afternoon, everyone. I'm very happy to be here for my first earnings call at Roblox Corporation. Thank you for joining us to discuss our Q4 and full year 2025 results. With me today is Roblox Corporation's Co-Founder and CEO, David Baszucki, and our Chief Financial Officer, Naveen Chopra. Before we begin, I would like to remind you that our commentary today may include forward-looking statements which are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions are included in our SEC filings, including our most recent reports on Form 10-Ks and Form 10-Q. You should not rely on our forward-looking statements as predictions of future events, and we disclaim any obligation to update these statements except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental slides, which are available on our Investor Relations website. With that, I will turn the call over to Dave. David Baszucki: Thank you, and good afternoon, and thank you all for joining us today. One year ago, we shared our goal of growing year-on-year bookings at 19% to 21%. We talked about our goal of capturing 10% of the $200 billion global gaming content market on Roblox Corporation. The results we are sharing today for Q4 and the full year 2025 demonstrate the incredible progress we have made. In 2025, we significantly exceeded our guidance both on revenue, where we grew by 36%, and on bookings, where we grew by 55% year-on-year. We saw the emergence of viral hits that broke concurrency records at a platform peak in August 2025. We hit 45 million concurrents on Roblox Corporation. We saw new records for individual games on Roblox Corporation, including in September 2025, Steel of Brain Rot peaked at 25.4 million concurrent players at the same time. We saw strong engagement and bookings growth across a long tail of content driven in part by search and discovery advancements, and we made great progress on the technical end of underpinnings of our platform that drives genre expansion. We took safety a step further in just the last two months, rolling out facial age estimation across our platform, and we are unique in large platforms with over 100 million DAUs. In doing this, we completed the global rollout in January. Today, we continue to be bullish about our future. We are at about 3.4% of the global gaming content market. As you know, we are aiming for 10%, and internally, we have even more ambitious goals for the US market. Now diving into Q4, where we delivered another quarter of outperformance, Q4 revenue was $1.4 billion, up 43% year-on-year. And our Q4 bookings were at $2.2 billion, which is up 63% year-on-year. We saw strong growth across all regions, US and Canada grew 41% year-on-year, APAC grew 96% year-on-year, with a couple of key strength points. Japan at 160% year-on-year, India 110% year-on-year, and Indonesia at over 700% year-on-year. On DAUs in Q4, we saw growth at 69% year-on-year, really strong growth across all regions. And our engagement hours in Q4 of last year were at 35 billion hours, that's up over 88% year-on-year. Quarterly, monthly unique payers were nearly 37 million, which is close to a double from a year ago and up sequentially, and this was strong across the globe, US and Canada up 34% year-on-year. In Q4, DevEx was at $477 million, which was up 70% year-on-year. This increase in DevEx reflects our 8.5% increase rate in September, and for 2025, creators earned over $1.5 billion for the first time. If we take a look at our top thousand creators, they earned an average of $1.3 million, which is up over 50% compared to a year ago. Our results reinforce our conviction in our long-term vision. We believe the future of gaming is part of a bigger vision around human co-experience. Our mission is to connect a billion people every day with optimism and stability, and we remain bullish about this vision. In the shareholder letter, we outlined some areas of innovation and investment we believe will fuel growth in 2026 and beyond. First, we introduced the concept of novel game expansion, which is how we talk about expansion in the genres and footprint to our older audiences. You will note now that we are age-checking all users who participate in communication on our platform, we have been able to find a really bigger growth opportunity in the 18 demographic than previously assumed. We estimate our 18 and over cohort is growing at over 50%, and this cohort monetizes 40% higher than younger cohorts. We are optimizing our platform technically to facilitate growth of high-monetizing genres popular with older users, such as shooters, RPGs, and sports and racing. And we believe our technical opportunity on the platform is enormous. When we look at the gaming industry as a whole, in a sense, there is enormous room for advancement. Right now, typically, where we are going with our platform is a focus on vertical integration from cloud to engine to tooling, to our clients on many devices to discovery economy and safety. As opposed to what typically and often happens in the gaming industry as in a bespoke way putting together different cloud, different engine, different social communication. We have an enormous amount of high-fidelity AI training data. That we will share more with you, and you can watch on our main X as far as what we are doing with it. And we are pushing the notion for studios that the exact same game and experience should run very well and at high performance on low-end two-gigabyte Android. And at the same time, blossom into high res on a PC or console. And that includes running on every language or most languages with auto translation as well. Our stack from top to bottom is multiplayer. And we run that extremely efficiently in our own data centers. And, of course, we auto scale. And we believe for cost, it is very important to run the majority of your world on your own bare metal but be able to burst in the cloud. Finally, we will talk more about our advances in safety that are built in. A couple of highlights on critical innovations we are introducing to support genre expansion. We have now are in the middle of a full cloud rollout of native streaming of both 2D and 3D with various LODs. We are doing that automatically in our cloud. We have introduced Slim, which is our nickname for dynamically compositing very complex assets in our cloud and delivering those at various levels of detail for performance on all devices. We have announced that we are bringing native server which is very necessary and popular in competitive gaming, and we have rolled out custom matchmaking, which our creators can use to optimize either latency, age, or social connection. In the first half of this year, stay tuned. We are doing a complete release of an expansion of our Avatar system, including higher fidelity and more articulation. And finally, really, we have seen over the last few years the definition of what is a game expands. The more infra and platform technology we provide, the more we see experiences that are not typically thought of as a game. For example, dress to impress and grow a garden, and we are sharing more and more the AI tech we are building on top of our enormous data to continue this expansion with the use of AI. This week, we launched 4D generation, which allows experiences to include creation of new objects simply by users prompting and creating by AI. We shared earlier our vision on using our training data to create higher and higher quality NPCs. We are now working on photo upsampling in our cloud on both 2D and 3D for higher photorealism. And we shared really yesterday the work we are doing on our internal world model as a service and as a service that could be used both for creation by walking around and painting potential worlds, as well as something we look forward to potentially integrating with Roblox Corporation moments. In addition to this AI future, AI is really driving creation, safety, discovery, translation, in addition to these potential areas of user growth on our platform. Every day, we capture roughly 30,000 years of human interaction data on Roblox Corporation in a PII and privacy-compliant way. We are actively using this data to develop and train AI models that continue to bring our vision to life. I want to highlight that we are internally now running over 400 AI models. This includes, of course, cube 3D, which is recently expanded to do 4D or functional interactive type simulation. We have our own facial tracking client-side model that we use for avatar facial animation. Our voice safety model has been open-sourced and is open-sourced with part of the Roosk consortium. Our text filter is constantly updated, and we believe one of the best, if not the best in the world. Our text and voice translations are supporting publish once. And chat in multiple languages. And, of course, we highlighted our internal world model team and our internal NPC efforts as well. We see a future of creation in Roblox Corporation Studio, that is enhanced not just by cogen, and not just by experience gen, but ultimately agentic iteration and testing in our cloud once again powered by our 4D foundational and 3D foundational cube models. Some other AI highlights, and then I will turn it over to Naveen. In discovery, AI has been driving personalization. In Q4, AI drove a double-digit increase in the number of unique experiences that are surfaced in our recommended for you algorithm. In 2025, on average, users engage with over 24 unique experiences per month. This is up double digits from 2024. And I want to note we have done this all relatively by sharing with our creators the factors we use for discovery. Of course, critically, in safety, we have been using AI not just for our voice model, but with state-of-the-art models like Roblox Corporation Sentinel and Roblox Corporation Guard. And I want to highlight in safety the continued focus on our goal to lead the world in online gaming safety and stability. We shared a few months ago what we believe is the gold standard. We continue to innovate in this direction. Of course, no image sharing on Roblox Corporation. Of course, monitoring text for critical harms. But in addition, moving to the estimation of age of everyone on our platform, and the use in how we support chat. In Q4, we started a global rollout of age verification for access to communication in the US, Australia, New Zealand, and the Netherlands. I am pleased to report adoption has been strong with approximately 60% of DAUs age-checked in these markets. We completed our global rollout in '26, and as of January, we have achieved 45% penetration of global DAUs. We are bullish about continued adoption with Australia, New Zealand, and as a model, we are also rapidly enhancing our platform to make both age check adoption and to improve its reliability. And then kind of a fun full circle here. That as part of our age estimation release, we are really going up and down our system. We have enhanced our matchmaking to cluster users based on their age and skill level. We are moving to continuous age estimation, which will use additional signals such as play patterns, the social graph, economic activities to supplement facial age estimation. And over the coming months, we have more product launches, including always continuous refinement of our text and voice filters. We are ambitious, and we believe these types of enhancements really give us the opportunity to enable even higher level of engagements than what we saw prior to our age check rollout. From a commercial and financial standpoint, our flywheel continues to accelerate. We believe having all ages on our platform is a long-term strategic opportunity that many other platforms are not confronting as they claim 13 and up users. We are seeing the growth we saw in 2025 in combination with fixed cost discipline to reinvest in our creators and our infrastructure all really with an eye to fueling continued growth and long-term margin expansion. We are excited about the innovations we are developing and executing across all areas of our platform, which we believe will ensure our ability to continue to deliver on our long-term vision and deliver growth over a multiyear period. With that, I will turn it over to Naveen. Naveen Chopra: Thank you, Dave, and good afternoon, everybody. Dave obviously shared a lot of the highlights from Spectacular 2025 and a strong end of the year in Q4. I am going to share a few reflections on the business based on what we have observed over the last few months. And then also share some additional color on our expectations for 2026. We have more conviction than ever in the ability for Roblox Corporation to grow in excess of 20%. Our platform is healthier than ever. In fact, if you look at Q4, we saw very strong growth rate, 63% growth in bookings, without the benefit of a big new viral hit. Our age check data, as Dave mentioned, showed that we have an even larger opportunity to grow with older audiences than previously imagined. That's especially true in the United States, where the 18 and over cohort on our platform is growing at more than 50%. We have an international business that is still relatively nascent and growing at close to triple-digit rates. And the pace of innovation in AI is a tremendous accelerant and has the potential to help us grow beyond gaming as we develop even deeper connections into communication, entertainment, and commerce. In addition to the tailwinds on the top line, all the ingredients for long-term margin expansion are in place. Now that margin expansion may not be linear, as you can see with investments that we are making in 2026. But in the long run, we expect to capture operating leverage from COGS infrastructure, and our fixed costs. So as I said, our conviction in the ability to drive very healthy top-line growth and bottom-line margin expansion continues to grow. Now at the same time, we have learned that it is difficult to predict exactly where this business will land twelve months out. I mean, if you look back at 2025, when Roblox Corporation set guidance, Steel of Brain Rot, and Grow a Garden had not even launched. And that's created a situation where the company has had to provide relatively conservative guidance. I do not think that's helpful to investors, and it's certainly not helpful to the day-to-day operation of our business. So we are going to get out of that cycle. We are going to give everyone a long runway. We are providing detailed guidance for 2026. But as we get into 2027, you will see us starting to guide one quarter at a time. So let's talk about 2026. We are expecting bookings growth of 22% to 26%. Those estimates are informed by the quality of the users that we saw come to our platform in 2025. It's informed by recent content trends that we have seen in early 2026. It reflects our confidence in the adoption of our age-checking technology, and a number of things that we have planned in our roadmap related to our economy, discovery capabilities, and many other features. Now importantly, our bookings guidance does not assume we would not be able to predict it, another viral hit of the magnitude of a Grow a Garden or a Steel of Brain Rot. Now when it comes to margins, we are expecting at the high end of our bookings guidance margins to be relatively flat year over year. At the low end of bookings, we are estimating a slight year-over-year decline in margin. That's driven by the increase in the DevEx rate that we announced last year, and we will see a full-year impact of that in 2026. It incorporates investments that we have talked about related to continued growth in users and engagement and also AI workloads. And we are also planning to invest more aggressively in safety marketing to better educate our users, parents, and other constituents about everything we are doing to ensure that Roblox Corporation remains a leader in online safety. And we are funding a decent chunk of those investments through operating leverage on COGS and fixed costs. Our guidance also implies another year of strong free cash flow growth. In fact, at the midpoint of our guidance range, we are estimating 26% year-over-year growth in free cash flow. That includes a slight uptick in CapEx spend relative to last year, as we are continuing to land GPUs in our own data centers and also navigating the recent inflation in memory prices. So overall, we see 2026 as another year of strong growth on top of a spectacular 2025. We are making investments in our creators, in our infrastructure, in our safety, all of which sets us up for future shareholder value creation in the form of long-term growth and margin expansion. With that, open the line for questions. Tiffany: Thank you. At this time, if you would like to ask a question, press star. Then the number 1 on your telephone keypad. To withdraw your question, simply press 1 again. Once your line is open, we ask that you present all questions upfront to our speakers. We will pause for just a moment to compile the Q and A roster. We'll take our first question from the line of Kenneth Gawrelski with Wells Fargo. Please go ahead. Kenneth Gawrelski: Thank you very much for the opportunity to ask questions. Appreciate it. Two, if I may. First, maybe one, could you talk about do you give a little bit more color on, you know, the elements that inform your outlook for the bookings outlook for the year, I think it was it certainly has been a bit better than, you know, than feared. Could you talk about I know you are saying that you do not assume any big viral hit. But, like, how much visibility do you have kind of beyond the first quarter into content schedules and releases? And kind of what informs your conviction in that guidance? And then the second one, maybe just could you elaborate a little bit more on the you said the increased the better opportunity to target the 18 plus. And maybe within that kind of if you could please if you could please talk a little bit about, you know, the recent developments with Genie and AI gaming. Just how does that inform your view? And help hurt you know, how are you going to use AI to make the platform better for developers? Thank you. David Baszucki: Hey. It's Dave. I'll kick off a little on the first question, pass it over to Naveen, and then come back on the second question. You know, we have a lot of internal leading indicators. We can see that in the, you know, somewhat correlate to the health of our system. And part of that is content diversity, content distribution, content velocity, and types of content that are hitting different age ranges and genres. And we see a lot of health in that. So from just the high-level predictive view, that is one confidence-inspiring thing we would see. I'll hand it over to Naveen on more of the modeling and the makeup of our bookings forecast. Naveen Chopra: Yeah. Thanks, Dave. I mean, I'll really kind of put a finer point on what Dave said and then a little bit of what I said in my opening remarks. You know, the content dynamic that Dave mentioned, I mean, we saw both in Q4 sort of an increasing diversity of content. We noted in our shareholder letter that experiences outside of our top 10 are growing at an even faster rate than they were in Q3, and that's true both with respect to engagement and bookings. So that's something we really like to see just, you know, spreading the growth around, if you will. And we've continued to see similar trends in early 2026. And we like both the diversity of content, but also the freshness of the content. So there have been, you know, even not necessarily something as big as a Grow a Garden or Steel of Brain Rot, but there have been new titles come in that have grown in a healthy way, which, you know, gives us a lot of confidence in the power of the platform. I also mentioned the quality of the users that we saw in 2025. You know, there was some uncertainty in that period of very high growth. You know, are these sort of low-calorie users that are going to come in and disappear? But when we look at what has happened on the platform, the behavior of the new users that came to Roblox Corporation in Q3, Q4, you know, they largely look like our core users, and that's true when you think about, you know, how they engage, how they spend, how they retain. So that gives us confidence in, you know, how to think about the business over the next few quarters. You know? All that being said, there is still uncertainty trying to predict exactly where things are going to land twelve months out. That's the reason we do not think annual guidance is the right approach long term. We are using a slightly wider guidance range for 2026 than what we've used in the past, which kind of reflects some of that uncertainty. And then importantly, as I said, we are not building into our guidance an assumption of a massive viral hit the size of a Grow a Garden or a Steel of Brain Rot. We're optimistic that things like that will happen again, but we can't predict them, they're not built into our guidance. David Baszucki: Dave, you want to take the second question? Hey. And then just on the AI future, and I highlighted a little that we're optimistic we're going to see an expansion of the definition of really what is gaming, and AI is going to power that. I'll step back, though, to our mission, and our mission is to connect a billion people every day with optimism and civility. And I'll highlight the word connect, which means bring multiple people together to play, to learn, to work. And for the last really, since we've gone public, we've been sharing the visionary spec we've been building, which is many, many people coming together in physically simulated environments within games to play. We've started adding the notion of adding both NPCs as well as people to those environments, making those environments more and more photorealistic, and finally, making those environments one in which in real-time, people can create, modify, and change the environment. So we are staying with that stack, that spec, and we're, you know, as we showed on X yesterday, starting to use AI up and down the stack, upsampling, 3D to bring things more to life, training NPCs with the 13 billion hours of not just video data, but intrinsic 3D world data. And we highlighted yesterday our internal world model team what they've done using not just video data, but internal Roblox Corporation data to build internal world models that we think we can use both for creation and whatever. I will highlight one thing, and that's very important to the spec we're designing. We're building multiplayer platform technology. We're building stuff that brings people together. And a lot of the current work that you see out there is operating in video latent space, rather than synchronized 3D multiplayer cloud space. I would just cautiously highlight investors to understand the difference of that. You can read our recent tweet on X. That said, we continue to be optimistic about hybridizing and putting together many AI components to build the stack we're talking about. Tiffany: Thank you. Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan: Thanks so much for taking the question and appreciate all the disclosure in the materials and especially the shift around the guidance philosophy. Dave, I have one for you. The journey you've been on with respect to discovery, on the platform over the last twelve months, what have been the key lessons you've learned about the opportunity that sits in front of you based on what you've learned about the evolution of discovery, and how does that align with your strategic priorities either for the platform or individual products as you look out over the next couple of years? Thanks so much. David Baszucki: Discovery is a really hard problem to do right. And we believe being transparent in it is very important. We're as much as possible trying to optimize discovery not for short-term gain, but for long-term gain. And that's both long-term gain in user engagement as well as long-term gain in platform health and creator health. And any efforts to optimize discovery in the short term may not be optimal for long-term enterprise value and the health of our system. So figuring out how to personalize discovery for every user in a way that connects great users with great content in the long term is what we've been focusing on. What we've seen as a result, as I mentioned, is more good content reaching more great users. An increased robustness in the diversity of our content mix, in a way that we believe is very, very healthy. And, also, future opportunities. So stay tuned with moments. We believe for many users, browsing in-game experiences will more and more be a complement to our discovery. It's a long-term journey, and we'll keep getting better at it. Eric Sheridan: Thanks so much. Tiffany: Our next question comes from the line of Matthew Cost with Morgan Stanley. Please go ahead. Matthew Cost: Great. Thanks so much for taking the questions. I have two, maybe for Naveen to start. I think the gross margins that you showed in the quarter were, I think, the second strongest that we can see going back even to 2020. I think it's the only time you did better. When we think about that improvement to gross margin, is that a function in the fourth quarter of a shift towards direct payments or any other moving pieces? And could you just give us an update on kind of the direct payment initiative? And then, a second one for Dave. If I could. I think the detail on the blog post that you've shared so far on the call about the work you're doing with AI and world models is incredibly helpful. And I want to put a finer point on the concerns that we've seen coming up in the market over the past week about the potential for, you know, disruption to your business from other, you know, advances from with AI coming from other companies out there in the space. And I wonder if you could respond to those concerns and, you know, what you see as the differentiating factor that protects Roblox Corporation. I think the commentary you made a moment ago about, you know, multiplayer versus non was really helpful, but if you could expand on that. Thank you so much. Naveen Chopra: Yeah. Hey, Matt. Thanks for the question. I'd really point to two things in relation to your question on gross margin in the quarter. One, as you hypothesized, we did get some tailwind from COGS. I think as we've spoken about in the past, we are doing a number of things in the product to try to steer the purchase of Robux to lower-cost platforms, and that honestly performed better than we anticipated in Q4. And that was very helpful from a margin perspective. The other source of margin expansion in the quarter was really bookings. Bookings came in also better than expected, which gave us powerful leverage against fixed costs. When we look forward, and I think I spoke about this in relation to 2026 margins, we do continue to expect improvement in COGS rates as we are able to shift more and more of the business to lower-cost platforms. You know, that's not going to be necessarily linear. There will be, you know, places and points in time we're able to be more or less aggressive on that. But in the long run, we do see that as a source of additional margin expansion in the business. Dave, on AI? David Baszucki: Yeah. I would hey. This is a great question. I would flip it and share how we think about it internally, which is an opportunity for disruption in the opposite direction. Which is an opportunity for the expansion of the Roblox Corporation vision beyond gaming into the future mix of what is entertainment and where does gaming end and where do other points begin. You know, ten years ago, a lot of people in the market used to talk about how is video going to get interactive, and there's been a lot of experiments on that that have been very difficult. But the other direction to think about is how does gaming expand and become part of entertainment. So I would say stay tuned on that. We feel what we're building, which is multiplayer technology that runs in the cloud, that more and more can load instantly, that more and more can be consumed in smaller bite-sized nuggets. More and more start to blur those two visions. World models are interesting. I would say not initially in many of the ways that I think many think, but we do think they have an opportunity for walking around and painting a world, for example, have a really interesting opportunity to think about where does video end and snapshots end and interactivity begin. And so we have developed our own models there, but the core of our technology will continue to be the very difficult problem of 3D cloud synchronization and building communication type technology. Tiffany: Our next question comes from the line of Omar Dessouky with Bank of America. Please go ahead. Omar Dessouky: Hi. Thanks for taking my question. I wanted to ask more of a financial question. Specifically, how do you think about dilution stock-based compensation in 2026? With your stock price significantly down compared to last year, could you explain how having that stock-based comp flexibility is helping you make long-term strategic investments? For example, what investments besides headcount have a higher ROI that you would use that cash for? Thanks. David Baszucki: I'll go first, and then I'll hand it over to Naveen. You know, internally, we're always running a multiyear model on stock-based comp and dilution at a very, very wide range of stock prices. And running the business in a way we feel comfortable. So do think about these things and model many dimensions. I'll hand it over to Naveen. Naveen Chopra: Yeah. Not a ton to add to that, Omar, but, you know, number one, I would say we look at this at a pretty long-term horizon. I mean that both with respect to the share price and dilution. I mean, sure, dilution at various points in time might spike just because of what's going on with the stock price. But ultimately, we think we're going to create shareholder value and, you know, that will cause dilution to come down over time. If you look at what's happened over the last few years, that's definitely been the case. So some would pay attention to, but we're much more focused on the operating results of the business because dilution's going to get solved by that. Omar Dessouky: Thanks a lot. Tiffany: Our next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz: Thanks for the questions. Maybe a quick update on your ramping advertising ambitions and how you're thinking about the potential growth contribution from advertising in 2026. And then any additional detail about the age verification rollout, which maybe was not as smooth as you hoped? Can you comment on specific challenges and adjustments the team has made to ensure a better transition? Thanks. David Baszucki: I'll go first. We sure do not think about it that way. We're very excited and proud of the way our age verification rollout has gone, and we're very optimistic that the result of it has been expanded thinking within our team on long-term how to be unique in being a platform that can have all ages on the platform, can monitor and help how communication happens on the platform. I'll say that we gave our internal teams an ambitious goal of rolling this out eventually with no friction. And I would say by doing this, we've found so many other opportunities for optimization that I'm very pleased and happy with the way the rollout's gone. Naveen Chopra: And then on advertising, you know, we expect our advertising business to show pretty healthy growth in 2026. That being said, it is still modest. It's not a major contributor to the top line as you've heard me say in the past. It is going to take some time to grow. I think the long-term opportunity is very given the scale and engagement of our platform. But it is going to take some time. And we are executing carefully with respect to building out those products, the integration of the technology in our platform, working with our creators to expand the amount of inventory, that is available and we're going to continue to be very methodical about that. To make sure we're building the business in the right way. Tiffany: Our next question comes from the line of Cory Carpenter with JPMorgan. Please go ahead. Cory Carpenter: Hey. Thanks for the question. I had two. Maybe first, there's been some reports of interest in maybe building your presence in China. Anything you can comment on there in the type of opportunity that you see? And then just on the age of users, you know, framed it as the large opportunity. Given, in novel game experiences, given, you know, more younger users than previously reported. You know, the half glass empty view of that, of course, could be that younger users have been tougher to age up on the platform than you expected. So, you know, what's giving you the confidence to invest there that you can age up more with users? David Baszucki: I'll go first on China. We continue to be a great partner with Tencent, and we continue to see a huge opportunity in China. We've revamped the way we look at China. If we were to go live in China, we would do it in an air-gapped way. And we think our infrastructure is built and designed in a really unique way. We can abstract and deploy it in multiple places. On our, you know, a couple of things about age checking and getting detail on estimated age. The first thing is it highlights the level of cultural phenomena that Roblox Corporation has become. And so yes, age checks slightly younger than self-reported. But if anything, it highlights a success. I, you know, I look to a couple of things. First, over 50% growth year-on-year eighteen plus. Two, the platform and technical advantages we've used to get to where we are in 18 are exactly the same eighteen plus vertical integration all the way from cloud to apps to discovery to social graph and beyond, we believe, rather than saying, ultimately, the tech as well, supporting more and more realistic experiences. So I, I continue to be absolutely bullish on our eight and up opportunity. Tiffany: Our next question comes from the line of Shweta Khajuria with Wolfe Research. Please go ahead. Andrew: Hi. This is Andrew from Shweta. Thanks for taking the question. Just kind of one on the age check rollout. You know, you talked a lot about the penetration that seems to be going well, but any change in behavior or engagement levels for those who have completed a check or if not yet. And then maybe when you think about the derivative impacts of paycheck, is it possible to think about how the older cohorts may be viewing this as a quality of life update, and that might be contributing to the engagement levels that you're seeing? David Baszucki: Yeah. I'll give one example on why excited about this, and that is the more we get into age check interacting with communication, the more we can more accurately match make different age bands together. That's one of the factors that makes me so optimistic is that age, you know, banding our matchmaking in ways that brings the average, you know, older user together as well as the average 15-year-old together. We believe can be a long-term growth aspect. So think this is going to become it's why we call it the gold standard, actually. And what we've seen after we did this is another very large gaming company announced they're going to do it. A communication platform announced. They're going to do it. We just see this as ultimately the way the world's going to work. We're proud to be one of the first big platforms to do it. Tiffany: Our final question comes from the line of James Heeney with Jefferies. Please go ahead. James Heeney: Yes. Great. Thanks, guys. Naveen, if we look at the Q1 bookings guide, it looks like a sequential decline greater than 20%, which I think would be one of your bigger sequential slowdowns. Is there anything you're calling out there specifically, or is it just kind of the conservatism that you called out? Anything specific and even maybe what you're seeing so far in Q1. Thanks. Naveen Chopra: Yeah. I mean, I guess I look at it pretty differently. You know, this is a quarter where we do not have at this point, a big new viral hit. And so, you know, to put up 40% to 44% top-line growth in the absence of that, I think we should all be very, very excited about what that says about the health of the platform. You know, we said last quarter, that as we started to move past this period of time with huge viral hits, that growth would slow. So I do not think anyone should be surprised by the sequential trend there. If anything, I think we should be really excited about what we're seeing early in the year. I'm going to turn it over to Dave to close that. David Baszucki: Hey. Thank you all for joining us on our call today, and we appreciate the really interesting and thoughtful questions. Thank you all, and we'll look forward to seeing you in a quarter. Tiffany: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Qualys' Fourth Quarter 2025 Investor Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Blair King, Investor Relations. Please go ahead. Blair King: Thank you, Michelle, and good afternoon, and welcome to Qualys' Fourth Quarter 2025 Earnings Call. Joining me today to discuss our results are Sumedh Thakar, President and CEO; and Joo Mi Kim, our CFO. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements that generally relate to our future events or future financial and operating performance. Actual results may differ materially from these statements. Factors that could cause results to differ materially are set forth in today's press release and our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. So with that, I'd like to now turn the call over to Sumedh. Sumedh Thakar: Thank you, Blair, and welcome to our fourth quarter earnings call. As threat actors continue to compress time-to-exploit, we believe the next phase of pre-breach risk management will be defined by an agentic AI-driven risk fabric with out-of-the-box business quantification, automated remediation to respond to the speed of these threats. Against that backdrop, we continued to execute well in Q4, demonstrated by another quarter of strong revenue growth and profitability. In my conversations with hundreds of CIOs and CISOs as well as security leaders from many of the world's largest and most innovative organizations, one message has remained consistently clear. Reducing cyber risk isn't about detecting more exposures. It's about operationalizing a cyber risk management program that aligns spend with risk tolerance. In doing so, CISOs are increasingly prioritizing the unification of fragmented security stack into a centralized risk fabric, one that serves as a credible alternative to single-vendor platforms by bringing diverse risk vectors into a prioritized, measurable view of risk that their teams can confidently communicate and remediate at machine speed. That message was further amplified at our recently concluded ROCon conference in Mumbai, with attendance up over 30% from last year's event as we again broadened the agenda to include a business track. And with the element of AI, which is democratizing cybercrime and enabling adversaries to operate with unprecedented speed and sophistication, this need is only intensifying. As a result, we believe that the future of pre-breach risk management belongs to vendor-agnostic agentic AI-powered solutions that continuously predict, assess, confirm, quantify, prioritize and remediate risks across on-prem and multi-cloud environments. Over the past year, we continued to execute relentlessly towards this vision, delivering meaningful platform innovation to help customers reduce risk faster, operate more efficiently and stay ahead of an increasingly dynamic landscape. Accordingly, in 2025, we broadly expanded the Qualys ETM platform to third-party data and launched a powerful new orchestration layer that unifies Qualys and non-Qualys findings, applies our industry-leading threat intelligence and delivers a business-contextual quantified view of risk with built-in prioritization and automated remediation. Building on this foundation, we introduced an agentic AI risk fabric that assesses and normalizes diverse internal and external data sources, applications and machines. We expanded -- we extended these capabilities with the first-of-a-kind agentic AI risk management marketplace, enabling security and IT teams to quickly augment their existing workforce with highly specialized autonomous experts that significantly reduce time to remediation, increase accuracy and reduce costs. To further close security gaps, we again organically enhanced ETM with a natively integrated Identity Security Posture Management solution at a time when identities have become part of the new AI perimeter. And further flexing the power of our platform, we are now confirming exploits before customers are compromised. While traditional Continuous Threat Exposure Management solutions rely on a theoretical risk score and ignore mitigating security controls, ETM takes a fundamentally different approach. On a single platform, it uniquely detects vulnerabilities, validates exploitability, applies remediation and revalidates exploit using Agent Val, agentic AI workflow. The net result is that Qualys is redefining how organizations manage pre-breach risk management. While competitors continue to focus on detecting vulnerabilities or mapping theoretical exposures, Qualys has moved decisively beyond that model. We are pioneering the first agentic AI-native Risk Operations Center, ROC, a new category in cybersecurity designed to centralize an organization's response to threats spanning exploit confirmation to autonomous remediation. Powered by our ETM solution, the ROC represents a fundamental diversion from traditional CTEM tools. Competitors can point to exposures. They can't quantify cyber risk in dollar terms that matters most to the business, and they cannot adequately fix them. ETM fills that gap. This is what sets Qualys apart. We don't stop at detection and non-quantifiable prioritization. We natively integrate CTEM, exploit confirmation, risk quantification and remediation operations into a single AI-powered workflow, leveraging both Qualys and non-Qualys data sources. In doing so, our architecture orchestrates and implements a perception-reasoning-action loop, enabling autonomous agents to collect real-time telemetry, reason through risk signals, plan response workflows and execute actions. This enables organizations to holistically predict emerging risks across infrastructure, cloud, application security, IoT and identities, safely confirm probable exploits, prioritize threats based on business impact, remediate through patching or other compensating controls and verify the effectiveness of the remediated tactic. This end-to-end vendor-neutral approach is catalyzing a paradigm shift in pre-breach cyber risk management, where customers aren't just seeing their risk holistically across the risk stack. They're validating it, quantifying it and reducing it continuously and autonomously at scale. By aligning security and IT decisions directly with business priorities, we are providing organizations with measurable proactive risk reduction that brings customer value. Armed with this fresh new set of capabilities and early momentum already validating this model, we are now laser-focused on accelerating ETM adoption through our VMDR customer base, and positioning Qualys for larger upsell opportunities over time. Moving to our business update. With customers spending $50,000 or more with us growing 4% from a year ago to 215, let me now share a couple of recent wins which illustrate why organizations ready to centralize the response to cyber risk are turning to Qualys to help unify the security stack, quantify and remediate risk in their environment and fortify their security operations. First, an existing Global 50 customer was struggling under the weight of multiple unintegrated security tools, millions of vulnerabilities and limited visibility into the overall risk profile. Traditional prioritization methods were unable to adequately filter critical findings, leaving security and IT teams without the necessary business context to act decisively. Consequently, this customer selected Qualys and launched a strategic initiative to unify their security stack by transforming siloed risk signals spanning on-prem and multi-cloud environment into a cohesive, agentic AI-native risk management solution. This included expanding the ETM deployment to further operationalize the ROC with ingested third-party data from several sources, resulting in a mid-6-figure annual bookings upsell. By consolidating these data services into the Qualys platform, we are now delivering this customer a unified orchestration layer and full visibility of their attack surface, centralized risk assessment, quantification, prioritization and remediation workflows while unleashing the operational efficiency of the stack consolidation. This expansion of their ROC underscores the power of our platform and reinforces Qualys' ability to unify siloed risk signals, operate as an autonomous defense layer, strengthen customer outcomes aligned to the business risk tolerance, and advance our leadership in the industry. Leveraging our mROC partner ecosystem, we are also pulling new business into Qualys. During the planning stages of launching a new ETM POC with a global 200 company in Latin America, we secured a 7-figure annual bookings upsell, which included our TotalCloud CNAPP and Policy Audit solutions. This win demonstrates the leverage of our partner-led motion and our ability to convert early engagements into meaningful, multi-solution growth. Turning to our Federal business. We achieved a mid-6-figure expansion with one of the federal government's most visible shared security services utilized by several large government agencies nationwide. Faced with an overwhelming volume of security issues that limited resources to continuously assess risk across augmented tools and manual workflows, this customer chose Qualys for its cloud-native FedRAMP High Authorized platform to enable a centralized government program that quantitatively prioritizes risk with automated assessment, standard outputs and low operational overhead. Given the success of this deployment, we are now working towards a multi-agency ETM rollout representing a significant upsell opportunity as this shared services team prepares to operationalize its Risk Operation Center. These results alongside another 6-figure upsell with a separate large federal agency, reinforce our proven ability to align technical capabilities with operational outcomes that address modern security challenges and underscore the long-term growth opportunity in our Federal business. Beyond these wins, we are also gaining more leverage from our partner ecosystem. As we continue to endorse a partner-first sales motion, partner-led deal registration increased again in Q4, reflecting deeper alignment and execution across the channel. In addition, with well over a dozen certified mROC partners actively launching new services, momentum continues to build towards a global ROC alliance, fueling our capability, harnessing transformative solution sales and bringing new business to Qualys. Further contributing to our growth profile, in Q4, we continued beta testing QFlex to help customers accelerate and maximize adoption of the Qualys ETM platform. Given the strong customer response and early success of this model, we plan to continue to focus on proactively identifying opportunities to leverage QFlex to enable select customers and partners to accelerate their adoption of Qualys solutions in 2026. In summary, we are fundamentally changing how organizations manage pre-breach cyber risk by unifying CTEM with exploit confirmation, risk quantification and automated remediation powered by an agentic AI risk fabric. Our rapid pace of innovation and strategic investments are driving strong competitive differentiation, deeper ROC adoption, broader engagements across large federal agencies, growing partner-led execution and initial QFlex success. Looking ahead to 2026, we'll continue our disruptive innovation, further advance our go-to-market investments and execute our ROC vision with a balanced approach to long-term growth and profitability. With that, I will turn the call over to Joo Mi to further discuss our fourth quarter results and outlook for the first quarter and full year 2026. Joo Mi Kim: Thanks, Sumedh, and good afternoon. Before I start, I'd like to note that except for revenue, all financial figures are non-GAAP, and growth rates are based on comparisons to the prior year period, unless stated otherwise. We're pleased to report a healthy finish to the year, highlighting our continued execution, financial discipline and scalable business model. For the full year, we grew revenues by 10% to $669.1 million and achieved adjusted EBITDA margin of 47%, even with continued 14% growth in investments in sales and marketing. Net income and EPS grew 13% and 15% to $257.8 million and $7.07 per diluted share, respectively. And free cash flow reached $304.4 million or 45% of revenues, all of which exceeded our expectations for the year. Turning to fourth quarter results. Revenues grew 10% to $175.3 million. The channel continued to increase its contribution, making up 51% of total revenues compared to 48% a year ago. Revenues from channel partners grew 17%, outpacing direct, which grew 4%. As a result of our strategic emphasis on leveraging our partner ecosystem to drive growth, we expect this trend to continue. By geo, 15% growth outside the U.S. was ahead of our domestic business, which grew 6%. U.S. and international revenue mix was 56% and 44%, respectively. With customers confirming their prioritization of security within IT budgets, we anticipate the selling environment in 2026 to remain similar to last year with a low to mid-single-digit growth in security spend persisting for the foreseeable future. Reflecting this sentiment, our gross dollar retention rate remained comfortably above 90%. We saw a modest sequential decline in Q4, with our net dollar expansion rate at 103%, down from 104% last quarter. In terms of product mix, our differentiated new products continue to drive growth with all 3 of the following increasing contribution to bookings in 2025. First, Cybersecurity Asset Management, combined with ETM made up 10% of total bookings and 13% of new bookings in 2025, up from last year's 8% and 9%, respectively. Next, Patch Management made up 8% of total bookings and 16% of new bookings in 2025, up from last year's 7% and 16%, respectively. Lastly, TotalCloud made up 5% of total bookings in 2025, up from 4% a year ago. We believe that these differentiated products combined will continue to increase contribution to bookings in 2026, given our opportunity to increase market share and maximize share of wallet. Turning to profitability. Adjusted EBITDA for the fourth quarter of 2025 was $82.6 million, representing a 47% margin, same as last year's. Operating expenses in Q4 increased by 11% to $68.9 million, driven by investments in sales and marketing, which grew 18%. With this strong performance, EPS for the fourth quarter of 2025 was $1.87 per diluted share, and our free cash flow was $74.9 million, representing a 43% margin compared to 26% in the prior year. In Q4, we continued to invest the cash we generated from operations back into Qualys, including $724,000 on capital expenditures and $44.7 million to repurchase 328,000 of our outstanding shares. Since commencing our share repurchase program in February of 2018, we've repurchased 10.7 million shares and returned over $1.2 billion in cash to shareholders. As of the end of the quarter, we had $160.5 million remaining in our share repurchase program. We are pleased to announce that our Board has authorized another increase of $200 million to the share repurchase program, bringing the total available amount for share repurchases to $360.5 million. With that, let us turn to guidance, starting with revenues. For the full year 2026, we expect revenue to be in the range of $717 million to $725 million, which represents a growth rate of 7% to 8%. For the first quarter of 2026, we expect revenues to be in the range of $172.5 million to $174.5 million, representing a growth rate of 8% to 9%. This guidance assumes no material change in our net dollar expansion rate with moderate growth contribution from new business in 2026. Shifting to profitability guidance. For the full year 2026, we expect EBITDA margin to be in the mid-40s, implying mid-teens increase in operating expenses, and free cash flow margin in the low 40s. We expect full year EPS to be in the range of $7.17 to $7.45. For the first quarter of 2026, we expect EPS to be in the range of $1.76 to $1.83. Our planned capital expenditures in 2026 are expected to be in the range of $8 million to $12 million, and for the first quarter of 2026 in the range of $1.2 million to $2.6 million. In 2026, with respect to operating expenses, we plan to align our product and marketing investments to focus on specific initiatives aimed at driving more pipeline, accelerating our partner program and expanding our federal vertical. As a percentage of revenues, we expect to prioritize an increase in investments in sales and marketing with more modest increases in engineering and G&A. With that, Sumedh and I would be happy to answer any of your questions. Operator: [Operator Instructions] And the first question comes from Jonathan Ho with William Blair. Jonathan Ho: Congratulations on the strong quarter. Can you talk a little bit more about some of your QFlex offerings and how it potentially helps remove friction and perhaps encourages broader adoption of your platform? Sumedh Thakar: Yes. Thank you very much. And that's a great question. We've talked about this last quarter as well. I think if you have to -- if you take that in relation to what we are doing with the Risk Operations Center and ETM and how we're differentiating ourselves from the exposure management solutions is that the ability to detect all your assets, find your vulnerability to use agentic AI to actually not only prioritize those, which is what a lot of these exposure management solutions do, which is just giving you a score, we're leveraging the ability to use agentic AI to confirm those exploits with the environment, which is very differentiated from what everybody does. But then after that, actually, the ability to also remediate those. And so being able to get this end-to-end very quickly, very fast before attackers are leveraging AI to do the same for your environment, the QFlex proposal allows the customer at their pace to then be able to consolidate a lot of these capabilities on a single platform with Qualys and do that over a period of time during their subscription with us, which allows them to maybe initially start with more of that prioritization and confirmation, but then as the year goes by, it allows them then to leverage our eliminate capabilities more and more to be able to focus on getting the outcome of getting these things fixed. And so what we're excited about is our conversations initially with the customers that have adopted this have been very positive in the fact that the security environment is not a static environment at the beginning of the year. It is continuously changing throughout the year. And the flexibility that, that pricing model offers them to actually be able to leverage different Qualys capabilities throughout the year as the threats change is a very big positive for them. So really happy with the feedback we have gotten in the beta phase. And at this year, 2026, we look forward to doing more of that and moving more towards the GA model for that. Jonathan Ho: Got it. Got it. And then just in terms of some of your comments around AI, I mean, clearly, you're seeing a lot of customer interest here. Can you maybe help us understand like where the customer is in terms of their AI journey? And also help us understand what that opportunity looks like for Qualys. So if you start selling more of these agentic products, AI sort of native products, how do we think about how that can impact sort of net retention going forward? Sumedh Thakar: Sure. I think a lot of people talk about AI is embedded in their platform. I think where we differentiate ourselves is that what we have done is introduced the concept of a AI agent marketplace within the platform, which allows the customers to actually augment their workforce, their security team, which we have talked about this for years that there's never been enough talent in the security space. So the ability to get Agent Sara who's an expert in patches, the ability to get Agent Val who's an expert agents with skill sets that can autonomously make calculations and decisions on exploitation remediation. So the ability to say, look, I want to employ this particular agent on the platform to achieve a task, which otherwise would take me weeks and months to hire a consultant to get that outcome, what we've done with our agentic AI capabilities is not only have those built in throughout the platform, but with agentic AI, we can now actually have these agents that feel like they're really part of that team, and they can help you get those outcomes. And the way we have really positioned this is that customers who are leveraging VMDR, they get a really high-quality list of findings. But then as they cross-sell into ETM, they get the ability to not only do the prioritization of these vulnerabilities but they get the agentic AI capabilities, which then allow them to do -- achieve different tasks. And as you look at how customers are thinking of head count, et cetera, in the agentic AI world, these really help them get to those outcomes pretty quickly. And then, of course, in addition to that, with our TotalAI offering, we're also helping customers detect, find and address vulnerabilities and misconfigurations that are coming up in the AI workload that they have. And so with that, we look forward to customers bringing more data around their own agentic -- around their own AI solutions into Qualys ETM. And we believe that the agentic AI capabilities are a differentiator for customers to upgrade from or to cross-sell from VMDR into ETM as well as looking at some of the other exposure management solutions where they just give you a score, this will allow them to actually use an agentic AI to get patching done pretty fast and pretty quickly. And so we see that, that differentiation can be the catalyst for our customers to pick ETM over some of those other exposure management solutions that are out there. Operator: And the next question will come from Kingsley Crane with Canaccord. William Kingsley Crane: Congrats on the quarter. You answered some of this in the prior response, but would just love to hear more about how Agent Val is elevating ETM from an efficacy perspective. And just how Agent Val is reducing total net hours at the customer level and how that's resonating with customers? Sumedh Thakar: Thanks, Kingsley. I wish -- unfortunately, the call is only an hour, but I can talk about this forever. But look, I think we have seen the history of this evolution back when Kenna has come out with this is like everybody is giving you theoretical scores, right, based on the vulnerability findings and CVEs information that is out there. Unfortunately, a theoretical score does not actually mean that a high score does not mean that the customer may not have other controls in place that mitigate that actual exploit from working in their environment. They might have a firewall. They might have something else, memory protection that is enabled, that a typical scanner or a typical exposure management solution will not pick up. What Agent Val does is it leverages that decision-making, autonomous decision-making process to basically look at the findings, look at the scoring, but then actually the ability to run a very safe exploit against the asset to confirm whether that vulnerability is actually exploitable in their environment, on their machine or it is not, not just a theoretical score. And what typically happens is when the security team gives these scores to the IT team, they spend a lot of time trying to chase down these findings only to feel like, oh, this was a false positive because, look, we already have a control in place and a lot of time is wasted in arguing back and forth. What the customers really want to be able to do is not waste their IT team's time on fixing things that actually are not exploitable in that environment. And the ability to, for sure, confirm by running an actual exploit in a safe manner that this figure is not exploitable. It means that the IT teams will be saving significant amount of time not chasing down ghost scores and will actually have a absolute confirmation that, yes, it is a very highly exploitable vulnerability, but I don't need to worry about it because I have other controls that are mitigating this, or it is highly exploitable, attackers are using it and I don't have a protection in my environment. So instead of just chasing scores, I can actually go and focus on fixing these and that's kind of making it a lot safer. So it's a significant time saving for the customer because of the agentic AI workflow. They can actually then significantly reduce the number of findings that they have. And the other thing is that, once exploit is confirmed on your environment, you don't have the time to create Jira tickets and ServiceNow tickets to help people go and manually make the remediation. As soon as you know that this is exploitable in your environment, confirm. You want to be able to use another agent to immediately kick off remediation and get it fixed. And you feel a lot more comfortable because now you have confirmed that this is exploitable, it's not theoretical. So people are going to want to also save time and not leave the exposure open for a long time by being able to run that exploit and then also automatically run the remediation. Now you cannot show up for the AI fight today with your Jira tickets and your ServiceNow tickets. You got to be able to do automation and autonomous decision-making to get things fixed. And that's the differentiator. William Kingsley Crane: Yes. It's really exciting times, and it's good to hear you're leading the way here. For Joo Mi, it's been a remarkable year for Qualys. You guided to 7% at the midpoint. Entering last year, and you put up 10% and now you're guiding closer to 8% this year. How can we think about the levers for upside to growth this year? Joo Mi Kim: Yes. 2025 was a solid year. From an execution standpoint, it was a very exciting year for us with ETM having gone live at the end of 2024. We've had significant number of discussions with our existing customers in terms of how we can increase value without them having to double their spend initially with us. And so, in doing that and working through our partners, what we were able to do is finalize our pricing and packaging for ETM and identify our key products that are going to be levers for growth in the short term, then long-term going forward as well. So 2025, solid year, with closing the year with another 10% growth for revenue, which we're really pleased about. Now when it comes to current billings, it came in line as expectations from last quarter with 2025 current billings growth of 8%. That's slightly lower than the 9% that we posted back in 2024 for current billings. So looking ahead to 2026, I think that's kind of more or less in line with what the baseline case is for us. Looking out, our guidance is really informed by what we see in the business today, the discussions that we're having, what we expect from the macro and in the spending environment. With that said, we do anticipate significant upside. Given what Sumedh just covered, we have very exciting product discussions with existing customers as well as prospects. I think that we've gone ahead and really leveraged our innovation and our power to really deliver what the customers are looking for and what the market is looking for. So we're excited about the outlook. But with that said, the baseline still remains to be around 7% to 8%. Operator: And our next question will come from Rahul Chopra with Berenberg. Rahul Chopra: I have a couple of questions. I mean I appreciate these are not your estimates, but if I look at 2023 market share data which you gave, at the time you had market -- total market as $64 billion. In the current deck, you are talking about $53 billion market for 2026. At the same time, I can see previously, you had '28 market of, I think, something around $79 billion, $78 billion. Now '29 market is $75 billion. My question here is that basically, is the core market shrinking for VM and exposure management. I appreciate these are not your estimates, but I just wanted to understand what you're thinking about the core estimates in terms of the market itself, what is it doing? One. The second question is, I wanted to understand your thoughts about the competitive landscape in more general, especially given the ServiceNow is acquiring Armis. Obviously, that's going to probably change some dynamics. So I wanted to hear your thoughts on that, please. Sumedh Thakar: Sure. I think I've been in Qualys for 20-something years, and vulnerability management has definitely changed. And if you recall, we've been talking about that as the number of assets have increased, the number of CVEs and software has increased. We're seeing that customers in the traditional way that vulnerability scanning was done is just generating way too much noise and vulnerability management has evolved, which we have called out many times. And that's the reason in the last few years, we've been focusing on shifting and focusing on the solutions that customers actually are looking for. So as an example, when we innovated with Patch Management, we're the first vendor to do that. And even today, we're not seeing really much traction with others. And Patch Management was, yes, not just -- vulnerability management doesn't mean you just scan and scan and scan if you cannot get it fixed. And so as that evolved, we innovated, we came up with Patch Management as a capability. We came up with Cybersecurity Asset Management that was needed for a successful VM program. Now we have expanded that capability with agentic AI with ETM because that's really what customers are looking for is how do you continue to triage that. And then adding a layer of validation is another game changer in our mind from a vulnerability management perspective. And then along the way, we've also focused on how do we bring TotalCloud, which is a CNAPP solution that we have, which we're very happy with the traction that we're seeing with that. We're coming up with agentic AI. So for us, it is about how do we continue to track the areas that customers are focusing on and then how do we maximize our share of that spend that they have. And that's what you're seeing, the provision and the innovation that we are going. And it's great to see that there is a focus and attention on the CTEM exposure management marketplace, as you mentioned, with ServiceNow buying Armis, which has been around for a long time, using passive capabilities to detect asset inventory, et cetera. But the reality, again, is that today, customers don't want just more vulnerability findings from these solutions that don't actually help you fix anything. And so, what we are looking forward to is, again, autonomous workflows leveraging agentic AI to get customers to fix things quickly, as you saw in the recent Mandiant report that the time -- mean time to remediate over the last 5 years has gone from 63 days to negative 1 day. So today, again, with solutions like that, ServiceNow, Armis and other solutions, do you have the time to create ServiceNow tickets and chase people down while attackers are having a free time exploiting your vulnerabilities. So what we feel pretty excited about with our customer conversations is the differentiation that we have that is allowing them to very quickly and accurately get to the things that actually matter to their business, put dollar value loss quantification numbers on it, get the validation and get the vulnerabilities fixed. And that is allowing us to differentiate, and that's where a lot of the conversations we're seeing are very positive in the focus of not just another exposure management solution, but moving towards a Risk Operations Center. And so our goal here is that, of course, security market keeps changing, et cetera. We're bringing solutions that we are looking forward to maximizing the share of the customer spend focused on the pre-breach side of the security and not necessarily the post-breach side. Operator: And the next question is going to come from Nehal Chokshi with Northland Capital. Nehal Chokshi: Nice color there on why the Armis acquisition by ServiceNow won't be impactful. It sounds like a key portion here is that basically, they're lacking Patch Management. So can you dive a little bit further here and explain why Patch Management has remained such a differentiator for Qualys here? Sumedh Thakar: Yes. Thank you. I think today, if you see, right, like people are finding millions and millions of finding and the IT team does not want to be spending all their time instead of innovating going out and fixing so many vulnerabilities without the proper context. And so what we're seeing is that -- and we talked about this a couple of months ago, that Qualys agents have been able to deploy 140 million patches just in the last 12 months. And in one of the recent GigaOm reports, we were placed as the #1 Patch Management vendor by the analyst. And so the reason why we're getting so much traction is that in the past, I remember when I joined Qualys scanning once a quarter and taking 30 days to fix all your issues was considered okay. Today, when the attackers are attacking, you -- within 3, 4, 5 hours of the vulnerabilities being disclosed, you need that ability to quickly correlate how CVEs figure out that it doesn't matter to your business or that it's not exploitable in your environment and actually get it fixed. And so our success with Patch Management really has been a highly integrated solution with VM and not just a partnership where you're going out with some other separate solution and trying to bridge that gap. It's highly integrated solution that is quickly able to not only detect the vulnerability, or find whether it is actually exploitable in the environment. But then within a matter of minutes, it can actually fix and patch that particular issue. And so what we're excited about is to see the success of Patch Management in the last few couple of years, but also what we did end of last year is moved even further into providing customer more abilities to mitigate the risk of the vulnerability without patching. And I like to call it patchless patching, which is applying mitigating controls on the machine, which have given even more flexibility to our customers because sometimes you're worried about a patch breaking something, how do you balance the worry of patch breaking something with the worry of getting exploited. And many times, because of our super deep research in the patch research landscape with our research analysts, we actually are able to figure out the way exploits are working and then find ways to apply mitigations on the machine so that the actual exploit can be blocked. So at the end of the day, what is the point of all the spend you do in vulnerability scanning is to get the right things fixed before the attackers get there. So the majority of the value that comes in that overall spend is really about the patching part. If you do not patch it, you can build all kinds of dashboards and there's a dashboard tourism going on right now, but those dashboards don't mean anything if you don't actually get it fixed before the attackers get to it. Nehal Chokshi: Okay. And Joo Mi, are there any headwinds leading to expectation of no change in NDER in your calendar '26 guidance -- that's embedded in calendar '26 guidance? Joo Mi Kim: Yes. Our guidance is assuming no material change in net dollar expansion rate. You could see that it's always kind of gone up a quarter or down a quarter in the past couple of years. And right now, us being -- starting out the year ending 2025 at 103, we don't anticipate a material change to that rate. Nehal Chokshi: But why is that? Why are you expecting no change? Joo Mi Kim: Our guidance is informed by what we're seeing in the pipeline today and what we're expecting based on our existing customers, what they anticipate buying more of or how they're thinking about spending more with Qualys in 2026. Our preliminary discussions and view into the outlook today implies that assuming kind of similar in line gross dollar retention, the expectations from an upsell standpoint and then, of course, a new business, what we expect to land from a new logo perspective, this is all informing our guidance and the way we look at things. Sumedh Thakar: And that's the base case. Now our goal will be to continue to improve our execution on the ETM and ROC, so the customers getting to know that. And that, to me, remains the upside in -- for the business is with federal -- now with our FedRAMP High that we got and the federal space partners, et cetera. So I think that's kind of where we are with just assuming 103 as we see it right now, but we continue to work on the upside in the business that we can potentially have. Nehal Chokshi: So does that imply that your expectations -- the baseline expectations that ETM incremental penetration into installed base continues at this relatively slow pace that we're not hitting an inflection point yet? Sumedh Thakar: I think it's very early. So like we said at the end of the last year where we had started with POCs, we're super encouraged with what we are seeing with the POCs and the conversion that we're having. But again, it's very early, right? We're talking about customers that are early adopters. So it's encouraging, but we're not -- we haven't had enough of those to really map out a confirmed trajectory of how that is going to go. So I think as we execute better in the first couple of quarters, that's where we will get to understand even better. Now that's where, as Joo Mi talked about in the past, we will start to provide guidance on how ETM is going to -- how ETM is going for us, starting the Q1 earnings call for 2026. And so that will allow you to sort of track where we're starting and then how we're going to expand -- go through the next couple of years on that big opportunity that we see right now. Operator: And our next question will come from Rudy Kessinger with D.A. Davidson. Rudy Kessinger: Joo Mi, I think you said in response to Jonathan's questions earlier. I think you said baseline remains around 7% to 8%. I'm not sure if you're referring to the revenue guide for this year or if that was also your expectation for roughly what we should expect for current calculated billings for the year. Joo Mi Kim: I would say that we don't give specific guidance for current billings, but our expectation is that current billings growth rate will be more or less in line with the revenue growth rate. So 7% to 8% for both for full year 2026. Rudy Kessinger: Yes. Okay. Got it. And then just maybe kind of a follow-up to the past question. Certainly, it sounds like there's a lot of optimism about the early ETM interest and adoption and whatnot. But at the same time, it's still just being too early to maybe drive an improvement in the net expansion rate or the overall revenue growth rate. I guess just -- I don't know -- we've been hearing that for a few quarters now. Is -- I mean, what needs to go right, whether it's with the channel or utilizing QFlex? Is there a potential that this year we could see enough adoption that we do see expansion rate pick up or revenue accelerate? Or is that unlikely just based on the current pipeline? Sumedh Thakar: Yes. I mean all of that needs to go right. I think we've done a lot of innovation. The products are coming out now, which is great. The Agent Val is going to be very interesting for us. And the recent identity solution is also very interesting. I think a key part of our strategy definitely has been working partners. And so as an example, one of the key areas of focus right now where we are certifying more mROC partners as an example. And we are getting these partners up to speed and we're getting the partners trained and helping them create their offerings around the Risk Operations Center. And the idea here really is that these partners then with those services actually can bring us net new business, can bring us upsell opportunities because they don't have to have a replacement conversation maybe with the existing vendor that they might have been selling for the last couple of years. They can actually create a service for risk management with mROC on top of their existing VM solution, as an example, by pulling that data into Qualys and then ETM and then charging the customer for the management and the consolidation of their various risk factors, et cetera. So that's an area that we are looking forward to as that matures and as we are in the early days of getting those partners up to speed. Once those partners then start to take those offerings to their customers, that response will also help us see how that is gaining traction. Again, early conversations have been great. We've got to see that in the way that these customers -- these partners are bringing us some of their business. I think QFlex has been really a positive thing for when we are taking a customer who has VMDR and then converting over to ETM. That has actually been a really positive thing for customers so that they can kind of build in sort of certain amount of growth, and they can look at the ability to take the journey of a Risk Operations Center at that pace. And then, of course, we just got our FedRAMP High end of last year. So that's allowed us to have more conversations for the 2026 budget cycle for federal that obviously were not in line in time for 2025. So those conversations after FedRAMP High for '26, '27 are also going to be quite interesting for us. as potential upside. And so I think as Joo Mi has provided sort of the guidance that we see as of now, we're excited about some of these things that can potentially create the opportunity for us to do better than that. Operator: And our next question will come from Matthew Hedberg with RBC Capital. Michael Steven Richards: This is Mike Richards on for Matt. Keeping a little high level here, Anthropic's new model release today put an emphasis on cybersecurity and specifically, the model's performance for vulnerability discovery and patching. So I was just wondering, if you could talk about what you believe these developments mean for Qualys and maybe the cybersecurity industry more broadly as model providers look to potentially go deeper into cybersecurity. Sumedh Thakar: Yes. Great question. I think today's announcement was great in terms of that understanding the fact that autonomous AI building the coding process or when you look at the code of a software and pointing agentic AI to that, is definitely something that the attackers are looking to leverage, and they're leveraging as well to be able to discover vulnerabilities in the codebase. Now having the ability to discover a vulnerability in an on open-source code is one thing, which is what Anthropic is helping. But once you find that this particular code has a particular vulnerability that could be exploited, you need to go find all of the machines running that software all over the customer's environment, internally, externally. And then the ability to test that after all the controls that the customer has put in place in their environment on that machine, is that actually exploitable, each individual customer's environment, each individual customer's machine. And that's the part where I think this -- the Anthropic development actually really helps again stress the reason why after a particular vulnerability is discovered, an exploit is discovered, why it is important to use an ETM agentic AI type solution to very quickly validate that in your environment and then actually fix it and apply a fix autonomously because when you're using AI to find these particular vulnerabilities and attackers are going to -- are using the same model, they are going to try to do their best to very quickly exploit those. So we -- what we feel is we are empowering our customers with ETM and with somebody like Agent Val to actually stay ahead of the gap between discovery of a vulnerability to the exploitation that we can actually leverage ETM with Agent Val to then actually find this issue in their specific environment on their specific machine and then protect them very quickly by actually being able to patch that. And so that's really the main differentiator. So I think in a way, it's great to show the power of what AI is able to provide for the attackers to find issues in open-source. And then it signifies even more the value of the ETM platform to actually find that during a run time and not just in the codebase as Anthropic is doing today. Operator: And the next question will come from Patrick Colville with Scotiabank. William Vandrick: This is Joe Vandrick on for Patrick Colville. Can you help us understand -- I know you kind of touched on this, but can you help us just better understand the strategy you're taking to get customers to adopt not just vulnerability management, but also prioritization and Patch Management. And then I'm wondering, is there a way to think about what percentage of the customer base is just using that basic functionality of vulnerability management? Sumedh Thakar: Yes, great question. I think if you kind of look at what we have been doing with Patch Management, by the way, and if you look at -- we're very happy to see the adoption of Patch Management, Cybersecurity Asset Management as the capabilities that sort of take that vanilla VMDR and add more execution around -- or execution for success around those list of CVEs, we're pretty happy and excited to see that. And so today with the ability to provide customers with things like average exposure window, the ability to provide customers the way that, that particular vulnerability actually impacts their particular environment. As an example, your typical threat exposure management solutions will give you a score, a risk score, and they will say that this particular issue has a risk -- or this particular asset has a risk score of 900 on 1,000 and another one has a 750 on 1,000, which one will you fix first? If you just go by the risk score as an example, you're going to see that maybe that risk score of 900 on 1,000 is on a machine that makes you $2 million a year, but the 750 is on one that makes you $500 million a year, immediately your prioritization switches and is exactly the opposite of what your exposure management solution give you because now you added a dollar value. And once you have that and you know that you're potentially going to have a loss of $500 million because of the exploit of this vulnerability, the next thing that customers want to be able to do is how quickly can I protect myself from making sure that I don't lose that $500 million? And that's where a integrated patching and integrated mitigation solution like Qualys is super impactful for them because now they don't waste time because once attackers are starting to exploit vulnerabilities, it is just a -- you're sitting duck with an open window and the quicker you can close that window, the better it is going to be. And our customers are really seeing that. That's why their adoption of Patch Management has been increasing, 140 million patches in the last 1 year is quite a milestone for us. And the ability to sort of give them that visibility to say that you can -- with this platform, you're not just exposing your exposure, you're actually fixing it is a great story. And our partners are also excited about the ability to not just provide service around more visibility. The ability to actually be the partner for the customer that gets them an outcome of actually the risk reduced is a differentiator. And that's kind of where we are looking forward to continuing our innovation around the exploit validation and the mitigation and Patch Management solution as well as awareness building around the Risk Operations Center is an area for focus for us. And then along the way, risks come from cloud. They come from your standard virtual machines, they come from cloud. That's where we have focused a lot. They come from identities. We have ISPM for that. They come from misconfigurations and we have Policy Audit for that. They come from AI now for which we have TotalAI as an example. So we continue to expand ways to bring more assets into ETM. At the same time, we continue to innovate on ways to absolutely get to the final outcome of actually releasing risk with automation and agentic AI as fast as we can. And that honestly is really, in my mind, a big differentiator. William Vandrick: That makes sense. And if I could sneak in one more. I think you mentioned that you're still in beta testing for QFlex and that you're going to leverage it for select partners. Is that just timing? Or are you not planning to go customer-wide with that pricing model? Joo Mi Kim: Yes. We went beta with QFlex last year. And so we understand how it could be very additive to sell a cohort of customers. So we're rolling it out on a case-by-case basis because we want to create a win-win scenario for us, right? If for a customer, we feel like they would really benefit and increase their spend with us by giving them this flexibility, we're more than happy to work with them through -- whether it's through a partner or directly with us. For broadly speaking, we don't want to be in a situation where unintentionally, it results in a downsell for us and then also, they don't have the ability to try out other products because they're maximizing their budget and thinking through it from that perspective. So right now, it's in beta, but in the longer term, we do plan on going to GA with that and potentially with a slightly tweaked structure. Operator: And our next question will come from Yun Kim with Loop Capital. Yun Suk Kim: Sumedh, I think you touched upon some of my questions already, but how engaged are partners involved in core VM renewals? Or are they -- or a lot of them, the newer partners that you attracted last year, are they more about selling new products? Sumedh Thakar: Yes. The mROC partners that we work with are pretty excited. We're starting to see these partners launch their own services for Risk Operations Center, which obviously takes some time because they have to come up with the brochures for the services, staff them with the right experts for risk quantification, et cetera. But what they are excited about is that instead of just looking at, can I get another $0.05, $0.10 of margin on $1, the ability to say that with ROC, they can actually offer higher value services. The service you can offer to a CISO is, hey, here's we're going to give you a business-oriented cyber risk visibility deck that you can take to your Board every quarter that's going to make you look very smart in front of the Board, is a significant value and they can charge multiple dollars, as an example, for those services around ETM, which they cannot necessarily do around other areas. And with the agentic capabilities built in, the partners are excited that, that actually can also reduce the spend that they have to do to staff their services teams with people if agentic AI capabilities in the platform can get them a patch Tuesday report within 24 hours versus taking 2 weeks for a consultant to manually go and create Excel sheets to do things like that. So very exciting early conversations. We're already starting to see some interesting wins, though it's early days, with new business and existing business with those partners that understand the risk story and positioning the broader risk management rather than just, okay, here's another list of vulnerabilities that I can provide you. Those conversations are very positive. And so as I said, we're really focused right now on our GTM efforts, around training these partners, around partnering with them and introducing them to customers as they introduce us to prospects, et cetera. And as that progresses, I'm excited about the potential that partners can bring customers to us, even if that customer might have another VM scanning solution, they can keep their solution, and they can actually bring that customer to us and the partner can make multiple dollars on every dollar of ETM that they sell for us. Yun Suk Kim: Okay. Great. That's very helpful. Joo Mi, if you can remind us how renewals are lined up for the year, either it's skewed towards second half of the year, consistent with the prior years? Or with the newer products coming in, do you see some early renewals or renewals mix kind of changing up this year? Joo Mi Kim: Right now, our expectation is that the seasonality remains the same. So same thing as what you saw in 2025. It will be skewed towards the second half of 2026. Operator: And the next question will come from Junaid Siddiqui with Truist. Junaid Siddiqui: Sumedh, you've talked about the Risk Operations Center's focus on proactive risk management versus the SOC's focus on detection after the breach being a major differentiator. Just wanted to ask, are you starting to see budgets flow more towards proactive security versus reactive detection and response? Sumedh Thakar: Yes. Thanks, Junaid, for that question. We definitely see the conversations with our partners who said like, look, I've invested a lot over the last few years in EDR, XDR, post-breach solutions around SOC. And of course, there is some focus now on agentic AI SOC solutions that they're looking at to improve that even further. But what they feel is that, on the pre-breach side, they have invested, but they've invested in a bunch of, I call them, SPM tools, which is, I have DSPM, I have SSPM, I have CSPM, but all of them are just giving you multiple dashboards. And there is definitely a bit of a fatigue with these customers saying, these dashboards are not helping me prevent a breach. While I have put in place a protection on the post-breach side to try to find attackers, if I can do a better job and operationalize my workflow so that I can take all these findings from multiple tools. You have these code scanners, which are kind of like false positive service sometimes because they give you so many findings. The conversations definitely are moving in that. There is positive conversation on leveraging budget that they have or asking for more budget over the next couple of years to move in that direction. And the early adoption of ETM that we are seeing is necessary -- essentially, we're going and getting budget but they are not always moving away from something they've already budgeted for. So some customers have started to put budget aside for exposure management, so to say, RBVM. But when we show them ROC, which is much bigger than exposure management and much more than RBVM, they are actually able to work with us to shift on that budget. So we definitely feel like there is more of a focus last year and into this year on, hey, we need to do a better job at proactive risk management. We've done a lot of work around the reactive side. Let's focus to get better on the proactive side. Operator: And the next question will come from Jason Zhang with Wolfe Research. Joshua Tilton: This is Joshua Tilton from Wolfe Research. Can you guys hear me? Sumedh Thakar: Yes, Josh. Joshua Tilton: Awesome. Sumedh, I want to follow up on your answer when you were asked about kind of Anthropic blog post today on cybersecurity. And I just -- I want to reask the question, but I want to ask it in a much more simpler way. Is the way to think about it that a lot of the functionality that Anthropic was talking to was more around application security testing. And kind of some of the vulnerability discovery that happens before you would use a traditional VM tool. And again, I just play a security expert on TV. So if I'm thinking about it the wrong way, please let me know. But is that kind of the right way to think about it? Sumedh Thakar: Yes. Right now, a lot of their focus is on looking at open-source code and looking -- going through the codebase to look at commit logs, et cetera, around that code to find the vulnerabilities in that particular codebase. Now that codebase is then compiled into some piece of application or software, which then is running all over the place across millions of machines in different customer environments behind different firewalls, et cetera. So generally, that's sort of where we see Qualys focus is more around once those vulnerabilities are discovered or attackers starting to use those, how do we then quickly assess those in a run time rather than a application code discovery time, which is where a lot of these AI agents are focusing on. Joshua Tilton: Makes total sense. And then maybe just a quick follow-up for Joo Mi. I think in the past, there's been several leadership changes throughout the years where there was always a plan to kind of invest to reignite growth. And I'm just curious, when we think about the EPS guidance for the full year, how do you think about the level of investment for '26 that's baked into that EPS guidance versus prior years when maybe you've had one of these kinds of new CRO in place or other leadership roles being filled? Joo Mi Kim: We're really pleased to start off the year strong with all key positions filled with a strong executive team who's tenured. So keeping that in mind, last year, we had guided to low-40s EBITDA margin coming off of 2024's 47%. So the implied gap or implied margin contraction was significantly higher than what you're seeing today. We closed out the year 2025 with 47% EBITDA margin. We're guiding to mid-40s for EBITDA. So a slight contraction, but it's not as significant as what we had guided to at the beginning of 2025. Operator: Thank you. This does conclude today's question-and-answer session, and this also concludes today's conference call. Thank you so much for participating, and you may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Power Integrations' Q4 Earnings Call. [Operator Instructions] I will now hand the call over to Joe Shiffler, Senior Director of Investor Relations. Please go ahead. Joe Shiffler: Thank you, Chelsea. Good afternoon, everyone. Thanks for joining us. With me on the call are Jen Lloyd, our CEO; and Nancy Erba, who joined Power Integrations last month as CFO. After Jen and Nancy's prepared remarks, we'll open it up for questions. Our discussion today will include forward-looking statements denoted by words like will, expect, should, outlook, forecast and similar expressions that look toward future events or performance. Such statements are subject to risks that may cause actual results to differ from those projected or implied. Such risks are discussed in today's press release and in our most recent Form 10-K filed with the SEC on February 7, 2025. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures in the fourth quarter exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, expenses associated with an employment litigation matter and the tax effects of these items. A reconciliation of non-GAAP measures to our GAAP results is included in today's press release. This call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Now I'll turn it over to Jen. Jennifer Lloyd: Thanks, Joe, and good afternoon, everybody. Overall, our fourth quarter results were largely in line with our expectations with a revenue of $103 million and non-GAAP earnings of $0.23 per share. I'm also pleased to report that we returned to growth in 2025. Full year revenue was up 6%, non-GAAP EPS grew by 8%, and we generated $112 million of cash flow from operations, up $30 million from the prior year. Last quarter, I shared that OpEx control would be an immediate priority, and we demonstrated that in Q4, reducing non-GAAP expenses by more than $2 million from the prior quarter. We are announcing today that we carried out a restructuring earlier this week, reducing our global workforce by about 7%. While such decisions are difficult, we took this action to better align expenses with revenue. This creates flexibility to invest in products, people and markets that will create long-term value for shareholders. Looking at recent business trends, booking improved significantly in Q4 after slowing in the prior quarter, partly as a result of excess appliance inventory shipped into the U.S. last year ahead of the tariffs. Encouragingly, the largest U.S. appliance OEM reported last week that this preloaded inventory has largely dissipated. Part of the recent improvement in orders relates to appliances, and we expect sequential growth in our consumer category in Q1. However, our broader view is that appliance demand continues to face headwinds, including low existing home sales in the U.S., the effect of tariffs on appliance prices and ongoing softness in China housing. The industrial market has been a key driver of the recent uptick in bookings, and we expect industrial to be our fastest-growing market again in 2026, starting with a strong Q1. Overall, we generated 10% growth in design win value in 2025 with particular strength in GaN and high-power products. We are also encouraged by customers' response to our new TinySwitch-5 ICs with a healthy pipeline of designs scheduled to begin production in the second half of 2026. Additionally, our multi-output GaN-based InnoMux-2 integrated circuits are seeing strong design traction in the TV market. These and other upcoming products will enable us to sustain and grow our core IC business even as we shift our investment priorities towards markets like AI data center, industrial and automotive, where our expertise is helping customers solve their toughest power challenges. Advanced high-voltage technologies are essential to the emerging power ecosystem. Our solutions span from the generation of renewable energy to long-distance DC transmission to battery storage to smart meters at the edge of the grid to the efficient use of power in homes, factories, data centers and vehicles. While it will take time to fully align our R&D and go-to-market efforts with our long-term strategic plan, recent results demonstrate that we have already built momentum in some of the markets we are targeting for long-term growth. For example, revenue outside of cell phone applications has averaged 12% growth over the past 2 years. And in 2025, industrial revenue grew 15%, driven by the big picture themes that are integral to our growth strategy, electrification, renewable energy and grid modernization. These themes are especially relevant in our high-power industrial business, which had a record year with double-digit growth, driven by electric rail, where we have a very strong position in the India locomotive market and by high-voltage DC transmission projects delivering renewable energy to the grid. We expect recent design wins to drive continued growth for high power in 2026 and beyond. Some Q4 customer wins included a leading European maker of inverters for utility scale solar and battery storage, commuter trains and street cars in Europe and Africa and multiple wins for power grid projects in India. In our industrial IC business, we saw double-digit growth in metering last year due to our leading position in deployments of smart meters in markets such as India and Japan. Our ICs enable compact, reliable designs with low standby consumption, making them ideal for meters, and we're now seeing customers migrate to our 900 and 1,250-volt GaN products for additional protection against the voltage swings common on India's grid. Another area of growth in our industrial business last year was power tools as lawn equipment and other tools continue to migrate to battery power. In automotive, we continue to make steady progress penetrating the EV market with our auto qualified InnoSwitch products for inverter emergency power supplies. We secured a design win in Q4 at a top Chinese Tier 1 supplying a leading EV maker and began production just this week on a design at the #1 European EV carmaker. Another highlight of our 2025 results was the continued success of our PowiGaN technology in the power supply market. Revenue from PowiGaN products grew more than 40% for the year. Notable GaN design wins in Q4 included a dual USB-C charging port. Charging ports integrated with AC outlets require both high power density and low standby consumption, making them an ideal application for our highly integrated GaN solutions. Also in Q4, we began production on a new server auxiliary design for a U.S. cloud services provider using a GaN-based InnoSwitch. As we discussed on last quarter's call, auxiliary power is a key aspect of our engagements with data center customers, including with NVIDIA on their next-gen 800-volt DC architecture, where our 1,700-volt GaN solutions offer a compelling alternative to silicon carbide. As I've met with shareholders during my first 6 months as CEO, I've been clear about the fact that we need to reorient our organization to ensure that our strong technology foundation translates to success in the market. That means a more customer-focused approach to product development and faster time to market. Changes like these take time, but we are moving with urgency. We are streamlining our R&D pipeline to focus on delivering our highest priority and highest value products in time to intersect the market. We've also moved quickly to strengthen the team to better leverage our unique capabilities in high voltage and deliver the right products for the evolving power ecosystem. New members of our team include Chris Jacobs, who joined us last month from Micron Technology to head up Marketing and Product Strategy. We welcomed Julie Currie, our new Head of People and Culture Transformation. And Nancy Erba as CFO, who you'll hear from in a moment. We have also bolstered our strong innovation capabilities with targeted hires in key technical roles. I'm very excited about the depth and breadth of experience in our team, and I'm confident in our ability to serve customers and create long-term sustainable value for shareholders. With that, I'll turn the call over to Nancy, who joined us 1 month ago as CFO. Nancy is a seasoned public company CFO, having served in the role for 6 years at Infinera until its sale to Nokia last year and previously as CFO at Immersion. Those CFO roles followed a long run of senior leadership positions at Seagate Technology. So I'm thrilled to have her as part of our executive leadership team. Nancy? Nancy Erba: Thanks, Jen, and good afternoon, everyone. I'm excited to be part of the POWI team, and I look forward to meeting many of our investors and analysts in the weeks and months ahead. I'll share a few observations from my first month in the CFO role and after a brief review of the results and the outlook. Today, I'll focus primarily on the non-GAAP numbers, which are reconciled to GAAP in the tables included with our press release and 8-K. Power Integrations had a solid year in 2025, returning to top and bottom line growth and generating healthy cash flow. Revenue fluctuated more than usual over the course of the year as tariffs disrupted the appliance market, and we experienced some lumpiness in our industrial business. But ultimately, revenue increased by 6% for the year with 3 of the 4 end market categories increasing year-over-year and industrial positioned for continued strong growth in 2026. Fourth quarter revenue was $103 million, down 13% from the prior quarter. On a sell-through basis, sales were down only 3% from the prior quarter as sell-through exceeded sell-in and we worked down channel inventory built in Q3. Channel inventory for Q4 fell by about half a week to 9.4 weeks. Looking at the end market categories. Industrial revenue was down 23% sequentially after 2 very strong quarters, reflecting recent seasonality and variability in customer order patterns. Overall, though, our industrial business had an outstanding year with growth of 15%. Consumer revenue, which is predominantly from appliances, was down 13% sequentially in Q4, largely reflecting the overhang of appliance inventories shipped in the U.S. in the first half of 2025 ahead of the tariffs. That effect can be seen clearly in the first half over second half comparison with consumer revenue falling by more than 15% half-over-half. In spite of that volatility, consumer revenue was slightly up for the full year. Revenue from the computer category was down 5% in Q4 on lower tablet revenue, offset by higher sales for notebooks. For the year, computer revenue was down 2%. Communications revenue grew 15% sequentially in Q4 on new design ramps in cell phone and the India 5G broadband business and for the year, grew 6%. In summary, revenue mix for the quarter was 37% industrial, 34% consumer, 15% communications and 14% computer. This mix was less favorable than the assumptions behind the Q4 gross margin guidance. And as a result, non-GAAP gross margins came in slightly below the range set at 53.3%. However, non-GAAP operating expenses of $45 million came in well below the outlook of $47 million, primarily driven by lower hiring and discretionary expense control efforts. Curtailing OpEx growth to a level well below revenue growth is a priority for the company and a key area of focus for me this year. Our Q4 results and the restructuring we carried out this week are important steps in that direction. Moving to tax. We received credits in Q4 related to new solar generating capacity we've recently turned on at our San Jose headquarters. These credits plus a higher-than-expected R&D tax credit brought our full year non-GAAP tax rate down to 2%, resulting in a negative 3% tax rate for the fourth quarter. Non-GAAP net income for the quarter was $12.7 million or $0.23 per diluted share, including a benefit of about $0.02 from the lower-than-expected tax rate. I will mention one item in the GAAP results. Stock-based compensation expense was negative in the fourth quarter, reflecting a reduction in the expected vesting of short- and long-term performance-based shares. As a result, GAAP EPS for the quarter was $0.24, $0.01 higher than the non-GAAP number. Turning to the balance sheet and cash flow. Cash flow from operations was $26 million for the quarter and CapEx was $7 million. Inventories on the balance sheet increased by $2 million during the quarter, while days of inventory on hand rose to 313, reflecting the lower revenue number. Importantly, wafer inventory came down in 2025, and we expect that, along with revenue growth to continue to contribute to a reduction in overall inventory days over the course of 2026. Moving now to the full year results. Revenue was up 6% for the year. Non-GAAP gross margin was 55.1%, up 70 basis points from the prior year, mainly driven by higher industrial revenues as a percentage of our mix with some additional benefit from higher back-end manufacturing volumes. Non-GAAP OpEx increased by 5% and non-GAAP operating margin increased by 100 basis points to 13.9%. Non-GAAP EPS was of $1.25 was up 8% for the year. The strength of POWI's balance sheet and cash flow generation continues to be compelling. In 2025, cash flow from operations was $112 million, while CapEx was $24 million, resulting in free cash flow of $87 million, demonstrating that our business continues to generate healthy cash flow. For the year, we returned $145 million to shareholders via buybacks and dividends or 167% of our free cash flow. Next, I'll review the first quarter outlook. We expect first quarter revenue to be between $104 million and $109 million. I expect non-GAAP gross margin to be between 53% and 54%. Mix should be favorable relative to Q4 with higher industrial and consumer revenue as a percentage of the total. Non-GAAP operating expenses for Q1 should be in a range of $46 million, plus or minus $0.5 million. The increase from Q1 reflects the resumption of FICA payments, offset by a partial quarter of impact of the restructuring, which reduced our global workforce by about 7%. Our GAAP results for the first quarter will include a restructuring charge of between $3.5 million and $4 million. Our effective tax rate steps up in 2026 as the benefit of solar credits is nonrecurring. And more significantly, the tax rate on foreign earnings increases as specified in the 2017 tax reform. I expect our effective tax rate for the quarter and for the year to be in the range of 7% to 8%. Before we open it up for Q&A, I'll offer a few thoughts on my first month in the CFO role. I'm excited to join POWI's management team under Jen's leadership at this very pivotals time for the company. Our technology is creating increasing value for our customers and giving us access to expanding new markets like automotive and AI data center. I see a clear opportunity to translate that into profitable growth for our shareholders. As CFO, my initial focus will be on establishing rigorous operating cadences, strengthening processes and leveraging automation to drive operational efficiency and scalability. And of course, I also want to recognize the Power Integrations finance team. They are a highly capable, disciplined team and an important asset to the organization. For our analysts and shareholders on the phone, I look forward to meeting you in the coming weeks and months. And now Chelsea, let's begin the Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Ross Seymore with Deutsche Bank. Ross Seymore: I guess, first, welcome to Nancy. And then I guess my first question, one near term and then the follow-up would be a longer-term one. In the near-term side of things, you talked, Jen, about the bookings increasing significantly in the fourth quarter. It's good to see you returning to growth in your first quarter guide, but it still seems like the channel inventory is a little bit high. So can you just talk about the plans that you have to burn that and what it might mean to the subsegment guides for the first quarter and maybe expectations of the growth rate for the year? Nancy Erba: Yes. Ross, this is Nancy. I'll start and then Jen can jump in. Certainly, we're glad to see the inventory come down a bit, as you mentioned. As we look forward to the full year of '26, part of the action plan that I laid out in terms of my areas of focus are really on these I'll say, rigorous cadences. We'll be looking at inventory, both in terms of weeks in the channel, but absolute value of inventory on the balance sheet and driving those plans through the year. We do expect, based on our plan today to see that come down to, I'll say, a healthier level. But certainly, it's dependent upon the Q1 and the first half bookings, the mix of those bookings and the timing and how much of the turn business we have to get each quarter. But net-net, it is absolutely on our list of key objectives to be able to bring that overall level of inventory and the weeks on hand back to a more healthy level in the channel. Ross Seymore: Great. And I guess as my follow-up question more on a longer-term basis. You talked about the high-power business, auto, data center, et cetera, and you mentioned GaN going up 40%. As you look over the next couple of years, when do you think those items are going to be meaningful enough in size to start moving the aggregate revenues and accelerating the growth? Jennifer Lloyd: Yes. So you mentioned 4 high-power, auto, data center and GaN. I think GaN -- I'll just start backwards. GaN is pretty meaningful today. And we mentioned in the call, growing 40% year-over-year this year. So it's becoming meaningful. High power is a very meaningful driver of our industrial business. I think we're already there, and we see continued acceleration of that next year, and that will support the industrial growth. Automotive and data center are going to take more time. I think we're doing well there. In automotive, we're seeing the wins. We mentioned some earlier. We are seeing that the market is a bit slower than we would have liked, and we're also seeing some design ramps push out, but we still see that we continue to win designs. And so that's going to take a little bit of time to materialize. And then data center, I think we're making good progress. I think we're engaging well across multiple customers and opportunities. We're developing our products and demonstrating capabilities to those customers and moving with urgency there. But as we have talked about, that's probably our longest-term play. So that -- we won't see that be material for a couple of years. Operator: Your next question comes from David Williams with Benchmark. David Williams: Let me also offer my welcome to Nancy. I guess maybe first, as you guys kind of look across the landscape and just kind of how things are developing here, it feels like overall, the demand environment is generally improving, just kind of depending on where you're positioned. But I guess if you look across all of your segments, how do you think -- and where do you think we are in the cycle in terms of are we at the bottom coming off the top or at the bottom turning here? Or are we still some time away just kind of given the inventory digestion that needs to happen? Jennifer Lloyd: Yes. Maybe I'll start and then Nancy can add. I mean, I do think the one area that is still we're being conservative on is in the consumer business with appliances. And we have seen improvement there, but we are also well aware there's still quite a few headwinds there. So the way we're looking at it is that will -- if things like the housing market takes off, interest rates come down, that would be upside for us. Nancy, do you want to add anything to that? Nancy Erba: Yes. I think we're really glad to have returned to growth in 2025. I think for '26, we're planning on, I'll say, similar growth levels year-over-year. As Jen said, though, it is very early in the year, and we're going to have to see how demand plays out in the first half. It has been lumpy in certain areas to date. But net-net, we're going to be planning for similar growth. However, I will say we're going to be cautious in our investments until we see those bookings really taking form and the step-ups that we expect to see, making sure that they are happening before we dive in deeper to certain investment areas. So you're going to see us be cautious on that as we are in '26. But we are optimistic over -- as Jen said, over the next couple of years, the markets that we're entering have great opportunity for us to step up that growth rate in the outer years. David Williams: Okay. Great. And then maybe just some color around your reorganization. And I know you talked about reprioritizing R&D efforts and accelerating that time to market. But if we kind of look at it, it feels like maybe we're starting to see some of that already take hold. Can you talk maybe about how we should see this unfold over the next couple of quarters and maybe the next year in terms of how this repositioning is helping? Jennifer Lloyd: Yes, a couple of things. I mean some of it is the restructuring and it's giving us the flexibility to strengthen. So that will continue to play out and everything there is good. In terms of the R&D, we also are bringing some real focus into the team. And acting with greater urgency and more agility, and that's a key part of how we're expecting to accelerate growth going forward. So I think a good example of that actually is in the data center space where we're working with NVIDIA. We've got much more openness in terms of our road maps and our product development discussions. And we are pivoting our focus areas so that we can address the opportunities and really intersect where the customer needs are. So there's the restructuring piece of it, but there's also the driving the change in terms of how we behave and bring a customer-centric view into the product development organization. Operator: Your next question comes from Tore Svanberg of Stifel. Tore Svanberg: And let me add my welcome to Nancy as well. I guess my first question is on automotive. It sounds like it's finally starting to contribute to some revenues. I think maybe there's been some talks about maybe this being sort of like low tens of millions of revenues, at least in the beginning. I mean, is that a number we can expect this year? Or given what you said before about some potential delays, that's more of a 2027 target at this point? Jennifer Lloyd: Yes. I think the latter is fair. Nancy Erba: Yes. I think it has the potential, right? But again, we need to see these wins start transpiring into the volumes that are needed. But there have been some delays in the EV market. We are pleased with the traction and the customer wins that we've seen. We're going to do everything we can to drive to that level. But whether it's 12 months or 18 months, I think that's the window we're thinking about. Tore Svanberg: Very good. And on the OpEx, I think you mentioned the sort of only half a quarter benefit from the restructuring. So you gave guidance, obviously, for the March quarter. So should we expect OpEx to come down by a few more million dollars in the June quarter then? Nancy Erba: I would think for the year, right, I'll frame it this way, right? If you look at revenue growth historically and OpEx growth, they've been fairly close. We're trying to cut that to get to about half. So for the year, I would think in the, call it, $3 million to $5 million range. And again, it was 7% of employees that were impacted. And we are continuing, though, to do work around the full business model and understanding right, where we have leverage that perhaps could be better utilized to focus on the areas that we are expanding into that we think long term drives the greatest shareholder value. So in addition to the actions that we took, we are going to be assessing really all of the programs, all of the new programs, as Jen mentioned, with Chris coming on board and really making sure that those prioritizations are exactly where we need to be and that the return on those investments are measured and we hold ourselves accountable to them as we are running the operation. The other piece of that in terms of customer centricity and really focusing on the customers' needs is the mix in terms of our go-to-market investments versus R&D and G&A and making sure that we are properly supporting our customers as we are out trying to move into these new opportunities for the company. Tore Svanberg: Good. And just my last question, maybe related to what you just discussed there. So I mean, the consumer segment seems to have been soft for a while now. I mean I'm glad to see the bookings coming back and maybe the inventory being adjusted. But as you continue to do this restructuring and thinking about your end markets, are there certain areas within consumer that you would perhaps consider exiting? Or do you still see that as an important growth segment for the company? Jennifer Lloyd: I don't think there's anywhere right now that we've identified in terms of exiting. It will still be a growth segment for us. And as we consider the whole portfolio of our investments, we are looking at what's the appropriate investment based on the growth rate that we're that we expect for that. So over time, we'll be pivoting towards the highest growth segments. For now, it's an important business for us to make sure that we support. Operator: [Operator Instructions] Your next question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: I guess for me, first of all, if you could maybe talk a little bit more about the cloud provider win for aux power. And then AI more generally, can you talk about broadening this portfolio into other applications beyond aux power and what you think that might mean for the top line overall? Jennifer Lloyd: Okay. So the first question was about the aux power win. cloud provider. So as you know, I think we've talked about before, aux is a socket for us that we see across a number of applications. And that win is an important validation of the latest products that we have. Aux power in general, isn't the largest opportunity typically as you talk about data center type systems. So over time, we hope to use that as an entry point with customers, but expect to expand our footprint. So it's kind of a -- it's a good entry socket across a number of applications. Christopher Rolland: Yes. I guess I was just asking what sockets might be next like, yes, if you want to hit that, and then I do have a follow-up. Jennifer Lloyd: What sockets might be next for aux power... Christopher Rolland: What no, no, no. What sockets and applications for your products, GaN and/or silicon within the data center 800 volt at NVIDIA or XPU infrastructure? Jennifer Lloyd: Yes. Got it. Got it. Yes. No, I mean, aux power is just a small part of the system. So we are looking to intersect the main power supplies where you'd expect a much more significant SAM there, and that's in development now. Christopher Rolland: Okay. Understood. And then maybe industrial, I think you talked about '26 that being your fastest area of growth. Perhaps talk about the underpinnings there. What do you think is going to drive that market-leading growth for you guys? Does it have anything to do with a clean channel and/or channel fill? Any other details underpinning that optimism would be great. Jennifer Lloyd: Yes. I mean I think really a lot of the optimism comes from our high-power business that grew really well this year. I think our go-to-market efforts there are strong, and we are expecting that to be a significant driver for next year. So we talked about that earlier. We've seen really good growth in our metering business. We're still expecting that to drive growth next year. So really, all of the industrial growth areas this year, we're expecting that to continue, and we have the win growth to support that. Operator: There are no further questions at this time. I will now turn the call back to Joe Shiffler for closing remarks. Joe Shiffler: All right. Thank you, Chelsea. Thanks, everyone, for listening. I know it's a busy afternoon of earnings. So we appreciate you tuning in. There will be a replay of this call available on our website that's investors.power.com. Thank you again, and good afternoon. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the 2025 Fourth Quarter Genpact Limited Earnings Conference Call. My name is Carmen, and I will be your conference moderator for today. We will conduct a question and answer session towards the end of this conference call. As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made available on the IR section of Genpact's website. I would now like to turn the call over to Krista Bessinger, Head of Investor Relations at Genpact. Please proceed. Krista Bessinger: Thank you, operator. Good afternoon, everyone, and welcome to Genpact's Q4 2025 Earnings Conference Call. We hope you have had a chance to read our earnings press release posted on the Investor Relations section of our website genpact.com. Today, we have with us Balkrishan Kalra, President and CEO, and Michael Weiner, Chief Financial Officer. BK will start with an overview of our results, and then Mike will cover our financial performance in greater detail before we take your questions. Please note that during this call, we will make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions, and expectations as of today, which may change over time. Actual results could differ materially due to a number of important risks and uncertainties, including the risk factors in our 10-Ks and 10-Q filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings press release. These non-GAAP measures are not intended to be a substitute for our GAAP results. More details on our constant currency growth rates can also be found in our earnings press release and fact sheet, which are posted to our investor relations website. And finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay and transcript will be available on our website in a few hours. And with that, I would like to turn it over to BK. Balkrishan Kalra: Hello, everyone. And thank you for joining us today. We delivered a strong close to a record year for Genpact. Focused execution, accelerating innovation, and broad-based demand drove $5.08 billion in revenue, up 6.6% for 2025. Advanced Technology Solutions revenue grew 17% to $1.2 billion, now accounting for 24% of our total revenue. We also delivered another year of healthy margin expansion. Gross margin expanded 60 basis points, and adjusted operating income margin improved 40 basis points, even with our significant investments for long-term growth. Adjusted diluted EPS increased 11% faster than revenue for the fifth year in a row. In 2025, we built a strong foundation to drive sustainable, long-term growth, with a deliberate focus on rapidly scaling data AI and domain-driven identity solutions to reimagine how clients operate. The shape of our business is meaningfully changing as a result. Our performance, pipeline, and prospects are increasingly higher quality and strategically aligned with our prioritization of advanced technology solutions and agentic-led work. We delivered over $5.5 billion in new bookings, with healthy growth in advanced technology solutions, which now account for more than a third of total bookings. We won 16 large deals and continue to make progress with the next generation of market disruptors. We are in a very strong position as we enter 2026. Demand is healthy and growing. Our inflows and pipelines are robust, and our backlog has never been higher as more clients see Genpact as a long-term strategic partner to transform their mission-critical operations. 2025 was a year of intentional disruption and tremendous achievement. As I look back, I am most proud of what we have built, launched, and scaled with our agentic solutions. We are fundamentally reshaping how businesses operate, and we are doing so at speed. Last February, we launched AP Capture, the first module in our accounts payable agentic suite, with AP Advance and Assist made available in June. While it is still early days, we have closed over $200 million in total contract value just for our AP agentic solutions. Within that, over 40% of awarded contract value came from new clients. And for existing accounts that have rotated from FTE-led to AgenTik, both revenue and gross margin expansion are notably above what we reported at Investor Day last June. With AP Suite, we have built the playbook for delivering sustainable, expanding value for clients and for Genpact. And we are just getting started. Our strong product roadmap of multiple domain-specific solutions, like AP, are clearly aligned to our areas of operational expertise. The insurance policy and record-to-report agentic suite that we announced late last year are just a couple of examples. We believe the most successful companies will be those that leverage AI to achieve higher levels of autonomy and redefine how they run their businesses. Genpact is shifting the paradigm of how knowledge work gets done. We are pioneering a new operating model. We call it agentic operations. Agentic operations move beyond automation to a collaborative model between agents and human experts through three main pillars. One, domain-specific agents that autonomously execute tasks in reimagined processes. Two, last-mile experts that validate exceptions, train and advance models, and reinforce learnings. And three, clear roles, skills, and governance underpinned by responsible AI. Agentech operations move from human process, human validated, machine processed, human validated. As we enter 2026, a new Genpact is taking shape. We are setting the standard for AI-led transformation. We are uniquely positioned to help clients reimagine the most critical components of their journey. From fundamentally redesigning end-to-end processes to building data and AI capabilities to operating at scale through agentic collaboration. The opportunity ahead is significant. AI is rapidly evolving from generating insights to executing actions, and CXOs face a clear business imperative. Translate AI and agentic investments into measurable financial outcomes. In the US alone, the work of more than 70 million knowledge workers will be transformed by seamless collaboration between AI agents and human expertise. And research indicates that enterprise app integration with domain-specialized agents that are built on last-mile expertise will increasingly become the norm. It is clear. Enterprise transformation demands a parallel focus on process reengineering, data modernization, agile tech architecture, with AI embedded at its core, and the discipline to unlearn legacy ways of working. This is exactly where Genpact shines. And where we continue to differentiate. Through our Genpact Next strategy, we are expanding our capabilities, clients, and catalysts to capitalize on this meaningful opportunity. And moving from meeting clients where they are to getting clients where they want to be. Let me walk you through key highlights for each. First, our capabilities. Advanced technology solutions grew to $1.2 billion, contributing more than half of total revenue growth in 2025. Demand for our data and AI expertise is increasing rapidly, with our investments accelerating our ability to deliver. Our AI Gigafactory continues to scale. We now have more than 400 GenAI solutions in the market, either deployed or going live. Up nearly three times from last year. And recently, we introduced AI Maestro, a software platform that helps AI builders and AI practitioners embed AI into last-mile processes at a much faster pace. Innovations like these are significantly increasing our set, with our data and AI pipeline up 50% year over year. AgenTeq has grown more rapidly than any other offering in Genpact's history. Our agentic solutions are clearly resonating, demonstrated by traction with new clients, as well as higher volumes and increased scope with our existing accounts. Core business services continued to grow, increasing 3.7% in 2025. Clients look to us to run their mission-critical operations at scale and do the foundational work necessary for AI transformation later. Because they know there is no artificial intelligence without process intelligence. Our deep domain and industry experience reinforce our competitive position and amplify demand for our advanced technology solutions, especially with large strategic engagements. Coming into 2026, we have been awarded more large deals than at the beginning of any prior fiscal year, further demonstrating how clients trust Genpact to drive real business outcomes. Next, clients. Clients choose Genpact because of our ability to combine data, AI, and AgenTeq with nearly three decades of experience running core operations. Let me walk you through a couple of examples to illustrate. The first demonstrates how our core business services position us to guide clients through their broader AI-led transformation. Humana is a leading American health and well-being company primarily focused on offering a wide range of healthcare services and insurance products. They are a long-standing digital operation client in finance and accounting. Recently, we expanded our partnership to support Humana's AI-enabled transformation across revenue cycle management, procurement, and, of course, finance and accounting. We are leveraging our deep process intelligence and last-mile knowledge to drive efficiency and consistency through process redesign and operating model improvement. Over time, we see the opportunity to support more advanced AI-enabled operating models, including agentic operations. This aligns directly with Humana's enterprise transformation and AI strategies and creates a pathway for Genpact to become a key partner to Humana's future workforce. The next example is Vesco, which shows just how quickly agentic operations can scale and generate meaningful outcomes. Vesco, another Fortune 500 company, and leading provider of business-to-business distribution, logistics, services, and supply chain solutions, has partnered with Genpact to reimagine their finance function, including an overhaul of their AP process. At our Investor Day in June, Vesco's CFO spoke about their comprehensive process and technology transformation. We transitioned their entire AP and procurement organization onto a unified platform and automated their end-to-end process with pre-trained outcome-oriented agents. Since June, we have made even more progress to drive better accuracy, faster cycle time, and an elevated supplier experience. Vesco has improved touchless processing of their 3 million invoices from 40% to 65%. They have also now implemented AP Advance, with plans to implement AP Assist soon. HFS research highlighted our work with Vesco as evidence that accounts payable is no longer just a back-office function. Instead, it is becoming a frontline for enterprise AI, providing a foundation for real-time visibility and agility across the finance enterprise. These are just a few of the success stories we have seen this past year. And finally, Catalyst. In 2025, partner-related revenue grew nearly 50% year over year. Partnering with companies like AWS, Microsoft, GCP, and Databricks is accelerating our ability to drive AI-led transformation. We are embedding domain-led solutions into their tech stacks with joint go-to-market efforts and roadmaps, setting us up to rapidly scale our execution. We also continue to invest aggressively in AI talent, through both hiring technology experts and intentionally training and upskilling our teams. Now with over 7,000 AI builders and nearly 20,000 AI practitioners, we are quickly building a future-ready workforce that can innovate, collaborate, and drive impact at scale. Looking ahead, 2026 will be a pivotal year for Genpact. Building on the momentum of Genpact Next, we expect to deliver another year of strong, high-quality results. Revenue growth of at least 7% year over year will be powered by advanced technology solutions growth, in at least the high teens. We will continue to aggressively invest in our technology solutions, expanding product development across AgenTic, data, and AI, and strengthening our sales and partnership ecosystem. Even with these significant investments, we are committed to again deliver healthy margin expansion. Finally, we expect to drive another year of double-digit adjusted EPS growth while continuing to return a significant portion of operating cash flows to our shareholders. In closing, let me leave you with a quote from one of our recent tech hires that perfectly captures why we are so excited about this new era. Genpact offers an incredibly unique opportunity to help customers move past the era of AI novelties and into the era of last-mile agent AI. Customers are realizing we can do what others cannot. We bring technology and process into the same room, connecting deep functional and industry understanding, proprietary data, AI, and agentic systems to truly integrate AI and transform their businesses. With that, let me turn the call over to Mike. Michael Weiner: Good afternoon, everyone, and thank you for joining us today. We delivered a strong fourth quarter that exceeded our expectations, underscoring the progress we have made throughout the fiscal year. As we consistently execute across our businesses, momentum from Genpact Next Strategy continues to build, demonstrating our strategic investments are paying off. In the fourth quarter, total revenue increased 5.6% to $1.319 billion. Advanced technology solutions revenue, which includes data and AI, digital technologies, advisory, and agentic, increased 15% to $323 million, with particular strength in data and AI. Our advanced technology solutions continue to create incremental value for our clients and generate higher value revenue for Genpact, delivering more than two times the revenue per headcount compared to the company average. This revenue is also growing more than two times faster than Genpact's overall revenue, with roughly 70% annuitized revenue and 70% from non-FTE models. Advanced Technology Solutions is high quality, sticky, and most importantly, strategically aligned to our future direction. Our rapid acceleration in AgenTeq reflects the strong foundation and client trust we have built over the years, as well as our leadership in advancing AI-led transformation. As BK mentioned, we closed over $200 million in AgenTeq contracts across new and existing clients in 2025, with more than 40% of awarded contract value coming from new clients. Within existing AP clients rotating to AgenTeq-led, we continue to see revenue and margin improvement driven by higher volumes, increased scope, or both, demonstrating the expansive opportunity of our AgenTeq investment. Core business services, which includes digital operations, decision support services, and technology services, grew 2.9% to $996 million in the fourth quarter, reflecting continued client trust and demand for our domain and industry expertise. Growth in core was offset by softness in decision support services as we continue to work through our go-to-market approach. In the fourth quarter, data tech and AI revenue increased 7.4% to $639 million, and digital operations increased 4% to $681 million. Non-FTE revenue, which captures our strategic shift to fixed fee, consumption, and outcome-based deals, represented 48% of fourth-quarter revenue. At a segment level, high-tech and manufacturing grew 9.9%, followed by financial services growth of 5% and consumer and healthcare revenue growth of 1.5%. Sales execution and demand remained strong, as we continue to make progress with new and existing clients. Existing client relationships continue to grow, demonstrated by our improvements in our net revenue retention rate. Our large deal momentum also continues. As noted earlier, in addition to the deals closed in the fourth quarter, we have a number of large deals awarded that we expect to close in the coming months, including some net new to Genpact. As a reminder, large deals are $50 million or more in total contract value. And across clients and cohorts, we are seeing a growing mix of advanced technology solutions pipeline and bookings. Turning to profitability, gross margin in the fourth quarter expanded by approximately 90 basis points to 36.6%. Over the past two years, our consistent track record of margin expansion reflects our disciplined approach to driving operational efficiencies, as well as an increasing contribution from our high-value advanced technology solutions. SG&A expense as a percentage of revenue was 20.3%. Adjusted operating income was $232 million, with adjusted operating income margin of 17.6%, as we continue to self-fund our strategic investments. Our effective tax rate in the fourth quarter was 24.2%, an increase from our prior year rate that was favorably impacted by a nonrecurring discrete item. Our full-year effective tax rate was 24.3%. Net income for the fourth quarter was $143 million, and diluted EPS was $0.81. Adjusted diluted EPS increased 6.6% to $0.97, faster than revenue growth for yet another quarter. We ended the fourth quarter with $854 million in cash and cash equivalents, up $207 million from a year ago. This quarter, we returned $129 million to shareholders through $100 million in share repurchases and $29 million in dividends. Turning to the full year, we delivered $5.08 billion in revenue, up 6.6% year over year. Advanced technology solutions increased 17% to $1.204 billion, and core business services revenue grew 3.7% to $3.876 billion. Data tech and AI increased 9.3% to $2.442 billion, and digital operations increased 4.1% to $2.638 billion. In 2025, we drove another 60 basis points of gross margin expansion to 36%, through rigorous operational discipline and our strategic focus on driving higher-value revenue streams. SG&A expenses as a percentage of total revenue were 20.3%, consistent with last year. We remain disciplined in managing costs by prioritizing strategic investments. Adjusted operating income grew 9.1% to $888 million, with adjusted operating income margin expanding 40 basis points year over year to 17.5%. Net income grew to $552 million. Adjusted diluted EPS increased 11.3% to $3.65, reaching a record high, growing faster than revenue for the fifth consecutive year. For 2025, we generated operating cash flow of $813 million, including $170 million from a client prepayment in the third and fourth quarters. Excluding this impact, cash flow from operations increased 5% year over year. Finally, we returned $401 million to shareholders through $283 million in share repurchases and $118 million in dividends. Turning to our outlook, which assumes the operating environment will remain relatively consistent, our strong execution, significant backlog, and rapidly accelerating demand for advanced technology solutions put us in a very strong position entering the year. As a result, we expect to deliver at least 7% growth for 2026 on an as-reported basis. This guide reflects committed revenue in line with historical ranges. In advanced technology solutions, we expect revenue to grow at least high teens for the full year, driven by ongoing demand for data and AI, as well as strengthening partnerships and continued momentum in AgenTeq. In core business services, we expect growth to continue, even as we help clients accelerate their AI-led transformations through agentic operations, and we increase our focus on driving sustainable growth through advanced technology innovations. Full-year gross margin is expected to further expand by 50 basis points to 36.5%. Adjusted operating income margin is expected to increase 25 basis points to 17.7%, reflecting our continued commitment to self-fund investments for growth. As a result, we expect adjusted diluted EPS to grow approximately 10%, again, faster than revenue. Regarding our capital allocation strategy, we continue to take a balanced and disciplined approach. We aim to return approximately 50% to shareholders through share repurchases and dividends, while maintaining flexibility for strategic investments. As a result, our Board of Directors has approved a 10% increase in our regular quarterly dividend to $18.75 per quarter and 75¢ on an annual basis. Turning to the first quarter on an as-reported basis, we expect to deliver total revenue between $1.282 billion and $1.294 billion, or 6% growth at the midpoint. We expect advanced technology solutions to accelerate from the fourth quarter to high teens growth year over year. And we expect continued growth in core business services. We expect gross margin to expand to 36.3% and adjusted operating income margin to increase to 17.3%. Finally, we expect adjusted diluted EPS of $0.92 to $0.93 for the first quarter. In closing, the unique combination of our last-mile expertise with advanced technology capabilities allows us to define how enterprises will operate in the future. With our Genpact Next strategy, we are innovating at scale to accelerate high-quality revenue growth and consistently expanding margins, all while further amplifying our differentiated position in the market. We remain committed to investing aggressively against the most strategic areas of our business to drive sustainable growth and improvements in our margin profile, with long-term partnerships that support improved economics for both Genpact and our clients. All this allows us to continue to grow adjusted diluted EPS double digits while driving long-term value creation. With that said, let me turn the call back over to BK. Balkrishan Kalra: Before turning to Q&A, I want to extend my thanks to an incredible leader. Krista Bessinger is transitioning to a new role at Genpact in 2026. Krista, you have made a significant impact here at Genpact. Thank you. Thank you for your partnership. And I look forward to working with you in your new advisory role. With that, I also want to welcome Kyle Wickstrom as our head of investor relations and the newest member of our Genpact leadership council. Kyle joined us from Microsoft last spring with over twenty years of experience in various finance roles in technology. We are very excited to have her on board. And now let me hand it over for Q&A. Operator: Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone and wait for your name to be announced. To remove yourself, press 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Bryan Bergin with TD Cowen. Please proceed. Bryan Bergin: Hi, guys. Good afternoon. Thank you. Maybe just given the material pressure on the from announcements from Anthropic and others, maybe we just start off with whether anything has changed for you on the ground in contracting conversations, whether you see any instances of clients seeking to try to do more themselves. You know? I guess I am curious. Where do you see type in the market being just that versus where there may be some validity to the risks that some of the traditional models face? Balkrishan Kalra: Sure, Bryan. Thanks. Let me take that. Look. I would say that we are incredibly excited with what is happening in Silicon Valley because it is accelerating our pivot. It is helping us drive outcomes for our clients faster. And whenever any of these tech shifts happen, it is always nuanced as to how it will apply to various different companies, and we clearly see this as a tailwind for us. We see that in our pipeline. We see that in our conversations. And if I just step back and maybe this is oversimplifying, Bryan, I see this as two main AI focus areas. One is, let us say, research AI, and the other one is task-oriented AI. You are probably referring to is more, you know, what is getting more attention these days in research AI, which is helping us accelerate our work. Where BCommon is more in task-oriented AI, and that is where we are building this agentic operations. We execute specific tasks within a process and making sure we are bringing in AI into the entire system of work, looking at the data, looking at the context, in these complex end-to-end business processes, which are unique to every industry. So fundamentally, if I see it from the operator lens as we speak to many Fortune 500 companies, not just the Frontier AI companies, we see our relevance increase. And we are seeing that, again, how our agentic operations are taken up, how data and AI are taken up. And what I would say is we are only seeing our pivot accelerate and only excited with this. Bryan Bergin: Okay. Understood. And my follow-up will be on ATS. You had nice solid growth here again in the fourth quarter, 15%. Now you are calling for an acceleration off of that level. So I want to test just the fact driving that confidence. I heard plenty of activity in your prepared script. Just give us a sense of maybe ATS bookings growth and is there an acceleration of work that is coming out of CBS? And into ATS? Anything that is kind of mechanically migrating between the two? Thanks. Balkrishan Kalra: I will answer it in two parts. And, Mike, feel free to give you a color. Point number one, I think we are beginning to see getting into a lot more conversations where we were originally not invited to, and I often have said that we are meeting where clients are, and, increasingly, we see that we can take them to where they want to be in a much faster manner. So we are, be it in large deals or mega deals, we are beginning to see into the conversation where we were earlier not invited, and that we see in our pipeline. Second, I think just from a core business services standpoint, we continue to see a very, very healthy demand because that is where we see last-mile advantage. That is where we have run mission-critical operations at scale. And that is where, you know, we understand the complexities and bring the process and technology conversation in one go. And fundamentally, what we have seen just agentic contracts grow, including with new clients, you know, 40% of the booking coming in from new clients or this contract value. You know, we are really excited. And even for the rotation, we see incremental revenue growth and gross margin growth. Michael Weiner: Yeah. So if you may just double click on that for a quick second. So just if you really want to just think about it from that perspective in the sense of how do we view ourselves in terms of ATS growth at the rate that we are projecting in the high teens for 2026. It is really driven by the two things BK alluded to. First, momentum we have seen in the AgenTeq ramp-up has been notable. Right? We put forth we had a TCV of approximately $200 million in bookings. Where we ended the year, and that is going to accelerate more as you roll out additional AgenTeq related solutions. That will help pivot some of the revenue from the core business services. And a few comments on that, as we talked about in our prepared remarks, the quality and sustainability of that revenue is incredibly important to us. It is highly sticky and continues to grow at a measured pace. It is recurring annual revenue if you want to think about it from that perspective. Balkrishan Kalra: I think maybe you know, what I am really excited about is how the shape of our business is changing. The pace at which it is changing. And more than a third of the booking is advanced technology solutions. And the majority of deals that in AgenTeq are obviously non-FTE, but driving consistent rec. Annual revenue streams. So the new commercial model is taking hold in a significant way. Michael Weiner: Okay. Understood. Thank you. Operator: Alright. Thank you. One moment for our next question. Comes from the line of Maggie Nolan with William Blair. Please proceed. Maggie Nolan: You mentioned, I think, 40% of your TCV for the AP suite was new clients. I think that number was maybe closer to 30% last quarter. Are there patterns in who is adopting this? You know, are they different than the typical clients that would have engaged with Genpact or BPO in general in the past? And then can you give us some data on how you are thinking about addressable market growth as you roll out these solutions? Michael Weiner: Thanks, Maggie. Balkrishan Kalra: Look, I think it clearly points to significantly expanding our total addressable market. And as I have said that we have not seen takeoff of any solution in Genpact history at the pace that we are seeing this. And many of these new clients are obviously net new to Genpact. But a number of them are also our existing clients who are not using finance, but they have now begun to use our finance stack. So, fundamentally, it is the enterprise client. It is mid-market client. It is our existing clients who are not using finance using us for finance. So a combination of all of that is really enhancing. And this is also in many ways getting us into the core foundational work that we need to do for many of these clients. Maggie Nolan: Okay. Thank you. And then have you noticed any improvements in the sales cycle or ramp times in the last ninety days or so, particularly in large deals, and I am curious what is contemplated in the full-year guidance with respect to those variables. And you sort of alluded to large deals in January being quite strong or those baked into the guide. Balkrishan Kalra: Look. I think large deals have their correct. Some move at a very accelerated pace. And some take much longer. And especially as we bring more technology and process and data and all of these skills together, especially for larger awards. It does not move in neat ninety-day increments. But, really, thrilled with the number of these conversations, the pipeline, across cohorts, including large deals is at record levels. Michael Weiner: Sure. May I have anything to add on to that, BK? So, Maggie, thanks for the question. Alright. You know, let me just bring this up a little. We are really confident in our guide at 7% on a full-year basis. So we look at everything that look at all deals. We probably weight them as we move forward and in our business. But a few things I want to just quickly talk. We think about the 7% number for us. We look at it in an absolute dollar perspective. Right? So we grew last year a little over six and a half percent and roughly the same number a year ago. So it is not a Herculean effort for us to grow at that rate for next year. But I would also like to just point out that our committed revenue is in line with historical averages. Which is about 75-ish percent. And again, this is all built off of a significant backlog which is at record levels, which takes into account 2025. Bookings as well as an exceptionally strong 2023 and 2024. So we feel really good about that on a go-forward basis. And specifically regarding your question, all deals are probability-weighted into how we look at the guide on a prospective basis. Maggie Nolan: Thank you. Congrats. Operator: Thank you. Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Please proceed. Surinder Thind: Thank you. I would like to touch base on the margins starting with the gross margins and the expectations of 50 basis points of expansion. Can you walk me through the levers that you are using there, and then what is the potential to kind of continue that trajectory as we look further out into '27 and '28? Balkrishan Kalra: Maybe I will start, and Mike, feel free to comment on it. Look, fundamentally, it is a shift to advanced technology solutions, which is giving a higher value to our clients. And it is a higher value revenue for Genpact. And we have been talking about it for a bit, and now I think it is picking up the momentum. We see that come through apart from the disciplined operational capabilities that we are driving. But it is more from advanced technology solutions. And, you know, I will not like to opine on what will happen in 2027-2028, but fundamentally, our trajectory is clear as we have demonstrated over the last couple of years and increased the margin by 90 bps or 100 bps over the last two years. And we are very clear that it will certainly grow further in this year as we have guided the street. Michael Weiner: Yeah. Two just quick add-ons to that, Surinder. So when you know, as BK alluded to, right, at the increased mix from ATS, right, particularly that, you know, we see these non-FTE commercial models really support our margin in that business. In addition to it, if you think of our margin in totality or the AOI margin we lay out, remember that grew 40 basis points year over year. That is net of significant investments made in our organization. So we feel very good about our margin trajectory on a go-forward basis. Surinder Thind: That is helpful. And I guess as a point of clarification, what I was trying to tease out here is this idea that is this predominantly a mix shift benefit that you are receiving or are there other benefits that you can get from just from the delivery footprint and you know, the AI advances that we are seeing. I was just trying to understand that component here. Michael Weiner: Yeah. So correct. So the mix shift component, the nature of the work we do in ATS, we just alluded to is one component of it. But if you are thinking about it from a client zero perspective, which is how we think about our organization, and using AI and everything and how we are training our internal organization. Yeah, that has helped perpetuate the growth and the efficiencies that we are seeing in our own business. Remember, we come to the term client zero because we are embedding technologies in everything that we do. Right? I disproportionately focus on functional areas, and I have seen that technology pay off. Right? And we are using that we are using some of that benefit to invest in the future of our organization. So I think it is both things. I think you are correct. Surinder Thind: That is helpful. Michael Weiner: And then following up on the comment about this is all net of the you are making a lot of investments, and so, obviously, you are still seeing some good adjusted operating income margin expansion. You kind of use the terminology that you are investing aggressively in strategic areas. Can you elaborate on that in the sense of can you do more, and is it how do you balance the level that you want here? Because when we look at you know, other I will use the extreme example is just you know, the hyperscalers. You know, their CapEx spend this year is coming in much, much higher than anybody is anticipating. So it always seems like there is the ability to invest more. How are you drawing that line? Michael Weiner: So I will kick it off on here, Ravi. So remember, what we are doing, there is not a tremendous amount of CapEx associated when we talk about investments. In totality. Right? We do run a very disciplined process in the organization. Right? We look at the ROIs and the strategic implications of every one of the investments that we do. Right? Is there always a greater ask that we are willing to do? We evaluate that on a quarterly basis. We do it in a very disciplined fashion. Right? But what I will say is from an investment perspective and things partnerships, which was called out in quarters past to training, we are not pulling back from that by any stretch. You know? We are investing quite a bit of the operating leverage of the business in the future strategic investments and a whole core whole course of things. Balkrishan Kalra: And I think there are clear areas of our investments, Surinder, that we have laid out. Partnerships we have laid out, we continue to invest more and more in that. We have laid out in building the talent. We are increasing that more and more. You know, I talked about agentic ops and so on and so forth. This is all the product investments and the engineering investments that we have done. Sales investments, and the front-end investments we are doing. So we are changing the business. That is what I mentioned. The shape of the business is changing very fast. And may I say we are no longer the company that we were two years ago. And really proud as to the speed and the pace at which we are moving. Surinder Thind: Thank you. Operator: Thank you. One moment for our next question, please. And it comes from David Conning with Baird. Please proceed. Michael Weiner: Yeah. Hey, guys. Great job. I guess my first question is really on pricing. And our clients, it seems like coming to you at an increasing pace. That is great. Are they coming with greater expectations of the ability to drive more efficiencies? Are you having to change dynamics, like, faster kind of efficiency gains in their contracts or anything changing in the dynamic of the backdrop? Balkrishan Kalra: Maybe I will take first and feel free to opine you know, overall might look fundamentally how I will think about it is yes, aspirations are high. Overall aspiration of whatever everybody is reading, and therefore, what can happen in their businesses is high. And so is true in pricing as well. But what we are able to so I will say it in two parts. First thing is think of it as simple as p times q. And in p times q, yes, we are giving in more productivity to our clients. But our costs are offsetting at a much faster pace, and that is what you see in gross margin. And as far as our top line is concerned, we are getting you know, a bigger share or, you know, more scope that for the same body of work, we are able to that is what we reported that in AgenTeq you know, our revenue growth is much higher than what we reported in June. So I think there is that is why we are saying that we are creating higher value solutions for our clients. And we are gaining in the process. The second piece I will also say is how we are working with our partners and leveraging partner ecosystem as well as embedding solutions at the last mile and they are repeatable in nature. And therefore, I think we are gaining as a leverage point there as well. Mike? Michael Weiner: Yeah. I you know, the way I think about it is it just I look at our gross margins. Right? And I look at the gross margin expansion that we have and the gross margin expansion that we are guiding for. Right? I think that is really the best measure on how we are doing this. Right? So, yes, as BK alluded to in the beginning of his comments, there is always productivity asks. Right? We have seen nothing dramatically change from the past. But it is always been there and it is not going to go away. And I think our ability to navigate through that thus far and what we are projecting has been quite impressive. Balkrishan Kalra: Yeah. Construction-based structures are taking hold, so that is giving us more leverage. David Conning: Yeah. Okay. And that is great. I guess and a follow-up question. When a company, let us say, they are brand new to outsourcing. They have not thought of AI too much yet. They are in the forefront of thinking about it. Who do they first turn to? Is it you guys? Is it, you know, the you know, one of the bigger tech companies? Like, are you at the kind of the tip of the spear like Genpact's our first call to, like, start this all out, or who do they go to? Balkrishan Kalra: Look. I think, this is what I was referring in one of my earlier comments that over last year or so, we have begun to see and sit on the table where we were usually not invited. Because we are bringing the process technology, data, you know, and how to run mission-critical operations at scale, all in one dialogue, all in one conversation. And that is really accelerating our pipeline, and, you know, you see the progress thereof. And you know, we are talking about advanced technology solutions growing 17%. And we are saying for next year, our view is it will grow on top of 17% this year, another 17% at least. So we see that in our pipeline. We see that in our momentum. And, yes, I think we are getting invited. Where we were not earlier invited, so feel really thrilled about that. David Conning: Yeah. Alright. Thanks. Nice job. Operator: Thank you. Our next question comes from the line of Puneet Jain with JPMorgan. Please proceed. Michael Weiner: Hey, thanks for taking my question. I wanted to follow-up on agentic solutions when you offer, like, AgenTeq operations or AP solutions. Who is the decision maker within client organizations? Is it like, the business managers? Or the CIO office? Who is driving the charge towards embracing the Genetic AI within your clients? Balkrishan Kalra: Yeah. Look. I think it is always a combination of both. When we were just talking about running mission-critical operation, obviously, the business wise is much bigger. Fundamentally, now as you need to intersect and need to weave in all of these agents into their complex system roadmap. Clearly, their CIO or CDIO, they are an integral part of the equation. And therefore, you know, that is the other piece where we are getting invited when a CIO, CDIOs looks at how we are thinking about agentic operations, how agents combined with human expertise how overall underpinned with responsible AI governance, our all of the framework we are getting invited in more and more dialogue. Puneet Jain: And then on the last deals, that you have closed this year, what is driving that increase of the trend? Like, are these like deals typically rebadging comp? Like, do these deals have rebadging components? Meaning that they are coming from clients in-house operations? Are these AI-led deals? What type of work are you typically seeing in those deals? Balkrishan Kalra: Look, operations and maybe you are referring to talent transfer and others. Been an integral part of our model. And there is nothing special about that. Clearly, what is special is that you know, a lot more of our clients have begun to see that bringing you know, we have been running these mission-critical operations. Sometimes they are running themselves. But how we are bringing agentic operations in those mission-critical operations. Therefore, some of those demands, spigots are opening up more. And, you know, we are getting invited into even GCC conversations. That, hey. Why do not you take up the center? And run it for us? Because that is not what their expertise is in there. That expertise has begun to shine more and more. Puneet Jain: Got it. Thank you. Operator: Thank you. And our last question will come from the line of Bradley Clark with BMO Capital Markets. Balkrishan Kalra: Hey. Thanks. Just one for me. Just so I think it is clear that, you know, trend with your business are strong right now and in the BPO industry with really strong pipeline, expected acceleration in ATS. And I guess I want to shift focus to, like, long, like, long-term durability, like, the demand of customers needing help, you know, implementing a lot of different solutions, your own solutions like your IP solution into these processes that had previously done mostly manual labor. And I guess we want to understand, like, what is the tail of these types of projects or services for clients? Are you, like, once you help them implement the solution, whether it be, you know, your AP agent, the solution or a third-party agentic solution. You know, how did growth come after that? Balkrishan Kalra: Look, I think these are, you know, I am talking is more from an operator lens you know, what we see every single day. And fundamentally, it is, you know, when I am talking about API centric solution or for that matter, record to report or insurance, these are just very initial solutions that are taking hold. And please understand each of these solutions are building recurring annual revenues for Genpact. And that is what the commercial model is. And these are clearly as we see it, shaping the business in a very significantly different ways. And like I mentioned in my previous comment, more and more of our clients especially mega deals, they have begun to see that the benefit of agentic operations, especially running finance, supply chain, some mid-offices, claims operation, underwriting operations, banking operations. It is how we bring in agents with human expertise in a responsible AI framework so that they get enabled at the front end. They can gain market share, and they can focus where they need to focus. So we really see this as a long-term change. That is building a long-term business for us in a meaningful way. Thank you. Operator: Thank you so much. And this will end our Q&A session. I will pass it back to management for final comments. Balkrishan Kalra: Thank you. Thank you, Carmen. Look. I just want to take the opportunity and thank all of the employees, you know, across the globe, you know, who make, you know, what Genpact is becoming possible. So my deepest thanks to all of them, and, most importantly, to our clients who are choosing Genpact. And also to our shareholders for their ongoing support. 2025 was an incredible year. Set us up for even better credible year in '26 and beyond. And I look forward to showing you more and more of that, and I really do want to thank you all. Thank you. Operator: Concludes our conference. Thank you for participating. You may now disconnect.