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Operator: Hello, and thank you for standing by. Welcome to StoneX Group, Inc. First Quarter Fiscal Year '26 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Bill Dunaway. Sir, you may begin. William Dunaway: Good morning, and welcome to our earnings conference call for our quarter ended December 31, 2025, our first quarter of fiscal 2026. After the market closed yesterday, we issued a press release reporting our results for the quarter, and this press release is available on our website at www.stonex.com as well as a slide presentation, which we will refer to on during this call. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you and all participants should note that the following discussion should be considered in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I will now turn the call over to Philip Smith, the company's Chief Executive Officer, for a brief introduction. Philip Smith: Thank you, Bill. Good morning, everyone, and thank you for joining our first quarter earnings call for fiscal 2026. I'm very pleased to report a very strong start to our fiscal year, reporting record net operating revenues, net income and EPS, which showcases the power and the scale of the ecosystem we have built at StoneX and of which we are incredibly proud of. We play a vital role in the global financial and physical markets by serving a wide and diverse range of clients. Our platform enables clients to access multiple markets, giving them the flexibility and choice they need to pursue opportunities and/or mitigate risk wherever they arise. This broad market access positions us with several avenues for growth as demonstrated by our performance this quarter. When conditions shift from one market to another, we have the breadth of products and services to support our clients' needs wherever they arise. This diversification is a core strength of our business model. Bill will go into more detail around our financials, but I would like to highlight a few areas that helped drive our record results. Record listed derivatives volumes and average client equity, significantly enhanced by the acquisition of R.J. O'Brien. Record commercial performance driven by an exceptional performance in global metals and in particular, in our precious metals business, which generated $75 million in segment income this quarter, which is $24 million more than it did in the entire financial year '25. This was an exceptional quarter, whereby our global footprint, the depth of our product vertical and our logistics expertise in being able to move physical metal globally in order to take full advantage of locational discounts and premiums being second to only the largest two global bullion banks allowed StoneX to record its best revenue quarter ever. To remind you of the deep dive into metals we provided in our Q2 earnings call last year, our unique precious metals vertical includes the following: StoneX is a leading OTC liquidity provider in all precious metals. StoneX is uniquely positioned as the only nonbank participant in setting the gold, silver, platinum and palladium daily price benchmarks. StoneX is the #1 nonbank FCM, providing access to futures contracts on exchange for all metals. StoneX is a wholesale and retail service producer of small bars and coins direct to consumers under our StoneX Bullion platform or to third-party companies themselves servicing direct to consumers. StoneX is one of the largest wholesale physical bullion businesses moving metal across jurisdictions efficiently to satisfy locational shortages and oversupply of material. StoneX owns a recently CME accredited vault, which now has in excess of $1.2 billion worth of metal in custody after only a couple of quarters of operations, providing bolting, storage and custody services. And of course, StoneX owns a London Good Delivery silver recycling and refining facility, providing investment-grade products into the bullion market from recycled material. Together, these products and capabilities produce a truly unique ecosystem in the metals market. In addition, our Institutional segment reported a record quarter, which was enhanced by the addition of R.J. O'Brien's institutional business as well as the investment banking, equity research and institutional sales and trading of Benchmark. This was in addition to record revenues reported in our legacy StoneX equities, fixed income and prime service business lines, underscoring the true value of our ecosystem. Finally, we also saw record payments average daily volume to start off the fiscal year. Bill will now cover our financials in more detail. So over to you, Bill. William Dunaway: Thank you, Philip. I will begin with a financial overview for the quarter, and we'll be starting on Slide #4 in the slide deck. First quarter net income came in at a record $139 million with diluted earnings per share of $2.50. This represented 63% growth in net income. However, earnings per share grew at a 48% rate due to the additional shares outstanding as compared to the prior year, primarily related to the issuance of approximately 3.1 million shares for the acquisition of R.J. O'Brien during the immediately preceding quarter. Net income and diluted earnings per share were up 62% and 59%, respectively, versus the immediately preceding fourth quarter of fiscal '25. This represented a 22.5% ROE despite a 70% increase in book value over the last 2 years. We had operating revenues of just over $1.4 billion, up 52% versus the prior year and up 20% versus the immediately preceding quarter. As a reminder, our operating revenues include not only interest and fee income earned on our client balances, but also carried interest that is related to our fixed income trading activities. Net operating revenues, which nets off interest expense, including that which is associated with our fixed income trading activities as well as introducing broker commissions and clearing fees were up 47% versus a year ago and 24% versus the immediately preceding quarter. Total fixed compensation and other expenses were up $75.6 million or 31% versus the prior year quarter. $44.4 million of this is attributable to the acquisition of RJO and Benchmark during the fourth quarter of fiscal '25. Total fixed compensation and other expenses were up 10% or $29.4 million versus the immediately preceding quarter, with $12 million of this change attributable to the acquisitions of RJO and Benchmark, each of which were only in the immediately preceding quarter for 2 months. Fixed compensation and benefits was up 17% versus a year ago and up 2% or $2.4 million versus the immediately preceding quarter. The increase versus the immediately preceding quarter includes $5.3 million attributable to the acquisition of RJO and Benchmark, partially offset by lower PTO benefit costs and higher participation in our employee-elected deferred compensation plan, which is part of our restricted stock plan. Professional fees increased $13.8 million versus the prior year, primarily as a result of higher legal fees related to our defense and various legal matters, including fees related to the BTIG matter associated with the commencement of the arbitration this quarter. They were up $5.9 million versus the immediately preceding quarter, which included $8 million of investment banking advisory fees paid out in connection with the acquisition of RJO. The acquisitions of R.J. O'Brien and Benchmark contributed $28.5 million and $4.6 million in pretax net income, excluding acquired intangible amortization, respectively, for the quarter. Looking at our results with a longer-term lens, our trailing 12-month results show operating revenues were up 28%. Net income was a record $359.8 million, up 30%, with diluted earnings per share of $6.70 and an ROE of 16.9% for the trailing 12-month period, above our target of 15%. We ended the first quarter of fiscal 2026 with a book value per share of $48.17. Turning to Slide #5 in the earnings deck, which compares quarterly operating revenues by product as well as key operating metrics versus a year ago, we experienced growth across all products with the exception of FX/CFDs and payments. Transactional volumes were up across all of our product offerings with the exception of FX/CFDs and spread and rate capture increased in all of our products with the exception of payments down 10% and FX/CFDs, which declined 30%. Just touching on a few key highlights for the fourth quarter. We saw operating revenues derived from listed contracts, increasing $157.3 million or 141% versus the prior year. Primarily due to the acquisition of RJO, which contributed $130.7 million as well as strong growth in base metals activity in LME markets, which increased $12.7 million versus the prior year. Listed derivative operating revenues increased 30% versus the immediately preceding quarter. Operating revenues derived from OTC derivatives increased 72% versus the prior year, driven by increased client activity in Brazilian and European markets. This also represented an 8% increase versus the immediately preceding quarter. As Philip noted earlier, we had a record performance in our physical business, with operating revenues derived from physical contracts increasing 69% versus the prior year, primarily driven by an $83.9 million increase in precious metals operating revenues, partially offset by a $19.8 million decrease in physical agricultural and energy revenues. Operating revenues derived from physical contracts were up 138% versus the immediately preceding quarter. Securities operating revenues were up 43% as volumes were up 22% and the rate per million increased 35% versus the prior year, with the improvement driven by strong growth in both equities and fixed income. Payments revenues were down 4% versus the prior year quarter, but up 7% versus the immediately preceding quarter, primarily due to an increase in the average daily volume. FX/CFD revenues were down 30% versus a near record prior year quarter, resulting from a 4% decline in average daily volume, primarily in institutional markets and a 30% decline in rate per million, primarily driven by lower spread retention in our self-directed business, particularly in non-FX markets. FX/CFD revenues were up 24% versus the immediately preceding quarter. Our interest and fee income earned on aggregate client float, including both listed derivative client equity and money market FDIC sweep balances increased $66.1 million or 61% versus the prior year, with the acquisition of RJO contributing $63.8 million. Average client equity and average money market FDIC sweep client balances increased 100% and 5%, respectively. For the current quarter, RJO contributed $5.8 billion in average client equity. Turning to Slide #6. This depicts a waterfall by product of net operating revenues for both the prior year quarter to the current one as well as the same trailing 12-month period. Just a reminder, net operating revenues represent operating revenues less introducing broker commissions, transaction-based clearing expenses and interest expense. For the quarter, net operating revenues increased 47%, principally coming from listed derivatives and physical contracts, up $68.4 million and $58.3 million, respectively. In addition, securities and OTC derivatives added $55.7 million and $26.5 million, respectively, versus the prior year. On a net basis, interest and fee income on client balances increased $38.1 million with RJO contributing $37.3 million. As noted earlier, due to the -- primarily to the decline in rate per million, we saw FX/CFD's net operating revenues decline $30.8 million versus the prior year. Looking at the bottom graph for the trailing 12-month period, securities has the largest increase, up $175.9 million versus the prior year, driven by a 23% increase in average daily volumes and 23% increase in rate per million. In addition, listed derivatives and interest and fee income increased $115.2 million and $54.9 million, respectively, primarily as a result of the acquisition of R.J. O'Brien as well as strong growth in LME base metals markets. Physical contracts, net operating revenues added $57.9 million versus the prior fiscal year, while OTC derivatives also added $38.8 million off of strong growth in Brazilian and European markets. Finally, FX/CFD's net operating revenues declined $60 million versus the prior year. Moving on to Slide #7. I'll do a quick review of our segment performance. Our Commercial segment saw net operating revenues increase 65%, primarily resulting from 56% and 72% growth in listed and OTC derivatives, respectively. In addition, physical contracts increased 75%, while net interest and fee income increased 50%. The growth in listed derivative and interest income were primarily driven by the acquisition of RJO as well as in the case of listed derivative volumes, base metal markets on the LME. Segment income increased 72% versus the prior year, while on a sequential basis, net operating revenues were up 50% and segment income was up 61%. Our Institutional segment also saw record net operating revenues and segment income with growth of 86% and 78%, respectively. The growth in net operating revenues was principally driven by a $54.9 million increase in securities revenues. In addition, listed derivatives and interest and fee income increased $47.5 million and $21.5 million, respectively, primarily driven by the acquisition of RJO. On a sequential basis, net operating revenues and segment income were up 11% and 4%, respectively. In our self-directed retail segment, net operating revenues declined 34% and segment income was down 67%, driven by the 41% decline in rate per million captured in FX/CFD contracts, partially offset by the 13% increase in average daily volumes. On a sequential basis, net operating revenues were up 25% and segment income increased 26% in this segment. In our Payments segment, net operating revenues were down 3% and segment income decreased 1%. Average daily volume was up 11% versus the prior year, while rate per million was down 10%. Versus the immediately preceding quarter, payments net operating revenues increased 10%, while segment income increased 13%. Moving on to Slide #8. Looking at segment performance for the trailing 12 months, we saw strong growth in our Institutional segment with net operating revenues up 54% and segment income increasing 60%. Our Commercial Payments segments added 14% and 4% in segment income, respectively. Our self-directed/retail segment income decreased 35%. Finally, moving on to Slide #9, which depicts our interest and fee income earned on client balances by quarter as well as a table which shows the annualized interest rate sensitivity for a change in short-term interest rates. The interest and fee income net of interest paid to clients and the effect of interest rate swaps increased $38.1 million to $115.5 million in the current period. And as noted, the acquisition of R.J. O'Brien contributed $37.3 million in net interest in the current quarter. During the first quarter of fiscal 2026, we entered into $1.2 billion in fixed rate SOFR swaps to hedge our aggregate interest rate exposure. The swaps have a duration of 2 years and an average rate of 3.32%. These swaps as well as the additional average client assets from the RJO acquisition are reflected in the interest rate sensitivity table on this slide. As shown, we now estimate a 100 basis point change in short-term interest rates, either up or down, would result in a change to net income by $43.2 million or $0.80 per share on an annualized basis. On a final note, before I turn it back to Philip, on February 3, our Board of Directors approved a Three-for-Two stock split of its common stock. The stock split will be effective as a stock dividend entitling each stockholder of record to receive 1 additional share of common stock for every 2 shares owned. Additional shares issued as the result of the stock dividend will be distributed after the close of trading on March 20, 2026, to stockholders of record at the close of business on March 10, 2026. Cash will be distributed in lieu of fractional shares based on the opening price of a share of common stock on March 11, 2026. Trading is expected to begin on a stock split adjusted basis at the market open on March 23, 2026. With that, I will hand you back to Philip for an update on the RJO integration as well as a product spotlight on our global hedging business. Philip Smith: Thank you, Bill. Moving to Slide 11. And as Bill mentioned, this is the first quarter of our combined and consolidated operations of StoneX and R.J. O'Brien. On last quarter's call, we provided a detailed overview of the integration process and reiterated our confidence in achieving the synergies set out in our initial announcement. The transaction has transformed StoneX into the leading nonbank player in this space. And now 5 months into the integration, we are seeing increased cross-sell opportunities due to our scale and breadth of offering, which I will touch on later. In terms of integration, this remains firmly on track and continues to follow the sequence we outlined last quarter. As a reminder, this includes the consolidation of our non-U.S. entities. We stated this will be completed in quarter 2 2026. As an update, we have migrated the business and assets of the largest subset of these entities, the R.J. O'Brien U.K. entity into the StoneX U.K. entity successfully in the first week of January. I expect the others to follow our execution and integration plan we set out previously. The U.K. consolidation has released $20 million in capital. The consolidation of the U.S. entities, this remains on track and is targeted to be completed by the end of the fiscal year. We are working hard to ensure a smooth and seamless transition for clients as we have prioritized revenue protection and continuity for clients of R.J. O'Brien. All in all, the integration remains on track, and we remain confident in achieving the synergies we set out at announcement and are making strong progress in providing a holistic integrated offering to clients across StoneX and R.J. O'Brien. Now moving to Slide 13. As done in previous earnings calls, we think it's helpful to go a little deeper into a specific business area, and I wanted to spend some time going over our global hedging business, which forms part of our Commercial segment and was recently reorganized to globalize what was a more fragmented regional set of businesses. This is a business that is core to StoneX's history and legacy of working with commercial clients to hedge and mitigate their risk exposure going back nearly 50 years and represents approximately 60% of the segment income for the Commercial segment for the last 12 months. We have built a deep presence in North America, Latin America, EMEA and are rapidly growing in Asia Pacific. We have always worked towards a North Star of connecting clients to markets, which help them manage the risks they face in their businesses with transparent access and risk management tools for our clients. On this slide, you will see the breadth of our global hedging and risk management offering. We provide deep market access across more than 40 derivative exchanges worldwide, combined with an ability to deliver customized OTC and structured products, which means we can create tailored hedging solutions, which closely align with our clients' risk management needs. Our leading market intelligence offering and digital platforms are core differentiators for us. They give clients market insight supported by teams with real boots on the ground experience across global markets. These combined efforts and capabilities allow us to serve a diverse range of clients and all parts of the supply chain shown on the right-hand side of the page, from farmers, producers and cooperatives to merchants, global traders, industrial end users as well as energy and resource extractors. In short, by operating across all parts of the supply chain, StoneX becomes a critical partner connecting markets, clients and flows in a way a few others can. On the next slide, being Slide 14, I wanted to expand on what I think makes us unique in this space. With the acquisition of R.J. O'Brien, we became the largest nonbank FCM in the United States, and eighth overall, which gives us scale and flexibility that very few firms can match in clearing and execution of listed derivatives. Furthermore, with our registered swap dealer, we can offer bespoke OTC solutions to address clients' needs through margin relief, financing and/or access to customized structured products. In addition, in collaboration with our physical businesses, our risk management consultants have the ability to embed hedging strategies within physical contracts in order to provide enhanced price risk mitigation to the clients. Another key differentiator is our people and experience. We have hundreds of risk management consultants around the globe who work directly with clients, building hedging strategies that help manage exposure and optimize their financial results. Through this work, we've earned a long-standing reputation as a trusted partner, one that clients rely on to help them navigate uncertainty and make confident decisions during volatile market conditions. We do this through the support of market-leading technology tailored to the commercial segment. This includes StoneX Hedge, automated order management, merchandising and origination platform integration into clients' ERP systems. Through this platform, clients have hedged in excess of 1 billion bushels, and we look forward to growing this further. StoneX Plus, leading dairy market platform for the delivery of market intelligence, pricing and trade data, OTC trading a.k.a. spot, web trading platform for customizable structured products and OTC trading across multiple commodities. We also spend a great deal of time, effort and resources assisting and educating our clients and the market at large through hedge scores, professional programs, product seminars, market outlooks, expos, conferences and joint events with exchanges. Some examples of these activities just in the last quarter include our participation in the ADPI, the American Dairy Products Institute, co-hosted with the CME, the Dairy Purchasing and Risk Management seminar, Brazil's National Association of Cotton Exporters, the Global Cattle Connect webinar, online events bringing together experts from across the globe to discuss trends shaping the future of the cattle industry, representing StoneX Brazil, North America and Australia. We do hundreds of events like this every year, reinforcing our integral role within the industry and form a very important component of our global hedging business with dedicated resources and teams supporting this globally. Our market intelligence platform is rooted in our employees' expertise, enabling us to deliver cutting-edge research based on data and insights from specialists on the ground. We have further broadened our reach by expanding our digital content through podcasts, videos and white papers, ensuring clients can access market insights whenever and wherever they need through our mobile app. Turning to Slide 15. We outline how we continue to strengthen this business and deepen the value we deliver to clients. First, we continue to expand our ecosystem by growing the number of OTC products we offer and deepening the links between this financial hedging business and our existing physical sales and trading business. We have begun to enter new markets such as power and electricity in Australia, carbon in Europe and other environmental markets, which we believe will not only diversify our client base, but capture more wallet share. Secondly, we continue to grow and diversify our client base. This includes extending our commercial introducing broker network, largely inherited from R.J. O'Brien, expanding our geographical footprint with new locations in Madrid and Paris and extending our OTC offering further into the adjacent markets like meat and dairy, where our expertise can help unlock new client segments. And thirdly, we are actively digitizing the business. This includes advancing our ERP integrations with clients to further embed StoneX into their operational workflow, expanding functionality with our farmer-focused mobile apps, such as Farm Advantage, et cetera, and utilizing AI to significantly increase broker capacity and automate tasks. These actions not only improve efficiency, but strengthen client engagement and reduce friction onto our platform. Taken together, these pillars position StoneX to continue expanding market share, deepen client relationships and increase margins, all while building a more interconnected, more digital and more scalable global hedging franchise. Moving on to the final slide, Slide 16. This was another consecutive record quarter, highlighting the strength of our diversified business. We achieved earnings of $139 million, a diluted EPS of $2.50 and an ROE of 22.5%, which represents a 32.4% return on tangible book equity. Our earnings and diluted EPS were up 63% and 48%, respectively. We remain well positioned to capitalize on current market volatility due to our diverse offerings, combined with our fortress balance sheet. Our assets under management and custody continue to grow as we are increasingly seen as the largest alternative to banks and an easily accessible ecosystem for banks as well. Our unique ecosystem captures clients across multiple touch points, and we continue to dedicate ourselves to better serve our growing client footprint. The enormous total addressable market still available to StoneX will continue to power growth in the years to come. We are very proud of the StoneX team for their steadfast commitment to clients throughout challenging market conditions, and we remain focused on providing the industry's most robust and comprehensive financial ecosystem. Operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Schmitt with William Blair. Jeffrey Schmitt: In the physical trading business, obviously, a really strong quarter there due to precious metals. How much of that strength came from cross-selling RJO clients? Or was that really kind of mainly volatility driven? And then just curious how that business is trending here in January, February with now that gold is pulling back? Philip Smith: There was limited upside from the precious metals revenues and volumes from traditional R.J. O'Brien client base. So I think a lot of it was primarily driven on the fact that we saw a heightened level of interest in this space, both in the wholesale and also at a retail level. Now you'll recall, in 2019, we purchased a company called CoinInvest, which we subsequently rebranded as StoneX Bullion. That was our direct-to-consumer retail trading platform. That has exceeded our expectations. And I think it's fair to say that when it was purchased, it was making probably $1.5 million a year. They've achieved that in a single day recently. So I think that's been a transformational expansion of our ecosystem because it gives us that ability to go directly to consumers. And at the same time, the wholesale business is also supplying physical material and refined products, mint-produced coins and small bars to other B2C companies, which themselves have been benefiting from the recent uptick in interest from a retail level. And at the same time, the disconnect that we often see in these markets and have seen for many years where there is a physical price disconnect between jurisdictional country A and country B. And because of our ability to move physical around the world sufficiently [Technical Difficulty] where there was a significant shortage of silver in India and it is not the easiest place for people to move gold into, but we've been [Technical Difficulty]. Jeffrey Schmitt: Okay. And then on the cost synergies, those appear to be on track or maybe you're realizing them even faster than expected. As you dig into the RJO business, I guess, are you seeing any potential upside to the $50 million? Or is it still kind of too early to tell? William Dunaway: Yes, Jeff, I mean, at this point, I think that we're still kind of just confirming the $50 million. I mean I think that it's coming along as we talked about last quarter. I think that we've seen some of the wins thus far. They'll continue to pick up throughout the rest of the fiscal year. The kind of milestones we have will be later this year. Over the summer, we will migrate the largest entities combined. So kind of coming out of fiscal '26, I think we'll probably be in a pretty good spot of having about 40 of them kind of in the run rate. And then going forward, we'll capture the rest over fiscal '27. But I think we're still kind of affirming at this point that $50 million figure. Jeffrey Schmitt: Okay. Great. And then just one quick one on the institutional segment. The securities business there had a great quarter. And you mentioned moving into U.S. stocks in the market maker business. I'm just curious how much of the mix that is? And maybe if you could talk about that. The rate per million there, I know you've talked about that inflecting up, but are we at a point where we're at a better run rate there? Or is there more upside to that? Philip Smith: Yes. I think that part of the business is still quite early stages in terms of its expansion. Most of the increase we've seen is very much across equities market making, fixed income and prime services. So as a subcomponent, we continue to grow in that space. That space has probably the addressable market of all areas, but it is one small step at a time. We continue to see growth, but not at the level and not at the level of maturity that you will see, say, in our market-making business for our unlisted ADRs, where we continue to be ranked #1 and have been for the last 11 years. So we'd love to be in that situation for mainstream equities, but it's a big market, and we're not there yet, but we're very pleased with the progress made so far. Jeffrey Schmitt: Great. And is that rate per million, I mean, do you expect that to inflect up more? Or are we at a point where maybe it's a good -- a better run rate? William Dunaway: Yes. I mean I think at this point, Jeff, it's probably kind of getting back to more of a run rate. I mean it kind of really dipped as we moved into some of those stocks. And as our institutional sales and trading business has picked up and some of the other the equity market making continue to perform. I think we've gotten -- this is obviously a high watermark, right? We're 320-ish. And we were a year ago -- I'd say a year ago, we were kind of at the low inflection point. I think somewhere in this 300 -- a little over 300 range is probably a more normalized rate for us now going forward. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: Just wanted to follow up on the environment. And obviously, you've seen a lot of movement in the underlying, whether it's gold, silver, all this stuff. So I was just curious about the health of the customer kind of post quarter, if there's been any changes in losses or as you just think about activity levels still being good and just the environment being constructive versus maybe this point in time, we've seen bad volatility. And so I just want to understand if this is still a constructive environment for you guys. Philip Smith: Yes. And I think we've discussed this previously. I mean we obviously benefit from increased volatility in the markets across multitudes of products within the StoneX ecosystem. But when it reaches a point of extreme volatility, that stress can become heightened and more of a concern for our underlying clients. I think the closeness of the relationship helps us through that. We obviously don't want our clients to get into a situation where such positions or such transactions put them in a hazardous situation. And I think identifying concerns and talking to our clients, speaking with them on a daily basis and just walking them through how they are hedging their positions, but at the same time, ensuring they have sufficient liquidity to stay at the table and to not be forced into taking off their hedges. So it's an engagement exercise. We obviously like the volatility. We don't like extreme volatility because of that potential negative impact on our clients. But that's been the case for many years for us. Daniel Fannon: Understood. And then just on the R.J. O'Brien deal in the context of what you see as the kind of most near-term kind of cross-sell opportunity in the context of some of -- there weren't numbers that were outlined when the deal was announced, but obviously, you've talked about multiples in size versus the expense synergies. So I just want to, again, if you could reprioritize kind of where you see those opportunities and what we should see as we think about the next couple of quarters. Philip Smith: Well, I mean, it's a sort of dual approach in terms of we have the integration process itself. And as we said, we've begun that with the U.K. entities. That's been completed. We're seeing the schedule of time lines for further integration and building up to the largest part of it in the U.S. That is a big part of the potential cross-sell. Because don't forget that until such time as we can kind of consolidate the entities, there's still the case of repapering with other legal entities within the StoneX Group. There's still an education process in many areas. So we talk about comparing and whilst we didn't specify the potential revenue expectations from cross-selling, we do anticipate based upon looking at our OTC, as an example, revenues versus our exchange-traded derivatives revenue and how that's morphed over the years and the revenue attributable to the OTC side of the product, we can then superimpose that onto a lot of the RJO revenue. It's not a guarantee, it's not a certainty. There's work to be done. There's education exercises to be done. We have to help all the RJO employees to sort of be confident enough and be able to engage with the clients and most importantly, make sure that it is the right thing for all the clients involved. We talk about some simple wins in that R.J. O'Brien across the entire organization did not have the ability to offer foreign exchange. That's a relatively mainstream vanilla product for us within StoneX. So things like that, we are gradually introducing more and more capability to across the organization. And even before the integration is completed, we're trying our best to ensure that we can get as much capability and products in front of our incoming R.J. O'Brien clients as possible. But it's -- we've had a lot of small wins that have built up, and we continue to encourage that, and we welcome it and we circulate internally some success stories. But we're not at the point to be able to say, here you go, we recognize this about so far. But we continue to be very optimistic about the potential there. Daniel Fannon: Understood. Okay. And then Bill, just in the context of the expenses and since we -- this is the full quarter with both the last couple of acquisitions in there. As we think about the run rate and the kind of go forward, anything to normalize based on integration or other things from an expense perspective or areas where you think the growth and/or movement of -- at a line item level might be most? William Dunaway: I mean I think we'll see, as you see every year, right, our Q2 is the start of the calendar year, right? So we'll see a tick-up in nonvariable compensation kind of related to the annual merit increases, kind of all the taxes and benefits and all those kind of things reset. So we'll see a tick-up from there. But I don't see -- I don't think there's other line items, Dan, that we would expect to materially change other than as we see some of the synergies come through. We should see hopefully some downtrend on that nonvariable comp line as well as some of the tech spend and on the longer term is where you'll start to see some occupancy, et cetera. But most notably here at start of the calendar year will be -- kind of there will be a bit of a tick up on the nonvariable compensation line. Operator: [Operator Instructions] our next question comes from the line of Lukas Jaeger with Liberty One Investment Management. Lukas Jaeger: Okay. So long time listener, first-time caller. I have a question in regards to sort of the pre-existing business of StoneX not really focused on the R.J. O'Brien and Benchmark acquisitions. This time last year, some of the discussion was within the securities business and sort of the sort of client group in the active ETF space sort of adding an additional piece of growth. And I guess I'm just sort of further looking for a discussion on some client groups that are going to come into the existing pre-existing StoneX client business that will kind of show sustained interest within sort of your risk management contracts and trading services? Philip Smith: Not quite clear in terms of the question. But from an institutional perspective, we do see a big sort of sizable shift in terms of the client space in the regional banks in the U.S., for example, where what we're seeing now is that if you turn up to one of the regional banks knocking on their door and saying, I'd like to talk to you about this particular product. They're not interested. What they are becoming very interested with us is the multitude and the breadth and depth of our product offering. So we're suddenly seeing some dividends coming through with regards to our ecosystem, which we talk about on a near constant basis and very proud of. But it's now becoming a big distinction between us when talking to new and potential clients in the -- just in the regional community bank space in the United States. So that's where we're optimistic in terms of this could be another phenomenal uptick in terms of revenue that we're looking to benefit from, but also to be able to solidify the relationship we have with said banks because what we increasingly can see across all of our products is where we fit in, I guess, in the level of priority or relevance from their perspective to us. We aspire to be a one-stop shop offering as much capability and product to as many clients as possible through a single avenue through to StoneX and our ecosystem. But it's starting to become a door opener in ways that perhaps we weren't necessarily expecting, just like we weren't expecting the growth in our build-out of our fixed income business in APAC to hit the ground so quickly and build so rapidly. Because we -- I don't think we fully understood the lack of alternatives, lack of service and lack of localized dealing desks in that region. So there are a lot of areas where we're looking to expand our capability. But at the same time, sometimes it takes a while for us to really get the benefit of something perhaps we weren't necessarily expecting in the first place. And the intro into those regional banks has demonstrated that. So we will talk to household names in terms of regional community banks. But the fact that we're offering -- we're able to offer a multitude of fixed income products. We're able to offer them access to SWIFT. We're able to offer them payments. We're able to offer them equities, overseas equities, ADRs, things like that, which you previously would be expecting them to be using multiple providers for, they can now do it in a single avenue. So that's where we see some sizable momentum coming down. Lukas Jaeger: Perfect I appreciate the additional color. And despite my poor phrasing, you look -- you answered my question very well. Moving on to sort of the FX and sort of CFD area of the business. I'm kind of just curious, so I saw that the rate per million is down around 30% compared to last year. And I was hoping to unpack sort of the reasons for that. My understanding would probably be that's largely because of some lower volatility. So I think the CVIX like average from this period compared to the last period is down around 15%. But I'm wondering if you could have further unpacked that rate per million figure just so that I can understand it. William Dunaway: Sure. I think I'll take that. So I mean, last year, just a reminder, we were -- that was probably the highest rate per million that we've seen out of the business since the acquisition of GAIN Capital back in -- or in 2020. So we did still kind of see -- I mean, the FX space, both as a reminder, in the FX/CFD space, we do that both on the institutional side as well as obviously the bigger piece of it in the self-directed. But overall, I think we continue to see kind of the FX volatility being somewhat muted and not the greatest environment for us. And obviously, it benefited tremendously in our physical space and the commodity space from the movements in gold, but it proved to be a bit more challenging in that space on the retail side with the markets moving around. So a combination of everything. And so I would say that it's not -- the rate per million that we're seeing now isn't out of line with expectations. I think it was more last year was just such a bang-out quarter for us on the retail side with really strong spreads. So I would say that this is probably a bit more normalized environment, something in the -- if you look at the retail -- the self-directed retail, we were at 110. We've kind of averaged over the last 4 quarters around 116. And I would say -- so it's not out of the realm of what the expectation is. It's just last year's comparable period of 185 was very strong. Lukas Jaeger: That makes complete sense. I mean that sort of falls with what the graphs on Bloomberg tell me so that I appreciate the additional color. Is there any particular currency pairings that sort of self-directed client group is interested in, just as a follow-up question. Philip Smith: No, I don't think we can step that into the mix. It's not as easy to sort of simply say, yes, this is the pair that we find more interesting than others. I think what you'll find is that the volume going through certain currency pairs and euro-dollar is one of probably the largest currency pair that we trade. But it's market-driven. So our clients will -- our clients in the wholesale FX business will be looking to hedge, looking to hedge their exposure, looking to lock in forward rates. And our retail CFD business is much more of a looking to take advantage of market moves at a retail level. But it will vary. And it's not something we really publish, but it's -- you would expect currency pairs and I include gold in those currency pairs because it trades like a currency where dollar-euro, dollar gold, dollar silver will be consistently high. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Philip for closing remarks. Philip Smith: Thank you, operator, and huge thank you to everyone [Technical Difficulty]. Operator: Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Helmerich & Payne Fiscal First Quarter Earnings Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Kris Nicol, Vice President of Investor Relations. Kris Nicol: Welcome, everyone, to Helmerich & Payne's conference call and webcast for the first fiscal quarter of 2026. On today's call, John Lindsay, our CEO, will be joined by Trey Adams, President; Mike Lennox, Executive Vice President of the Western Hemisphere and Kevin Vann, our Chief Financial Officer. Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under securities laws. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations will prove to be correct. Please refer to our filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. Reconciliations of direct margin and certain GAAP to non-GAAP measures can be found in our earnings release. I also want to highlight that we will have a presentation, which will support the prepared remarks from the management team and can be found on the IR website. With that, I'll turn the call over to John. John Lindsay: Thank you, Kris. Hello, everyone. Thank you for joining us. As always, we appreciate your interest in H&P. I'll begin with an overview of our first quarter results, and then I'll turn it over to Trey and he will discuss the broader macro environment, current dynamics in the rig market and several key commercial developments from the quarter. Including an update on our latest technology initiative, FlexRobotics. Kevin will then walk through our financial results and provide guidance for the second quarter and full fiscal year. To wrap up, Trey will return to summarize the key takeaways before we open the line up for questions. Turning to Slide 4 of the presentation, I'd like to begin by highlighting some of our key achievements for the fiscal first quarter. Execution continued to strengthen across our business. Driving solid operational and financial performance. Adjusted EBITDA exceeded expectations at $230 million, supported by resilient results in our North America Solutions and Offshore Solutions segments as well as the stronger-than-anticipated performance in International Solutions. I would note that the first quarter benefited from the timing of certain rig reactivation expenses, which will be more heavily reflected in the second quarter. Beyond the rig reactivations in Saudi Arabia, we also saw meaningful margin improvement from our FlexRig fleet operating in the vast Jafurah gas field. I'm encouraged by this progress and optimistic that we will continue to see further margin expansion throughout the remainder of the year. In North America Solutions, I want to recognize the team for another quarter of strong execution. We averaged 143 rigs working and our industry-leading technology and talented teams continue to deliver for customers, generating average margins of over $18,000 per day. Our offshore segment also delivered another quarter of robust operational performance. This business typically operates under long-term contracts, which provides a stabilizing counterbalance to the more cyclical land drilling market. As Trey will discuss during his remarks, FlexRobotics, automated drilling and connections, represent the next step forward in rig safety and capability. I am personally very excited about this development and view it as yet another example of how H&P continues to lead the industry in rig technology and drilling innovation. Now as this is my final earnings call as CEO for H&P, I want to take a step back for a moment and share a few reflections. I started my career at H&P 39 years ago. And while I don't have time to thank everyone that was instrumental in my career, there are many, and I am deeply grateful to all of them. During my 12 years as CEO, we've navigated volatile cycles, shifting markets and rapid technological change, and H&P still leads. Our long-term success depends on discipline, the skill and commitment of our people and the company's willingness to invest through the cycles rather than just react. Durability matters, we don't chase a perfect quarter, but we would build with patience, rigor and people who do things the right way. We build for decades of performance. Finally, I want to thank my exceptional leadership team and the many employees I've had the privilege to work with along the way. For their commitment, professionalism and support. For truly living the H&P way. I also want to thank our customers for their partnership over these many years and our shareholders for their long-term support of the company. It's been a privilege to lead H&P, and I'm excited about the future of the company under Trey's leadership. We have a strong team, a clear strategy and we are well positioned for the future. So thank you all. And now it's over to you, Trey. Raymond Adams: Thank you, John. I'd like to express my gratitude both on behalf of our whole organization and personally for your outstanding leadership, discipline and the example you've provided and especially for the mentorship and friendship. You've led this company with a long-term mindset, a steady hand through multiple cycles and a deep respect for the people and values that define H&P. The strength of the company today is a direct reflection of that leadership. As I step into the role next month, I do so with a great deal of respect for what's been built and for real excitement about where we're headed. The foundation is strong, a global footprint, differentiated technology and the H&P way, a culture that truly differentiates us. Building on that foundation, our focus will be on continuing to evolve, leaning into innovation, advancing our capabilities and positioning the company to compete and create value at a global scale in what is a constantly changing energy landscape. I'm honored to take on the role of CEO and to lead the next chapter of Helmerich & Payne alongside this team. I look forward to working with our employees customers and shareholders as we move forward together. Turning our attention to the current macro environment on Slide 6. We firmly believe that in the future, the world will require significantly more energy than it consumes today, driven by expanding population and growing prosperity in emerging markets, along with the rising power needs from AI advancements in many developed nations. This dynamic supports our view that demand for oil and gas will persist and grow for many years to come, which in turn, bolsters the need for our global drilling solutions. Looking at this year, the energy landscape appears cautiously positive, but uneven as various macroeconomic and geopolitical factors continue to influence the market. While these developments have these concerns over an imminent fall in oil prices at the year's offset, the price rebound has not been sustained for long enough to influence a pickup in industry activity. Operators remain focused on disciplined capital deployment, conserving inventory and prioritizing returns over volume expansion. Consequently, we anticipate oil-related investment will remain soft this year with greater upside potential likely to play out beyond this year. In contrast, the outlook for gas markets is more robust. Structural growth continues, fueled by demand for LNG and surging AI-led power demand. As such, we expect 2026 global upstream investment levels to remain flattish overall, though with notable variations by region and market segment. North America is likely to remain most restrained market in the quarter ahead. This is evident in current activity levels and the recent behaviors of both customers and competitors. We do, however, expect activity to gradually improve through the course of the year and strengthen into 2027. Internationally, the market demonstrates greater resilience. With a clear uptick in activity in the Middle East. Our recent announcements regarding reactivations in Saudi Arabia highlight this growing momentum, and we are beginning to observe broader improvements across the region. South America is also on a more positive path. In this context, our strategic priorities remain unchanged. Maintaining our focus on pricing, making selective capital investments and positioning our business to capitalize when the market cycle strengthens. Turning to rig dynamics on Slide 7. I want to provide a brief update on the operational front. Lower 48, rig demand moderated into the end of the year, with operators adjusting activity levels to align with market conditions. North America Solutions exited the first fiscal quarter with 139 rigs, a 4% decline from the prior quarter's exit rate. For the second quarter, we expect to average between 132 and 138 active rigs and currently have 135 rigs operating as of today. Although activity has softened, we remain optimistic for the full year outlook, supported by ongoing discussions with customers. Our expectation is that conditions will gradually improve over the course of the year with a pickup in both oil and gas focused activity. Moving to our international operations. We continue to expect the phase reactivation of the suspended rigs in Saudi Arabia that we've been notified will return to service. We now have raised the mast on 2 rigs and anticipate completing reactivations by mid-2026. Offshore Solutions continues to perform well, reinforcing H&P's leadership in offshore operations and platform maintenance. Currently, this segment has 3 active offshore rigs and 31 management contracts backed by long-standing customer relationships, creating a steady and reliable cash flow base. Our geographic footprint positions us well for anticipated offshore investment cycle and the continued integration of our land and offshore operating models and safety practices will strengthen our performance, both over the near and long term. Turning to Slide 8, on the commercial front, we made progress in several areas during the quarter, most notably was the announcement of rig reactivations in Saudi Arabia, which commenced in November last year. This marks a turning point in activity levels in the Kingdom, and we remain hopeful that we will see further reactivations as well as the opportunity to further deploy our technology and performance capabilities over time. Our teams are working hard to redeploy these rigs in country with a focus on customer satisfaction, safety and operational performance. Elsewhere in our International Solutions business, we are pleased to deploy additional rigs in both Australia and Pakistan and continue to see a high level of engagement with host NOCs, IOCs and leading OFS service firms on opportunities to expand our presence in the Middle East and North Africa. The potential reopening of Venezuela could offer meaningful growth for H&P in the medium term. We have a long and distinguished heritage of operating in the country and with the right operator, commercial framework and returns profile in place, we can mobilize relatively quickly. Furthermore, we are excited to note that geothermal rig interest remains high, both in Europe and North America. During the quarter, we received 3 contract awards for geothermal rigs in Germany, Denmark and the Netherlands. In January, we added another rig for a geothermal project in North America. Domestically, while the rig count remains soft, we are pleased to sign multiyear contract extensions for several of our rigs operating for key customers across the Lower 48. This strengthens our term backlog and provides greater visibility regarding activity levels and margin rates. Offshore Solutions saw continued commercial momentum during the quarter with progress on several multiyear offshore contract renewals and extensions under evolving commercial frameworks. These opportunities span multiple regions and reflect ongoing customer demand for H&P's operations, maintenance and integrated service capabilities. While certain contracts remain subject to customer approvals and customary conditions, the company is encouraged by its potential to support long-term revenue visibility in the offshore portfolio. As I mentioned, our Offshore Solutions business is differentiated from the more cyclical parts of our portfolio providing durability and longer-term visibility and is in an area we are actively looking to expand over time. Moving to the next slide, I would like to take this opportunity to discuss our latest advancement in rig technology. FlexRobotics, our system has been successfully deployed on 3 pads for a Super Major customer in the Permian Basin, delivering results in line or better across several operational metrics. FlexRobotics is all about the automation of routine tasks so that crews can concentrate more on performance and safety. FlexRobotics fully automates drilling, drilling connections and tripping rig floor activities. This, in turn, helps improve safety and operational performance by helping move our rig crews out of the rig floor Red Zone. We started our journey with FlexRobotics testing in 2024 on our R&D FlexRig 918 in Tulsa to help validate the system. But now FlexRobotics is successfully deployed and operational in the Permian Basin. The FlexRobotics system is designed with 3 off-the-shelf robotic arms used in many industries, allowing for a retrofit-ready system to integrate seamlessly with any of our active rigs. We are excited about the potential to deploy more FlexRobotic systems on our rigs in the future. At the same time, customers are excited about its potential with several inbounds on our latest innovation. As John said, H&P continues to lead in rig technology innovation. We remain dedicated to developing solutions that both enhance customer experience and deliver superior returns for our business. With that, I will now turn the call over to Kevin, who will walk you through our financial results. J. Vann: Thanks, Trey. I will start by reviewing our first quarter operating results and providing details on the performance of our operating segments. I will then spend some time walking through our capital allocation framework and conclude by outlining our guidance for the fiscal second quarter before handing it back to Trey. Let me start with highlights for the recently completed quarter on Slide 11, where we exceeded the midpoint of our direct margin guidance in all our operating regions despite the dynamic market environment. Alongside our continued operational and commercial success, we also made strong progress on the deleveraging front as we have paid off $260 million on our $400 million term loan as of the end of January, remaining significantly ahead of the debt reduction goals we laid out last year. During the quarter, the company generated revenues of $1 billion, which is the third consecutive quarter at that $1 billion mark. We generated $230 million of adjusted EBITDA coming in ahead of expectations. This was primarily led by stronger-than-anticipated margin performance in International Solutions as a result of the lower-than-expected reactivation cost in Saudi during the quarter. The balance will now occur in the second fiscal quarter and is reflected in our 2Q international margin guidance. On EPS, we reported a net loss of $0.98 per diluted share. These results were negatively impacted by a non-cash impairment charge and some unusual non-cash items of $103 million. Absent those items, we generated a loss of $0.15 per share. Capital expenditures for the first quarter were $68 million, trending below our sequential run rate. This outcome was primarily driven by slower-than-anticipated CapEx associated with the Saudi reactivation capital deployment in International Solutions, along with timing changes in some of our North American solutions spend. In line with this, H&P free cash flow in the quarter came in strongly at $126 million. Our cash flow generation funded $25 million in base dividends in addition to the significant progress on paying down our term loan. Now turning to our 3 segments, beginning with North American Solutions on Slide 12. We averaged 143 contracted rigs during the first quarter, which was up slightly from the levels we experienced in the fiscal fourth quarter of 2025 and consistent with the activity expectations we set on the prior call. Segment direct margin for North American solutions was $239 million, which came in above the midpoint of our guidance range. This was driven by a higher rig count sequentially and our total gross margin holding in above $18,000 per day as we closed out the calendar year. This outcome is also evidence of our commitment to our customers. We benefit when they benefit via our performance-based contracts. Ultimately, our goal is to help them meet their objectives of drilling consistent and timely wells and setting them up for a clean and efficient completion and production process. Turning to International Solutions on Slide 13. The segment ended the first quarter with 59 rigs working and generated approximately $29 million in direct margins, exceeding the high end of our guidance range of $13 million to $23 million. Again, the much higher-than-anticipated margin rate is primarily driven by the timing of reactivation costs, which were anticipated to occur in the first quarter, but will now happen in the second fiscal quarter. Underlying the lumpiness of our reactivation cost in Saudi Arabia we saw continued improvement in the margin performance of our FlexRig fleet and higher-than-anticipated rig utilization in the Middle East and in Colombia. Finally, with our Offshore Solutions segment on Slide 14, we generated a direct margin of approximately $31 million during the quarter, which came in slightly ahead of the midpoint of our guidance range. We had 3 active rigs and 33 management contracts in operation during the quarter. As with prior quarters, we are excited about this business and the consistent and stable results that it delivers. As Trey said, it requires minimal capital and generate steady cash flow, which is distinctive from the cyclical and more capital-dependent nature of our onshore portfolio. Turning to Slide 15, I want to provide an update on our capital allocation framework. Our focus remains unchanged, with the top priority being continued deleveraging and maintaining our investment-grade status. In relatively short time, we've made meaningful progress to reduce our post-acquisition leverage and we remain committed to reaching our near-term goal of paying down our term loan of $400 million ahead of schedule by mid-2026. As I mentioned earlier, we have paid down $260 million on it as of the end of January. At the end of the fiscal first quarter, we had cash and short-term investments of approximately $269 million. Including the availability under our revolving credit facility, our total liquidity is approximately $1.2 billion. Beyond the term loan repayment, we are focused on driving leverage down to around 1 turn or 1x net debt to EBITDA. We continue to evaluate our asset base to ensure capital is directed towards the highest return opportunities while simplifying the portfolio where appropriate and driving structural cost improvements across the organization. Since we closed the sale of the transaction, we have been able to reduce our SG&A by over $50 million relative to premerger stand-alone run rates, and we'll continue to align the cost structure with the level of activity. Further, as I stated last quarter, we are harmonizing processes and systems across our Eastern and Western Hemisphere operations. These efforts will help in the longer term with the cost-conscious culture we have at H&P. On portfolio optimization, we continue to work diligently to streamline the portfolio and have line of sight on over $100 million of divestments. Lastly, on shareholder returns, a key element is the dividend. We view the base dividend as a core commitment to shareholders, and we remain confident in its sustainability. The dividend is well covered by cash flow and our capital allocation decisions are structured to support it across commodity cycles. Now I want to transition to our second quarter and full year guidance on Slide 16. Looking ahead to the second quarter of fiscal 2026 for North American Solutions, we expect our margins and operated rig count to taper down in line with the typical seasonality and ongoing softness in U.S. land activity levels. As a result, we expect direct margins in our second quarter to range between $205 million to $230 million based on anticipated rig count of between 132 to 138 rigs in the second quarter. Importantly, as we look out to the fiscal third and fourth quarters, we do see signs of the market stabilizing and expect our rig count to pick up in the back half of the year, giving us a path to approach the midpoint of our full year rig count of 132 to 148 rigs. For international, we anticipate the rig count to average between 57 to 63 rigs in the second quarter, which includes the rigs being reactivated in Saudi. As a reminder, this outlook also includes the expectation for some lower rig counts in non-core countries where the current EBITDA contribution is minimal. When we think about core Middle East, the year-on-year trend is positive. We expect International Solutions to generate a direct margin between $12 million to $22 million. As previously mentioned, we did not incur as much reactivation costs in the first quarter as we anticipated. The balance will now fall in the second quarter, resulting in a step down in sequential margin rates. We are also experiencing some churn in Argentina, where rigs coming to the end of their term are returning to the yard to be fitted with additional technology packages before being redeployed. Despite this timing difference, we expect the direct margin in the fiscal third quarter and fourth quarter to be materially higher than the direct margin rate we achieved in the fiscal first quarter. All reactivations will be behind us, and we expect our FlexRig fleet margin to continue to improve. For offshore, we anticipate an average of 30 to 35 management contracts and operating rigs. We expect the margin rate in the fiscal second quarter to range between $20 million and $30 million. This step down is reflective of typical seasonality, lower revenue days and the roll-off of some higher-margin rig management contracts in Angola. As we progress through the remainder of the year, we anticipate the margin rate to step back up and remain confident in the $100 million to $115 million direct margin full year guidance we shared previously. We are also trimming our 2026 gross capital expenditure budget slightly to be between $270 million to $310 million as a result of activity levels and ongoing benefits of our optimization programs. All other full year guidance ranges remain the same. To conclude, the timing difference of the cost associated with reactivations is creating some lumpiness in the direct margin between the first and second quarters. Beyond that, we remain optimistic about activity and direct margin progression in the third and fourth quarters and are comfortable with where external expectations lie for the full year. I will now turn it back over to Trey for some closing remarks. Raymond Adams: Thank you, Kevin. Turning to Slide 18. I'd like to conclude by refocusing on our compelling investment thesis. H&P today is unrivaled in our scale, geographic diversity and portfolio to capture rising global onshore drilling activity. We are clearly the technology leader and see a significant opportunity over time to deploy our cutting-edge technology across our global fleet. We believe we are only in the early stages of international shale development and are particularly excited about the prospects in the Middle East and North Africa. At the same time, we are embarking on a rewarding journey of enterprise optimization with several programs underway to streamline our portfolio, cost structure and deliver on the full potential of the KCA Deutag acquisition. Our near-term commitment remains on deleveraging our balance sheet, and we are confident in repaying our term loan ahead of schedule. Beyond that, we believe we will have the financial strength and flexibility to enhance our attractive shareholder return profile and further differentiate our portfolio. Lastly, I'm proud of the way we started the year with solid first quarter results. While we face some timing and market dynamics in the second quarter, we are optimistic about activity improving through our fiscal third and fourth quarters and remain confident in the guide we set out at the start of the year. I want to thank the employees of H&P for all of their efforts and look forward to what we can achieve together this year and beyond. That concludes our prepared remarks for the quarter. And I will now turn it back to the operator for questions. Operator: [Operator Instructions] We'll take our first question from Scott Gruber with Citigroup. Scott Gruber: And before I ask the question, I just want to thank you, John, for all the insights over the years. It's been a real pleasure and enjoy your next adventure. John Lindsay: Great. Thank you very much, Scott. I appreciate it. Scott Gruber: Yes, indeed. And Trey, congrats on the promo to you as well. Raymond Adams: Thank you very much. . Scott Gruber: So I want to ask about the moving parts incorporated into the fiscal 2Q guide. We got some color, which I appreciate. It sounds like the start-up costs are going to increase in 2Q as you really push forward those reactivations in Saudi. Are you able to dimension the size of those start-up costs in fiscal 2Q? And will there still be some reactivation costs continuing into fiscal 3Q? And then you mentioned the seasonal headwinds in the U.S. business. Outside of seasonality, is the underlying profit margin for the North American services business now is pretty stable? Or is there still some contract roll headwind in that business. So just some color on those moving parts in the guide for 2Q and how some of those headwinds abate into the future. Raymond Adams: Yes. Thank you for the question. This is Trey. I'll start, and then Kevin and Mike may fill in some additional color as we go through this question. We definitely saw some lumpiness between Q1 and Q2, and we'll discuss the 3 primary drivers of the lumpiness between the quarters here in just a second. I will firmly commit and say that we feel good on the forward guide. We feel good about our guided activity range in North America, as Kevin stated in his prepared remarks, and we feel good about the international Solutions outlook. As it relates to reactivation costs in Saudi, those costs we anticipated occurring in the first fiscal quarter now have moved into the second fiscal quarter. We will see some of those costs continue to move forward into the third quarter, but the vast majority of those will occur in the second fiscal quarter and within our guide. We did also -- the other kind of key driver was in our North American Solutions segment. As you guys are aware and as we've shown, we do expect fewer rigs in North America. This was largely driven by the end of the calendar year 2025 crude pricing. Some of the churn rates and some of the private activity that we have traditionally seen was much more moderated as we exited the calendar year 2025 and entered into our second fiscal quarter. Mike can get into some color later on the call about how we see that outlook as we progress through the year, but we feel like that's much more robust. Private E&Ps compared to a couple of years ago, definitely didn't load to the wagon in the fourth quarter and into the first quarter like they had been over the past couple of years. Our public E&P customers remain very fiscally disciplined. Their capital returns programs remain very much firm and in place. So we feel pretty robust on that guide as we go forward, but it just all kind of occurred as we started this new year with a little bit lighter of a guide than we had initially anticipated in North America. The last kind of component of some of the lumpiness was this offshore seasonality that Kevin referred to in some of his prepared remarks. We definitely had some rigs that moved from a drilling to a more maintenance mode. We had 1 rig that stopped working and stopped activity in Africa. That is pretty seasonal, though. We expect those rigs to go back to drilling and off of maintenance mode. And so it just provided a little bit of lump in our quarter through the offshore segment. What we are, though, is very optimistic on the full year guide. The Saudi reactivations are putting a lot of wind in our sails. We feel like those are largely behind us and the start-up expenses are behind us. We feel good about our forward guide on those as well as our FlexRig margins throughout the rest of this FY '26 year. Our FlexRig margins continue to trend well and are moving in the right direction. In North America Solutions, the current expectations of activity improvement are being felt and seen. And so we still feel very good about our overall activity guide in North America Solutions. And then lastly, I'll just touch on before I turn it over to Kevin for some additional color. I'll just touch on the optimization of costs and expenses throughout the company and portfolio will be a keen focus area throughout the rest of FY '26. Kevin referenced in his prepared remarks and can add some additional color on our CapEx guide, but we feel comfortable about that. So overall, I think we're feeling good about the second half of FY '26 and believe that this second quarter bumpiness will abate and resolve itself. Turning to you, Kevin? J. Vann: Yes. Scott, yes. And if you think about second quarter international guidance of $12 million to $22 million. We've got all of the additional start-up reactivation costs that are hitting margin. We've got them plugged into that quarter. We're pretty confident they'll all hit next quarter. But what you're going to see, without giving you third quarter guidance, you're going to see a material step-up in gross margin coming out of our International Solutions segment from the second to third quarter. So again, from an International Solutions perspective, it's really just kind of sliding some costs between quarters, but we still anticipate when you think about those reactivation or those reactivated rigs in Saudi. We're anticipating a little over $5 million of EBITDA per year contribution out of those rigs. And then on top of that, with our FlexRig performance continuing to get better in Saudi. I think what we've talked about historically has been between $20 million and $25 million for that fleet, those rigs to contribute to annualized EBITDA. So again, second quarter, kind of a lull. Some of that's activity driven. Some of that's, that's just getting ready to really ramp up our International Solutions segment. So -- and as Trey mentioned on cost, using all that as the opportunity from a capital perspective really to take a long hard look in the mirror and make sure that -- we've got capital allocated to the best projects and the ones that are going to return the most value the quickest. And so we're lowering our capital guidance a slight touch. But again, I think that's demonstrative of just us keeping our eye on the ball. Operator: We'll take our next question from Arun Jayaram with JPMorgan. Arun Jayaram: Yes. Good morning, gentlemen. Trey, I wanted to start -- see if we could start with your vision for H&P. You talked about this being a new chapter for the company as you take over for John next month. But I was wondering if you could talk about your vision for the company, including what you see as some of the opportunities internationally, particularly as we see growth in unconventionals and geotherm? Raymond Adams: Yes. Thank you. And first, I just want to take a moment to say how excited I am about the future and about where we're positioned today. John is sitting here and his vision has been manifested in is coming to reality across the organization. The company is well founded. And our foundation is strong. If you think about where we were 14 months ago prior to the KCA Deutag acquisition and the True from 2 of H&P today versus where we were then, we're a truly different company in business today than we were 14 months ago. We're the global leader in onshore drilling. We have a great base of operations in offshore, the leader in platform, operations and maintenance services globally and having an incredible customer base to be levered and build upon as we look into the future. In addition to that, if you think about the geographic diversity and talent we have at the organization today, it's just incredible. From an engineering resource, drilling expertise, our office-based employees, we just have an incredibly talented organization to build and leverage for a lot of future growth. When you think about the vision over the next 3 to 5 years, obviously, this will continue to be dynamic and very iterative as we look forward. But it's really founded on 4 kind of key notes and nodes, if you will, right? And the first one being international growth and expansion that you referenced. We are very, very focused on continuing to build our Eastern Hemisphere land exposure, the Middle East and North Africa, backed by our rig reactivations in Saudi, key IOC relationships. And then the transference of our models and technology from the North American business will really underpin what we believe is going to be a growth -- a great growth story for the organization into the future. In addition to that, North America Solutions and maintaining and continuing our leadership position in North America will be a key focus for us. Over the last decade, 1.5 decades, we've continued to accrete and grow our share position in North America. We've done that through our great people, processes, equipment, technology portfolio. Continuing to build and expand on that will be a big focus and we'll be right in our front window as we look forward through '26 and beyond. And today, we've talked about in some of our prepared remarks, some of our technology innovations, continuing a leadership position in the digital and automation space, FlexRobotics and continuing that progression in the North American shale market will be a very critical for us to maintain that leadership position and continue to grow share over time here in North America. A subcomponent that I will reference is offshore. It's not bullet 3, but offshore continues to be a very exciting space for us. It's a very capital-light and stable, very durable business that we look to expand and grow in '26 and beyond. Bullet 3 really is what Kevin was talking about in his prepared remarks and we'll continue to discuss and that's deleveraging and maintaining our fiscal discipline at H&P. For 106 years of our company's history, we've been very fiscally rooted and founded in very good stewards of capital. We're committed to shareholder returns, and we're committed to getting balance of 1-turn of leverage, and that will be a focus for us through the rest of this year and over the next 3 to 5 years to really maintain that fiscal discipline. The fourth bullet I'd like to discuss and really focus on here is this enterprise optimization. If you think about enterprise optimization, I'll break it into 2 pieces. One is on the field and front office focus for us. And you think about the transference of the H&P business system, the transference of the H&P way outside of the North American market and into the international markets in a big way and in our offshore segments. Our customer-centric culture and being able to see that through everything we do, everywhere we work, driving safety excellence every single day, everywhere we work and continuing to be the performance and technology leader that we are today. But we need to see that, and we will see that come through all of our operations across the globe. On the back office, we're committed to being a very lean and efficient organization. We're committed to being a very cost-conscious culture, as Kevin mentioned. And now leveraging our global scale and capabilities, there's ways to continue to optimize our customer delivery and everything we do as we're looking forward. Moving to international excitement. Yes, go ahead. Arun Jayaram: No, no, go ahead. Go ahead. Raymond Adams: Moving to international excitement, right? We sit here today, and we're talking about the reactivations in Saudi that are going to be foundational for our Eastern Hemisphere land growth. What we haven't referenced in a big way, I think Kevin touched on it a little bit earlier, but we are adding a second rig in Australia today, excited about that opportunity. In addition to that, we saw a little bit of activity moderation going from 1Q to 2Q in Argentina. We expect that activity to pick back up through the second half of the year. And what we're taking advantage of through that activity moderation period is we're investing in technology in Argentina. And so our digital applications and fleet we'll be able to be levered by our customers down there that's going to create exponential value for us as we look forward in Argentina. Today, as we stand here on the call, we're rolling out technology and our digital solutions in Oman as well for some key IOC clients. We're excited about that progression. And so as we stated in prepared remarks, we believe we're in the early innings of a really long game here and a long great growth story in the international market. Outside of some of the rig reactivations in Saudi, there's continuing ongoing discussions with IOCs and NOCs in North Africa and in the Middle East. Those are great conversations. We look forward to providing more material updates as the quarters move through the year. But it's really, really exciting to see kind of where we're going. I think you mentioned geothermal. Geothermal, both in Europe and North America continue to be exciting for us. We've added a second rig in the North American market. We've signed an LOI for a third rig in North America. And then Europe, geothermal, we're proud to be over the most advanced extended-reach complex geothermal project in Europe today with more activity points that are coming in the near term. And so that's really starting to gain some good momentum. Arun Jayaram: Great. John, I wanted to wish you the best. John, I want to wish you the best as you joined Hans and George Doty in retirement? John Lindsay: Yes. Thank you very much. I appreciate it. It's an exciting time for the company, and I'm looking forward to my next chapter as well. Thank you. Operator: We'll take next question from Saurabh Pant with Bank of America. Saurabh Pant: And John, I'll echo Arun, and Scott, congrats on your retirement. It's been a pleasure to hear your patient and reassuring voice over all these years. John, Thank you. John Lindsay: You're welcome. Thank you very much. It's been a great journey. Saurabh Pant: Yes. I'm sure you're looking forward to slowing down a little bit. But Trey, you will face the tougher questions now. So -- maybe I'll throw one at you. Maybe I want to dig in a little bit on the international outlook, Trey or Kevin, if you don't mind. I know you alluded to this a little bit in your prepared remarks and in response to Scott's question, but how should we think about profitability when all these 8 FlexRigs are done fully ramping up and the 7 rigs we are reactivating in Saudi. I know activity moved up, right? But keeping everything else steady. How should we think about where margins can go, I think, let's say, perhaps by the fourth fiscal quarter of this year. Just some idea of where things might land. Raymond Adams: Yes. Thank you. And I'll start and then turn it over to Kevin for additional color on anything I missed. So we're excited today, as we sit here on the call, we have 2 masts in the air of the planned reactivations and a third mast that's ready to be raised imminently. So we're making good progress on our rig reactivations, working closely with our customer there in the Kingdom to make sure that those start-ups move seamlessly and go really, really well. Overall, we expect 6 of those 7 reactivations to resume prior to the first half of calendar year 2026. The seventh rig, we're still working on timing for rig #7, as it relates to some of the financials around those reactivations, our CapEx for those reactivations has been built into our CapEx guide. So there's no additional CapEx that is being planned or will come out. It's based into our FY '26 assumptions as we sit here today. Beyond that in Saudi Arabia, that being a really core and key area for us on Eastern Hemisphere growth. We're continuing to have ongoing conversations with our primary NOC customer there in the Kingdom and really think that there's plenty of opportunity as we look through '26 and '27. Nothing that we can comment on materially today, but a lot of encouraging conversations. It's all underpinned by safety and performance. So we have great safe start-ups and our FlexRig performance has been moving in a direction that's providing a lot of tailwinds for us for incremental activity. That operations team continues to drill very safe and efficient wells. The more we do that, the more opportunities will be right there in front of us. As the rigs come out of suspension, the 7 reactivations, we anticipate annualized EBITDA of roughly $5 million per rig. And as you alluded to, we expect that to get there into full run rate by Q4 of our fiscal year. In addition to that, we referenced on some commentary earlier that our FlexRig margins continue to improve, and we expect those rigs to get to full annualized run rate numbers by the end of FY '26 as well. So it provides a pretty robust and well-founded business for us there in Saudi through this fiscal year. I will just hit more broadly on the international segment direct margin before turning it to Kevin to see if there's anything I missed here is once everything is reactivated in Saudi, and it's still -- obviously, there's still a lot more to happen and more opportunity in front of us, but these reactivations come online. We expect our International Solutions segment, to be right around a direct margin rate exceeding $45 million per quarter. And so it's just a good testament to getting these reactivations behind us and we can get to a very stabilized run rate as we're looking beyond FY '26. J. Vann: No, and this is Kevin. I don't really have much to add other than as Trey mentioned, getting gross margin above $45 million, hopefully relatively soon when I think about the big step-up that I mentioned earlier between the second and third quarter. But even more important to that, Trey mentioned all the potential new business and growth that we're going to see out of the Eastern Hemisphere. The acquisition of KCAD basically enabled us to be in this position where now we have that footprint to continue to grow from it. And so $45 million is a good start, but I'm anticipating for years to come now that number to continue to grow. Operator: We'll move next to Eddie Kim with Barclays. Eddie Kim: I wanted to circle back to a comment you made about North America likely remaining the most restrained market in the quarter ahead as evidenced by recent behaviors of competitors. Are you still seeing some bad actors out there in terms of pricing? And I know you expressed confidence in maintaining your full year rig count in North America, which does imply a ramp up as we move through the year. Does that same confidence apply to pricing as well? Or do you think that ramp-up will take a bit longer to materialize. Michael Lennox: Eddie, I'll start. This is Mike. I appreciate the question. Yes. So let's start with the customers and kind of what we're seeing is there's kind of 2 camps out there, the ones that are just disciplined and staying true to what their plans are. And then we have the ones that are more sensitive to the commodity prices. And so what we saw in the quarter, and we've already rebounded essentially, as I described it, where they had pulled back kind of a wait and see, but they still have plans to pick up, and we're starting to see those conversations pick up. And that's why in the back half of the year, we're very optimistic of picking up. Most of those players that were obviously sensitive are your smaller E&Ps, your independents, as far as pricing, we're still saying true. We're not wavering from the 45% to 50% direct margins that we've been on. We're not chasing market share. And really why 45% to 50% direct margins, it's what we need as an organization to continue to invest back in the organization and to achieve the outcomes that our customers are looking to achieve. Again, we're confident in our ability just to navigate the near term and we're very optimistic about the back half of the year. Eddie Kim: And just a quick follow-up. Do you think direct margins in North America you'll be able to hold around that $18,000 a day level for the full year? Or does that look more like an upside case based on pricing trends you're seeing right now? Michael Lennox: Yes, kind of more short term, I'd call it flat. Yes, we're holding -- trying to hold on to that 18 roughly a day. The back half is kind of -- let's -- we'll see. We do think -- like I said, there's some opportunity there. And of course, that's on the revenue side. And then on the expense side, we're obviously working that. Just from a Trey had mentioned just leveraging our scale, we had some great opportunity there, and we continue to work on our expenses as well. Operator: We take our next question from Derek Podhaizer with Piper Sandler. Derek Podhaizer: I just wanted to discuss the opportunity for FlexRobotics. I mean could you please explain the details around how much capital is required to retrofit an active rig? How many rigs you see being upgraded to FlexRobotics? Will this be customer-funded? How should we think about the paybacks? And how meaningful could this be for your earnings over the near to medium term? Michael Lennox: Derek, this is Mike again. I'll start, and then Trey probably add in. I'll just start bluntly. I think it is meaningful in the long term. There's a lot of excitement and really proud of the efforts we've made on our robotics so far. I think Trey mentioned in his earlier comments, we have a test rig that we've been testing this on for quite some time, and we're rolling it out. It's already proven I'll talk about the rigs that's already deployed for a Super Major in the Permian. We work very closely with them to establish goals. We weren't just going to do robotics for robotics just for fun, it was going to have to at least perform at P50 level. So the average level for that operator in the Permian Basin. And after 10 wells, we've drilled and completed. We've moved the rig twice, so 2 pads we're roughly at P40. So we're exceeding that. And really, that's a lot of hard work by our employees, our rig crews, our customer working with us very closely as well as our vendors. It's taken some vendors interacting and setting that goal and going out and achieving. So very optimistic. The demand, the pipeline, the discussion around it. Yes, we think it's very optimistic and look forward to progressing that. Raymond Adams: Yes. And I'll just -- this is Trey. I'll just share that on your question around pricing and commercial constructs, right? We intend to make these investments with appropriate returns. Obviously, we're focused on improving safety out at the edge. And then the performance related to robotics is going to be another step change in uplift for us and for our customers. And so those creative commercial constructs that we've levered throughout the rest of our business will be looked at and levered here as well. And we're not going to make this investment without an appropriate returns profile. But it's still early days. The conversations are moving with customers. There's great customer interest and intrigue in the FlexRobotics system and look forward to providing additional color as we move forward. Operator: We'll move next to Keith MacKey with RBC Capital Markets. Keith MacKey: Maybe just a question on free cash flow conversion, very strong for Q1. We have some of the pieces for how 2026 will unfold. But can you help us maybe fill in some of those gaps for how we should be thinking about free cash flow conversion for the full year? J. Vann: Yes. I mean, obviously, without giving full year guidance, when you think about how much cash we're going to be able to generate, as I mentioned earlier, and we've talked about in some of Trey's prepared remarks, we have a clear line of sight on the paying down of the remaining $140 million of our term loan, and that's just from organic cash flow. And that should happen by the end of our third quarter or right around the end of our fiscal year third quarter. So very optimistic about that. But that tells you that how much additional free cash flow, obviously, the dividend is still of primary importance to us. And so we'll continue to obviously pay that. But then when you think about just the capital guidance that we're giving this quarter, obviously, a slight reduction, but or -- but again, just the free cash flow will continue to increase. This quarter was a little bit higher just because of the lower CapEx numbers. But again, for the full year, again, clear line of sight on being able to pay down just organically, the remaining balance on the term loan. And then on top of that, we haven't really talked about it, but we've got -- as we said on the call, we've got $100 million of clear or clarity around some portfolio optimization that we're doing coming out of the acquisition. Feel very strongly about our ability to execute and get those deals pulled across the line by the end of the year. Operator: And we'll move next to Ati Modak with Goldman Sachs. Ati Modak: I guess on the rig rationalizations in the quarter, should we expect more? Can you talk about that? And can you give us any more color on what your thoughts are for market to reduce capacity? J. Vann: Yes. This is Kevin. I'll begin just in terms of rig rationalization and the impairments that we took for the quarter. It's very difficult. Accounting rules will drive a lot of those impairment decisions and impairment accruals that we have to take. But I'll let Mike touch a little bit on just kind of what those stem from in terms of the rigs that we've had on the sidelines for a while. And if you look at the amount of capital that was going to be necessary in order to put those rigs back to work versus the rigs that, obviously, we're just continually trying to churn and get those put back into our operating system. We just -- from an accounting perspective, we looked at that as too much of a hurdle. And so as a result of it, again, these impairments happen from time to time. But I'll let Mike touch on kind of the specific rigs. Michael Lennox: Yes, Ati, more on the details. So we're talking about 30 rigs. Most of them had already been decommissioned. We had been pulling a componentry, reusing that across our fleet. These rigs had not worked since COVID or prior to COVID. So they had been idle for quite some time. And some of the components that we're talking about, for example, on 42 of our rigs today, we have what I call Level 1 automation. So it's a rig floor automation that's removing people from the Red Zones on the floor. So as we've put new equipment on those rigs, the equipment that we've pulled off is what we're talking about that we've -- we're decommissioning and impairing. Another example would be, as we've upgraded our entire fleet, at least domestically, we've had to put new drillers cabins with new technology to run our full suite of tech on those rigs. So these drillers cabins, we've used about as much as we can on them, and it's time to clean the yards and dispose of that equipment. So that's kind of the nature of what we're talking about on equipment. Ati Modak: And congratulations, John. John Lindsay: Thank you. I appreciate it. Operator: And that does conclude our question-and-answer session for today. I would now like to turn the call back to John Lindsay for any additional or closing remarks. John Lindsay: I just want to thank everyone for joining us on the call today. It has truly been honored to lead the company as CEO, serving our shareholders, our Board of Directors and our amazing employees. It has really been the dream of a lifetime and we'll be forever thankful. I truly believe Trey and team will achieve great success. I have complete confidence in their ability to execute the strategy going forward. And with that, operator, you may now close the call. Operator: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at this time.
Operator: Greetings, and welcome to the Construction Partners First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Rick Black, Investor Relations. Please go ahead. Rick Black: Thank you, operator, and good morning, everyone. We appreciate you for joining us for the Construction Partners conference call to review first quarter fiscal 2026 results. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, February 5, 2026. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to our earnings press release for disclosure on forward-looking statements. These factors as well as other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted net income and adjusted EBITDA and adjusted EBITDA margin. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. And with that, I would now like to turn the call over to Construction Partners' CEO, Jule Smith. Jule? F. Smith: Thank you, Rick, and good morning, everyone. We appreciate you joining us for today's call. With me this morning are Greg Hoffman, our Chief Financial Officer; and Ned Fleming, our Executive Chairman. I'd like to begin by thanking the approximately 7,000 employees across our family of companies for their hard work, expertise and dedication to both safety and operational excellence. Our people are at the heart of everything we do, and they are also the stewards of our unique and strong family of companies' culture. one of our key competitive advantages as we continue to grow throughout the Sunbelt. Thanks to their efforts, along with favorable weather during the quarter, we delivered a strong start to fiscal 2026, exceeding our expectations and prompting us to raise our outlook for the year. First quarter revenue increased 44%, while adjusted EBITDA increased 63% compared to the prior year. Adjusted EBITDA margin reached 13.9%, the highest first quarter margin in our history. We also closed the quarter with a project backlog of $3.09 billion, underscoring the robust demand across our markets. Project demand throughout our footprint remains strong. On the commercial side of the business, steady project bidding is supported by ongoing population migration to the Sunbelt, reshoring trends as more manufacturing and supply chain capacity move back to the United States and the continued build-out of AI infrastructure. Our teams are actively bidding and building a wide range of commercial projects to reflect these macro trends. A few examples to highlight. In Southern Oklahoma, we are currently negotiating contracts to provide work for a large national retailer on a new distribution warehouse and a food manufacturing facility in Ardmore. In Central Texas, north of Austin, we're currently working on a facility to provide power to data centers in the area for one of the Magnificent 7. In Santa Rosa County in the panhandle of Florida, we have just completed work on a large distribution facility for a leading soft drink bottler. This new facility will bring in 350 to 400 new jobs to the area, fueling growth that will create more demand for our services. Finally, in York, South Carolina, we are currently working on a large site work contract for a new data center in the Greater Charlotte metro area. These are just a few examples of the approximately 1,000 commercial sector projects we will participate in building this year across our 8 states and over 110 local markets. On the public side, both the federal and state governments are continuing their investment in infrastructure to keep up with the growing economies in the Sunbelt. In Q1, we have seen strong public contract bidding throughout our 8 states and expect total federal, state and local contract awards in FY '26 to increase approximately 10% to 15% over FY '25. This is particularly true for the small- and medium-sized recurring maintenance projects for state DOTs, cities and counties that represent a majority of our work. On Capitol Hill, both houses of Congress continue to work with Secretary Duffy on completing a 5-year reauthorization of the Surface Transportation program by September 30. We expect the size and shape of this bill to be known this spring. From what we have heard so far, we expect the reauthorization to provide a significant increase in the annual funding amount going to the states by per capita formula, which is good news for CPI. Both the administration and many members of the Congressional Transportation Committees have stated that they believe the formula method to the states is the best means to prioritize hard infrastructure investments needed to support a growing economy and to ensure timeliness in building these projects. Turning to our growth strategy. We began fiscal 2026 with 2 large and strategically important acquisitions that were completed in October in Houston and in Daytona Beach, Florida. Both businesses now have been fully integrated and are operating well. Earlier this week, we announced another acquisition in Houston. GMJ Paving Company, a leading asphalt paving contractor focused on public infrastructure projects across the Greater Houston metro area. GMJ's hot mix asphalt plant located in Baytown on the east side of Houston expands our coverage of this major metropolitan market and complements our existing Houston assets exceptionally well. This acquisition represents our 12th hot mix plant in the Houston market, further strengthen our geographic footprint and providing incremental throughput opportunities at our nearby liquid asphalt terminal at the Houston port. Last August, we made our first entry into the Houston market with our acquisition of Derwood Greene Construction, and then we significantly expanded operations in October through the acquisition of Vulcan's asphalt construction assets in Houston. With the addition of GMJ, we are further strengthening our market position and expanding our team with highly skilled experienced operators who bring deep local market knowledge and strong customer relationships. This positions us well to serve one of the most dynamic and rapidly growing markets in the country. Expanding our footprint into new markets while gaining market share exemplifies our model and underscores a core element of our growth strategy, entering the right markets with the right partners. Currently, we see a very robust pipeline of acquisition opportunities across our existing footprint and surrounding states, and we continue to have dialogue with a number of sellers as they determine the best future for their businesses and their valuable workforce. We believe our model as a family of companies with a strong organizational culture makes us the acquirer of choice in our industry. We also remain focused on organic growth as a strong driver of building shareholder value. This quarter, we will bring online an HMA greenfield in Georgia. This new facility will serve the dynamic Brunswick, Georgia market with its port facility and migration to the Golden Isles regions of South Georgia. As a key part of our organic growth, there are several more greenfield facilities that we plan to bring online later this year and early next year. Before turning the call over to Greg, I want to reiterate the vision we shared last October to our Road 2030 growth plan. This plan outlines our path to again double the size of the company to revenue of more than $6 billion by 2030, utilizing the same strategy we have successfully executed for over 2 decades. The plan also targets EBITDA margin growth to approximately 17% and is expected to generate more than $1 billion EBITDA dollars annually. And finally, we're excited about the start of this fiscal year as we prepare for a busy work season, building on a record backlog. I'd like now to turn the call over to Greg. Gregory Hoffman: Thank you, Jule, and good morning, everyone. As Jule mentioned, we had a strong start to our fiscal year, which I will review in more detail before discussing our raised outlook ranges, and then we will open the call to questions. I'll start with a review of our key performance metrics for the first quarter of fiscal 2026. Revenue was $809.5 million, an increase of 44% compared to last year. The breakdown of this revenue growth was 3.5% organic growth and 40.6% acquisitive. Gross profit in the first quarter was $121.5 million, an increase of approximately 58% compared to last year. As a percentage of total revenues, gross profit was 15% compared to 13.6% last year. General and administrative expenses as a percentage of total revenue in the first quarter decreased to 7.7% compared to 7.9% last year. Net income was $17.2 million and adjusted net income was $26.4 million. Earnings per diluted share for adjusted net income was $0.47. Adjusted EBITDA was $112.2 million, an increase of 63% compared to last year. Adjusted EBITDA margin was 13.9% compared to 12.2% last year. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's earnings release. Turning now to the balance sheet. We had $104 million of cash and cash equivalents and $163 million available under our credit facility at December 31, net of a reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12-month EBITDA ratio was 3.18x. We remain on pace with our strategy of reducing the leverage ratio to approximately 2.5x by late 2026 to support sustained profitable growth. To that end, we anticipate cash flow generated to effectively fund this week's GMJ paving acquisition without the need for additional long-term debt, demonstrating the strength of cash flow from our operating model. In the first quarter of fiscal 2026, cash flow from operations was $82.6 million, up from $40.7 million in Q1 of fiscal 2025. We expect to convert 75% to 85% of EBITDA to cash flow from operations in fiscal year '26. Turning now to our outlook. We have raised all of our ranges for fiscal year 2026. Revenue in the range of $3.48 billion to $3.56 billion, net income in the range of $154 million to $158 million, adjusted net income in the range of $163.5 million to $168.7 million, adjusted EBITDA in the range of $534 million to $550 and adjusted EBITDA margin in the range of 15.34% to 15.45%. Our revenue outlook for fiscal 2026 continues to anticipate organic growth of approximately 7% to 8%. Consistent with historical seasonality, we anticipate the first half of the fiscal year to contribute approximately 42% of the annual revenue and approximately 34% of the adjusted EBITDA. In the second half of the year during our peak construction season, we expect to deliver the remaining 58% of revenue and approximately 66% of adjusted EBITDA. Lastly, as Jule mentioned, we had a project backlog of $3.09 billion at December 31, 2025. We have approximately 80% to 85% of the next 12 months contract revenue covered in backlog. And with that, we will open the call to questions. Operator? Operator: [Operator Instructions] Your first question comes from Adam Thalhimer with Thompson, Davis & Company. Adam Thalhimer: Jule, can you give some more color on the acquisition pipeline? You said it was robust. I'm just curious what the mix there is between potential platform deals and potential tuck-ins. F. Smith: Yes, Adam, as you know, we talk to a lot of folks all the time, and we look at a lot of things. And I would say we're continuing to be busy with that. We did 3 platform acquisitions last year. And so that's created a lot of new opportunities in Texas, Oklahoma and Tennessee now that we have a great management team in each state. So we're busy. But at the same time, we pass on a lot of things that aren't a good strategic cultural fit. So you're going to see us continue to make acquisitions that we think are just compelling and great strategic fits. Adam, why don't I let Ned weigh in on the big picture as we look toward our strategic growth model? Ned Fleming: Adam, I would say over the last 25 years, it's as active now as it's ever been. I think what you're really starting to see both on the platform side as well as the tuck-ins. I mean, obviously, when you do 3 platforms in a year, it gives you a lot of opportunities for organic growth as well as tuck-in acquisitions. But the generational transfer continues to give us opportunities to do acquisitions, both what I would call tuck-ins as well as platforms. But obviously, given last year with the 3 platforms, we've got a lot of tuck-in acquisitions in those states as well as a lot of organic growth opportunities in those states. So I would say it's as robust as it's been in 25 years, maybe even to some extent because we did 3 platforms in 1 year, I see we've got more opportunities. Adam Thalhimer: Awesome. And then, Jule, I wanted to ask you, you said in your prepared remarks, I think you mentioned this a site prep job for data centers. Just wondering -- I haven't heard that before. Just wondered if you could expand on the size of that project and what your scope might be. F. Smith: Yes, Adam, we wanted to highlight just a few of the commercial projects we were doing currently because we talked about that there are several macro trends that are driving the commercial markets now. migration to the Sunbelt, but also the reshoring, which is creating a lot of manufacturing facilities moving back to America and people wanting to build in America. And so I just thought let's give a few highlights of these. And there's a long list to choose from. But data centers are part of that. And we're building more data centers than I had the time to list in the remarks, but it's one part of what we do, factories, distribution centers, there's a pretty strong demand for those things in our Southern and Southeastern markets. So we don't travel around and specialize in data centers, but they're a big part of what we do. And sometimes like in South Carolina, we're participating more in the site work and it's a larger contract. And sometimes we're doing the paving for a data center, just like we would do for an Amazon warehouse or a school project. So we did want to highlight just some of the commercial projects that are getting bid and built now. Operator: Next question, Kathryn Thompson with Thompson Research Group. Kathryn Thompson: Just first, I want to focus on organic growth, just reconfirm that you had kind of low to mid-single around 3.5% organic growth in the quarter, but you also gave guidance for a 7% to 8% organic growth range for the full year. Could you help us bridge what you're seeing today and also how much adverse weather in Q1 may impact or may have impacted the quarter? F. Smith: Yes, Kathryn, good question. Our organic growth expectations for the fiscal year are still 7% to 8%, just as we normally do. In Q1, the difference between our organic growth and what sort of that 7% to 8% range was, was about $19 million. And when you looked at that, there were 2 factors that really created that. The first is in North Carolina, we had about 3 projects that we expected to do in Q1 that got a late start just due to the customer not being ready for us, and those are now underway. The second thing, as you can imagine, we -- in 110 local markets, we have competitive dynamics across the board. Some markets are healthy. Some markets are more competitive. We had one market where irrational competition, we said, you know what, let's move equipment and do work at higher margins in some adjacent markets. Which just so happened where that equipment moved was acquisitions we've made in the last 12 months. So that revenue was counted as acquisitive growth. So that happens from time to time, but we still anticipate our organic growth being in that normal range for the year. Kathryn Thompson: Okay. Great. And as you -- maybe you have given color about obviously, very active M&A in calendar 2025 and into early '26. Could you give just maybe a little bit more color in terms of your strategy and thoughts in terms of integration and how that has progressed over the past 12 to 15 months? F. Smith: Yes. Kathryn, we've done 7 acquisitions since the Lone Star acquisition last fall. And integration is a big part of what we do. As Ned has said on these calls before, it's a core competency that CPI has developed over 2 decades. And so we have to be good at integrating these companies. I would say, for example, in Houston, Derwood Greene has done a great job of integrating with Lone Star, our platform company since August. But then those guys have done a great job of integrating the Vulcan assets in October, and they just had a great Day One earlier this week with GMJ. And so as we can integrate these companies in, we start to create organic growth opportunities in the future. And when you have a great management team in that market, you can continue to add, that's where we start to compound both the top line and the bottom line and start to make 1 plus 1 equal 2.5. And that's part of our strategy. And I would say it's gone well. Operator: Next question is Andrew Wittmann with Baird. Andrew J. Wittmann: I guess maybe for Greg, I wanted to ask about the seasonality of the business. We heard your comments here about the first half, second half revenue and EBITDA splits here. And obviously, the first quarter came in very strong and ahead of at least the Street's expectations. But the ramification of that means that the second quarter guidance actually looks a little bit light. And so I was just wondering if there's something we need to understand there. Certainly, the weather here in the last couple of weeks in the South has been particularly notable. I'm wondering if that's a factor or if there's something else that explains the second quarter implied guidance there. Gregory Hoffman: Yes. No, Andy, I think that our -- what we say a lot is that our first half of the year and the second half of the year are very similar year-over-year. And our weather within each half of that year balances out. You have some good weather and you have some bad weather. I think that we're essentially reiterating what we said from the beginning that it's going to be a standard year with the expectations that we gave to the market. So I don't think there's any negative connotation. I think it's just reiterating what we said at the beginning of the year. Sorry, do you want to add to that? F. Smith: Yes. I just want to say we don't try to overthink things like that. Yes, weather was good in the first quarter. We don't know what the second quarter will be. Certainly, the last 2 weeks throughout the Southeast and Texas, we've had some ice and snow. And so you think, well, that should affect January. But when you look, the first 2 weeks of January were really good. So we're right on kind of plan. And we expect winter weather in January. If you remember, last January, we had a lot of snow. We even had snow on the beaches in Pensacola. But by the end of the quarter, it turned out to be a really good quarter. So I would just say we don't really try to overthink it. We're not in any way trying to communicate something about the second quarter. We're just sort of trying to say that's our normal revenue and EBITDA split in the course of a normal year. Andrew J. Wittmann: Okay. That makes sense. I appreciate that. And then I guess you had a comment on your view on the public sector bidding. I think you said that you expected the awards to be up 10% to 15%. I don't know that you had a similar comment on commercial. certainly sounded like the projects that you're doing are keeping you positive there as well. But did you have a view on where the awards could be or the increase in backlog could be on the commercial side? Is it the same level of strength? Is the public stronger? Just maybe some context around how you're seeing that developing as the year plays out. F. Smith: Yes. Andy, I would say the commercial market, we've continued to use the word steady. I would say, if anything, we feel like this spring and summer could be stronger on the commercial market. But the reality is when we look at our backlog, it stayed pretty steady. If anything, it's gone up, Greg, I think a couple of percent to public. But the reality is that could be just that the acquisitions we made last spring and summer with Overland and PRI focus a little more on the public side of things. What we do have is good data on the public awards from ARPDA, which says, look, the state, local and federal, when you look at the overall contract awards, it's going to be up 10% to 15% this year. And that's the data we really go by and what we see. Andrew J. Wittmann: I see. Just a final cleanup question for me. Greg, I don't know if you could quantify how much of that revenue got switched between -- in that competitive market where you moved the crews out to the acquired market. Is that a quantifiable amount of revenue? I'm just kind of curious to help inform the understanding of the quarter a little bit better. Gregory Hoffman: Yes. Jule, when he addressed that earlier, talked about $19 million of maybe moved in or addressed in different markets. I'd say it's about half and half. Operator: Next question, Ethan Trollinger with Raymond James. Ethan Trollinger: This is Ethan on for Tyler. Yes. So Greg, I know not a ton has changed on the M&A front. But just from a modeling perspective, could you update us on what the M&A rollover impact to revenue is in fiscal '26 based on the guidance? Gregory Hoffman: Yes, absolutely, Ethan. About $260 million to $280 million in the remaining 3 quarters are from -- going to be from acquisitions. Ethan Trollinger: Okay. Great. And then Jule, this is... Gregory Hoffman: Ethan, I'm sorry, that does include GMJ, the acquisition we just made recently. Ethan Trollinger: Okay. Very helpful. And then, Jule, just a bigger picture question. But you guys closed the GMJ acquisition in Houston earlier this week, which I think is maybe the third acquisition in Houston, say, the last 6 months. I was hoping to get a little more color on the evolution of that market. Could you maybe talk about how the margin profile in Houston has changed or is expected to change versus maybe the Derwood baseline? And do you guys see even more M&A opportunity in that market longer term? F. Smith: Yes, Ethan, I love to talk about Houston. Houston, we're very pleased with how Brad, Greene and his management team, Jonathan, Daniel Green, those guys are third-generation Houston contractors. And so that management team, combined with the Lone Star management team, Houston has started off great. They've made a meaningful contribution to this quarter. Those guys did a great job of integrating the Vulcan workforce into their operation. And then with GMJ, the acquisition we made this week, that's an example of where not only is their asphalt plant geographically helps us more on the east side of Houston, but Lupe Munoz and his family and his business, they really have a strong niche in the public infrastructure paving. They have great relationships with public grading contractors that do work in Texas. And so that's really very complementary to what Derwood Greene has historically done. And so this is an example of just adding not only management team and workforce, but it's also adding market share in Houston. Ethan Trollinger: Okay. That's great color. And then just one last one. Obviously, Houston is uniquely big compared to some of your other markets. But are there other big metros that you aren't in today that could come together like Houston? Or did just the stars kind of align there? Could you maybe talk a little bit more about that? Ned Fleming: Well, I mean, I think it's -- this is Ned, by the way. As a Board and as a company, strategically, we're always looking for metropolitan areas like Houston. We've historically, for the last 25 years, invested capital in growth areas. Houston is maybe the second fastest-growing city in the country. So yes, there are other metropolitan areas that are like that, that we've identified that we'll continue to look for the right companies, particularly on the platform side to be able to invest in those areas. So I think one of the things historically, we've done a really good job of is being in the areas where the demographic growth drives organic growth for the country. Operator: Next question, Nandita Nayar with Bank of America. Nandita Nayar: This is Nandita Nayar on for Mike Feniger. So you mentioned leverage is currently around 3.18x, and you plan to delever to around 2.5-ish by the end of the year. Could you just talk a bit more about your confidence in hitting that target? And also, just could we see you guys doing more M&A this year? And I mean, I think the answer to that would probably be yes, just given the strong pipeline. But just curious, would those also mostly be funded by cash from ops just like GMJ? Gregory Hoffman: Yes. Sure, Nandita. That's right. Yes, 3.18 is where we are currently. We're still very positive about hitting that guidance of getting closer to 2.5x by the end of the calendar year. And I think that what will continue -- what you'll see continuing is what you'll see in our cash flow is that we've had $215 million worth of purchase price and only borrowed $140 million. And like you said, GMJ, the expectation is that, that purchase price will be covered in cash as well. So we keep doing that. The business keeps generating cash like it has historically and why -- and what it does or what it has done throughout the beginning of this year, we should be good with that guidance. F. Smith: Nandita, I would just reiterate, we're going to continue to look at opportunities. We're going to pass on opportunities that aren't strategically compelling. But we're not going to -- GMJ is a great example of one where we said, look, this is a great opportunity. And so we're going to continue to make acquisitions. We're going to continue to use cash more and more to pay for those. And you'll see as that EBITDA rolls through the leverage ratio will come down. Nandita Nayar: Got you. That's super helpful. And just another one, guys. We've been hearing a slight change in the tone regarding the reauthorization bill with some conversations around the CR potentially entering the discussion. Just curious what you -- what's the latest on the ground that you guys have been hearing regarding the reauthorization? F. Smith: Well, as I said in the prepared remarks, we feel really good about both houses of Congress, both committees on transportation are working on the reauthorization and the expectation is they'll get that done by September 30. We like what we're hearing about the size and the scope of it and the fact that it's going to be focused more on hard infrastructure coming -- the funds coming to the states through the formula method. So -- but we've had CRs in the past, and that's really just a continuation of where we are. But if you look back, what we expect is guided by history over the last 2 decades. And when you look at it, they've always reauthorized the 5-year plan, and they've always reauthorized it for higher than the previous bill. So we fully expect that history will continue to repeat and that we'll get a new surface transportation bill at a higher level for the next 5 years. Operator: I would like to turn the floor over to management for closing remarks. F. Smith: Right. We want to thank everyone for being with us today. We look forward to speaking again in the future. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good afternoon, and welcome to Werner Enterprises Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants are in a listen-only mode until after the presentation. Should you need assistance, please signal a conference specialist. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead. Chris Neil: Good afternoon, everyone. Earlier today, we issued our earnings release with our fourth quarter and full year 2025 results. Release and a supplemental presentation are available in the Investors section of our website at warner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on Slide two of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties, and other factors that could cause actual results to differ materially. The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today's call with me are Derek Leathers, Chairman and CEO, and Chris Wikoff, Executive Vice President, Treasurer, and CFO. I will now turn the call over to Derek. Derek Leathers: Thank you, Chris, and good afternoon, everyone. We see signs of encouragement for the industry and Werner as we move into 2026. During this prolonged and unprecedented multiyear downturn, we have focused on executing our strategy to position our business for revenue and earnings growth as demand returns. We diligently cut costs, increased efficiency, and continued our technology investment to enhance visibility across our execution modes, streamline and automate our operations, and improve customer service. In the fourth quarter, we made a decision to strategically restructure our One Way Trucking business, to be even more targeted towards specialized expedited cross-border Mexico and engineered business. Once fully completed, we expect meaningful earnings improvement in TTS in 2026. And most recently, we used our strong balance sheet to deploy capital to acquire First Fleet, a large, high-quality dedicated carrier. This acquisition is immediately accretive and dovetails with our strategy to lean further into profitable, sustainable growth and dedicated with large complex shippers across diverse markets. With ongoing capacity attrition, and the early signs of demand improvement, the outlook for Werner in 2026 is more positive than it's been for several years. Turning to Slide five to discuss Q4 and 2025 highlights. Disciplined pricing led to a smaller fleet and lower truckload logistics volumes. Higher one-way miles per truck partially offset those factors resulting in fourth-quarter revenues that were 2% lower year over year. Peak volumes in December in total were flat year over year, consistent with expectations. Peak revenues were up mid-single digits due to higher peak pricing compared to the prior year. In dedicated, revenues increased by low single digits in the quarter, driven primarily by higher average fleet size. As we enter a new year, momentum in Dedicated remains positive. With a strong pipeline of opportunities and early realization of some rate increases. Customers remain focused on reliable and flexible transportation partners like Werner, who offer creative solutions and high service and scale. The strength of our dedicated business combined with First Fleet creates a more scalable platform to drive sustainable profitable growth. For Werner's future. We will discuss more about the acquisition momentarily. One way continues to be pressured across the industry. We remain committed to specialized services in one way such as expedited, cross-border Mexico, and engineered business. We've taken actions to restructure our One Way operations and offering. That will result in profitability enhancement, which we expect to be noticeable in the second quarter. Our vision for One Way is a smaller, more productive, and specialized fleet complemented by asset-light PowerLink carriers. One way trucking is an integral part of our portfolio and provides several competitive differentiators. First, it serves as valuable experience for drivers before being placed in dedicated and other high-service fleets. After graduating from one of our 20 vertically integrated training academies, drivers are onboarded through a collaborative pairing process to successfully navigate diverse operating environments while maintaining high safety standards. Second, it is an entry point to get to know customers, to build relationships, and allow new customers to test Werner's solutions, service, and capabilities on a one-year or shorter-term basis. And lastly, One Way provides flexibility and surge capacity for our dedicated customers and it allows us to support a wide range of customers during times of increased demand. These restructuring actions are designed to increase miles per truck, and shift towards more profitable specialized freight and lanes. Combined with our large trailer pool and power lane carriers, we believe this positions us to capitalize on improving market conditions and drive greater margin improvement. In logistics, intermodal and final mile, revenues and profits increased year over year. Both of these divisions exited 2025 in growth mode. And we anticipate momentum continuing in 2026. Truckload brokerage results were challenged in the quarter as purchase transportation costs increased. Escalating rapidly in December and resulting in lower logistics operating income in the fourth quarter. While margin compression has continued into Q1, and was further pressured by the recent large storms across much of our operating area, we expect it to moderate as we work through customer pricing agreements and our ongoing efficiency initiatives take hold. Moving to Slide six, our plan to generate earnings power and deliver value creation remains largely the same entering 2026 and is focused on three overarching priorities. First is driving growth in core business, which comprises growing our dedicated fleet, increasing one-way production and rates, and expanding TTS and logistics adjusted operating income margin. All of these are underway. Average dedicated trucks grew in the quarter, and new fleets are being implemented in '26. Dedicated revenues per truck per week have increased 11 over the last twelve years. The addition of First Fleet grows dedicated by 50% and the combined Dedicated portfolio represents over half of our $3.6 billion pro forma revenue. Dedicated provides more consistent revenue streams with long-term customer relationships. Total addressable market for dedicated is over $30 billion and we expect to capture more market share as customers look for stable, financially viable carriers offering high service expertise and scalable capacity. We took decisive action beginning in the fourth quarter to restructure One Way Trucking to improve earnings. In logistics, we've seen a continuous reduction in cost to serve through tech enablement while intermodal is growing at double digits. And Final Mile is seeing the strongest momentum since inception. Second is driving operational excellence. Which will be accomplished by maintaining a resolute focus on safety and service. Continuing to advance our technology roadmap, embedding cost discipline throughout the organization, and realizing efficiencies and synergies from acquisitions. Our safety metrics remain near record lows and our transformational technology journey is progressing and continuing to gain momentum leading to top and bottom line synergies. Remain focused on cost discipline. We've reduced costs by approximately $150 million over the last three years the majority of which are largely structural and sustainable. In the fourth quarter, OpEx excluding purchase transportation, fuel, restructuring costs, and gains was down 5%. And relative to acquisition integration by mid-year 2026, all prior acquisitions with the exception of First Fleet will be fully integrated. We have a clear line of sight on expanding historical first fleet margins through measurable cost synergy realization. We'll also be working to size revenue synergies such as increased backhaul, surge capacity for first fleet customers, and cross-selling opportunities as our integration efforts begin in earnest. Our final priority is driving capital efficiency. This includes preserving strong operating cash flow, optimizing working capital, and improving free cash flow conversion while reinvesting in the business. First Fleet is expected to be cash flow accretive. Our capital allocation will remain balanced to fund growth, invest in technology, return capital to shareholders, and reduce debt and leverage over time. Our technology journey carries on as we make progress on building out functionality in our cloud-based edge TMS. By the 2025, 95% of One Way loads and 85% of dedicated trips were migrated to the platform. Logistics volumes were transitioned to Edge previously, and have contributed to lower OpEx and cost to serve. For example, in the fourth quarter, truckload logistics personnel costs declined 15% year over year. With visibility in the platform to all loads mostly complete, teams are focusing on building out one way and dedicated execution functionality. In addition to Edge, the organization is also progressing with implementing AI throughout the business. Streamlined driver onboarding, increased customer visibility, enhanced predictive maintenance, and increased speed to bill is just a few examples of an AI-enabled workforce. Moving to slide seven to discuss firstly in more detail. We are excited to add First Fleet, one of the leading pure-play dedicated trucking companies. To the Werner portfolio. We closed on January 27 and hosted a call on January 28. Please refer to the press release and presentation relating to our announcement last week. There are several key takeaways worth noting again here. First Fleet accelerates our intentional portfolio shift to higher margin, more resilient dedicated business. With more than $615 million in trailing twelve-month revenues and 2,400 tractors, Firstly, it expands Werner's scale, network density, and geographic reach. First Fleet deepens and diversifies our presence in attractive end markets with customers in grocery, bakery, and packaging solutions. We expect immediate EPS accretion with further benefit from $18 million in annual cost synergies. And lastly, FirstLead is a strong cultural fit with a shared commitment to safety, service, and innovation. We Moving to Slide eight, showing a revenue snapshot before and after the FirstLead acquisition. The combination expands our revenue from approximately $3 billion for Werner on a standalone basis to approximately $3.6 billion on a combined basis. As a percent of our portfolio mix, Dedicated grows from 43% of total revenues today to over half on a combined basis. First Fleet services many leading customers in attractive and resilient markets, Among its top 10 customers, the average tenure is seventeen years. And three of its top four customers have been with First Fleet for over twenty-five years. On a combined basis, First Fleet diversifies our portfolio. Retail remains our largest vertical, though it decreases from 66% to 60% on a combined basis with roughly half concentrated in discount and value retail. Grocery retail expands, adding more resilient nondiscretionary volume. Industrial exposure increases from 13% to 19% on a combined basis, while food and beverage remains steady at 14%. As a result, our overall portfolio is increasingly more durable and resilient. Improving revenue stability, deepening customer diversification, enhancing our ability to produce steady revenue and earnings growth. Before Chris discusses our financial results in more detail, let's move to Slide nine to summarize our current market outlook. Capacity exits continue driven in part from ongoing broad enforcement efforts and recent tightening between and demand suggests that that pace is increasing. Consumers remain selective yet resilient. Which bodes well for our mix of retail being more concentrated in discount and value retailers. Value retailers are producing good results as middle-class families trade down. And while mixed signals continue to make headlines on the health of the consumer looking ahead the potential for lower interest rates and larger tax refunds are creating cautious optimism. Retailers are operating leaner as the inventory to sales ratio continues its year-over-year decline. While shifting trade policies may affect future stocking timelines, the consistent replenishment of nondiscretionary items provides a critical buffer against market volatility. Spot rates performed consistent with seasonal trends in October and November then outperformed normal seasonality in December. So far in January, spot rates remain elevated. As the recent winter weather subsides, we expect spot rates to moderate, but we expect an upward trend throughout the year as capacity exits and demand improves. Used truck values are likely to remain above two-year lows, with pressure tilted upwards longer term. However, we're also cognizant of the possibility that accelerated attrition from enforcement could create short-term pressure. Class eight net truck builds continue to be below replacement levels and not only signal truckload capacity tightening ahead, but also that more carriers could be looking to refresh their fleet in the used equipment market. With that, I'll turn it over to Chris to discuss our fourth-quarter results in more detail. Chris Wikoff: Thank you, Derek. We'll continue on Slide 11. All performance comparisons here are year over year unless otherwise noted. Fourth-quarter revenues totaled $738 million down 2%. Full-year revenues also declined 2%. Adjusted operating income was $11.3 million and adjusted operating margin was 1.5%. Adjusted EPS was $0.05. Consolidated gains on sale of property and equipment totaled $2.4 million down from $6.5 million in the prior year period, included a $5.1 million gain on the sale of real estate. Turning to Slide 12. Truckload Transportation Services total revenue for the quarter was $513 million down 3%. Revenues net of fuel surcharges declined 3% year over year at $455 million. On a full-year basis, revenue excluding fuel decreased 3%. TTS adjusted operating income was $12.7 million. Adjusted operating margin net of fuel was 2.8% a decrease of 30 basis points. Dedicated fleet growth lower insurance costs compared to last year and higher equipment gains were more than offset by margin degradation in our One Way Trucking business. Let's turn to Slide 13 to review our fleet metrics. TTS average trucks were 7,340 during the quarter, down 2.1%. The TTS fleet ended the quarter down 5% and dropped 345 trucks sequentially also down 5%. Both reflection of the one-way restructuring that began before the end of the quarter. TTS revenue per truck per week net of fuel decreased 0.4%, primarily due to lower miles per truck partially offset by higher revenue per total mile. Within TTS, dedicated revenue net appeal $292 million up 1%. Dedicated represented 65% of TTS trucking revenue up from 63% a year ago. With First Fleet included dedicated will grow to over 70% of TTS. Dedicated average trucks increased 2.4% year over year and 1.8% sequentially to 4,954 trucks. At quarter end, the dedicated fleet was up 10 trucks from where we started the year and represented 68% of the TTS fleet. Dedicated revenue per truck per week decreased 1.1% in the quarter, but was slightly positive for the full year. In our One Way business for the fourth quarter, trucking revenue net of fuel was $156 million a decrease of 8%. Average trucks of 2,386 decreased 10% on a year-over-year and sequential basis. Three sixty fewer one-way trucks were in the fleet at the end of the year, Sequentially, the One Way fleet fell two thirty trucks. Revenue per truck per week increased 2.2% due to higher miles per truck. While One Way revenue per total mile declined slightly year over year in the fourth quarter, the negative variance was a result of mix change. The mix issue is a byproduct of the restructuring started in the fourth quarter, ultimately designed to improve profitability. We are focusing on more specialized one way like expedited and diversifying to verticals such pharmaceuticals and technology. This mix change will impact one way trucking revenue per total mile throughout the year. Miles per truck increased 2.3% in the quarter, On a full-year basis, after increases of 2.2% in 2023 and 7.6% in 2024 miles per truck decreased 2.1% for the year. Although empty miles increased 10 basis points, the sequential change from the third quarter to the fourth quarter was 20 basis points lower than last year. Reflecting better balance in peak season. For the year, combined One Way and PowerLink total miles declined less than 2%, in spite of average One Way trucks falling 4.5%. One way trucking production improves and the PowerLink fleet grows, we'll be able to serve customers efficiently with fewer assets. To give some further color on the One Way restructure, we began a strategic restructuring of our One Way Truckload business a decisive action designed to significantly enhance profitability and fleet utilization by maximizing production and mitigating unprofitable freight. The restructuring resulted in a total charge of $44.2 million in the fourth quarter is important to note that a significant portion of this is non-cash totaling $42.7 million which includes the impairment impairment of $21.7 million of intangible assets and $21 million of revenue equipment. This non-cash charge reflects the necessary steps to rationalize our assets and business model for future margin expansion. Logistics results are shown on Slide 14. In the fourth quarter, logistics revenue was $208 million representing 28% of total fourth-quarter revenues. Revenues decreased 3% year over year and 11 sequentially as we focused on yield management. Truckload logistics revenues decreased 8%. A 9% lower shipments with gross margin contraction. Traditional brokerage volumes declined 8% while our PowerLink shipments also fell down 10% due to fewer PowerLink carriers. Disciplined pricing and load acceptance resulted in lower volume as purchase transportation costs increased during the quarter, rising rapidly in December. Purchase transportation costs moderated slightly in January and have remained relatively high resulting in ongoing gross margin pressure. Intermodal revenues which make up approximately 16% of the logistics segment increased 24% almost entirely from higher volume. Final Mile revenues which comprise the remaining 12% of the segment increased 4% year over year. Logistics adjusted operating margin of 0.5% decreased by 60 basis points driven by lower volumes and gross margin contraction partially offset with lower operating expenses. Fourth-quarter operating expenses in logistics were the lowest since before our Reed TMS acquisition in late 2022 permanent part through technology investments. Let's review our cash flow and liquidity on Slide 15. We ended the year with $60 million in cash and cash equivalents. Operating cash flow was $62 million for the quarter and $182 million for the full year. Fourth-quarter CapEx was $69 million and full year was $163 million less than 6% of revenue compared to just under 8% prior year. Net CapEx for the year was down $72 million or 31% in part from an exceptionally low CapEx spend in 2025. The last nine months of the year net CapEx was 7.5% of revenue. Free cash flow for the full year was $19 million just under 1% of total revenues. Total liquidity at quarter end was $702 million including $60 million of cash on hand and $642 million of combined availability under our credit facilities. Ended the quarter with $752 million in debt. Up $27 million sequentially and up 16% from a year earlier. Net debt increased $83 million or 14% year over year. Continue to have strong balance sheet, access to capital and no near-term maturities on our debt structure Let's turn to Slide 16. When it comes to broad capital allocation decisions, we will remain balanced over the long term. Strategically investing in the business returning capital to shareholders and maintaining appropriate leverage. With the acquisition of FirstFleet, our focus in 2026 will be on integrating the business gain momentum on realizing $18 million of targeted synergies and enhancing value. In terms of certain details of the First Fleet transaction and the impact on our total debt. The total purchase price was $282.8 million consisting of $245 million for the operating company and $37.8 million for acquired real estate. Approximately $48 million of the consideration was deferred including a $35 million earn out that will be measured and if earned it will be paid after March 2027. The transaction was funded with a combination of cash on hand and incremental debt which included additional draws on a revolver revolving credit facility and the assumption of first fleet capital leases at closing. As of 01/31/2026, total borrowings under our revolver and accounts receivable securitization facility were $884.6 million representing an increase of $132.6 million versus 12/31/2025. Assumed capital leases at closing were estimated at $57 million resulting in a total estimated increase in debt of $189.7 million since year-end 2025. With First Fleet, we believe we have a compelling set of opportunities to accelerate profitable growth, enhance resiliency through the cycle and deliver on our mission to keep America moving. On Slide 17, we are introducing our 2026 guidance includes First Fleet. We are changing our fleet guidance metric from end of period trucks to average trucks, as fleet size fluctuates quarterly creating volatility in end of period metrics. Including first fleet, our average truck fleet guidance for full year is a range of up 23% to 28%. The one-way trucking fleet decreasing further in the first quarter, we expect average TTS trucks from the organic Warner fleet to decline early in the year before showing improvement as the year progresses. Our full-year 2026 net CapEx guidance range including first fleet is between $185 million and $225 million The upper end of the range allows for a pre-buy in the second half given 2027 EPA emission changes. Dedicated revenue per truck per week full-year guidance range is down 1% to up 2% We expect low to mid-single-digit increases in contractual rates for both our organic dedicated fleet and the first fleet business. However, the combined mix results in a more muted change relative to our Werner standalone metric. One way truckload revenue per total mile guidance for the first half of the year is flat to up 3%. We are expecting mid-single-digit contract rate increases but the revenue per total mile is muted due to mix changes from restructuring actions. Our effective tax rate in the fourth quarter was 20.8%, The effective tax rate for the full year was 20.1% before discrete items. Our 2026 guidance range is between 25.5% and 26.5%. The average age of our truck and trailer fleet at the end of the fourth quarter was 2.7 and 5.6 years respectively. Regarding other modeling assumptions, with the acquisition of First Fleet, we expect net interest expense this year will be between $40 million and $45 million We anticipate stable used equipment demand through 2026 and expect resale values to remain generally stable given OEM production constraints and the evolving regulatory backdrop will be an incentive towards high-quality used assets. Excluding real estate gains of the sale of used equipment is expected to be in a range of $8 million to $18 million With that I'll turn it back to Derek. Derek Leathers: Thank you, Chris. As we reflect on 2025, it's clear that while the environment remains challenging, the actions we've taken over the last several years are beginning to show tangible progress. We made difficult but necessary decisions redesign parts of the business while continuing to invest in areas that position us for long-term growth and strengthen our long-term earnings power. Remains constant through uncertainty is Werner's competitive advantage. We are a large-scale, award-winning, reliable partner with a diversified and agile portfolio of solutions designed to meet customers' evolving transportation and logistics needs. Our dedicated business continues to perform well. Our logistics platform is gaining momentum, and the addition of First Fleet meaningfully accelerates our shift toward more resilient higher margin revenue streams. As we recognize our seventieth anniversary with a more durable and diversified portfolio, and as market conditions improve and demand begins to normalize, we believe Werner is well positioned to generate operating leverage and improved earnings performance as demand accelerates. We Most importantly, wanna acknowledge the dedication and commitment of all of Werner's talented drivers and associates and I wanna welcome our First Fleet family. None of this progress would be possible without the entire team. Their commitment, adaptability, and focus on safety and service continue to differentiate Werner every day. While the job's not finished, we remain confident in our strategy disciplined in our execution, and focused on controlling what we can as we position the company for sustainable long-term value creation for our customers and shareholders. With that, let's open it up for questions. Operator: We will now begin the question and answer session. Please pick up your handset before pressing the keys. We ask you to limit your questions to one question and one follow-up. This call will end at 5 PM Central Standard Time following the company's closing remarks. Our first question today is from Rishi Harnane with Deutsche Bank. Please go ahead. Rishi Harnane: Hey, thanks gentlemen. So look, it seems like a lot is happening here with the company. You just made this accretive acquisition. You have, you know, more organic dedicated growth maturing. You're restructuring of One Way, trucking market also undergoing repair. So just in light of all these things, know, Derek, you started this conversation by saying you see a better outlook for Warren than you've seen in a long time. But you know, as the dust settles, like, is, a normalized earnings power that you see here underlying the business, and how should we expect the cadence of sort of improvement from 2025 levels to play out in 2026? Derek Leathers: Yeah, Rich. I appreciate the question. You're right. There is a lot going on, a lot of moving parts. We are excited about where we came out of it. As we go into an evolving market. As we think about '26, we certainly see opportunity for earnings growth I want to be clear about a few things. We're not abandoning one way, but we are a leaner more agile version of ourselves, complemented now with a growing and more capable set of power link carriers. So we like the flexibility that provides for us. The acquisition of First Fleet, as you mentioned, something we're very excited about. We do believe it gives us the more durable stable opportunity for earnings growth as we look out into future years. We've talked about this on prior calls, but over any ten year period, dedicated outperforms one way on average about eight out of those ten years. We recognize that one way is at an inflection point from an overall marketplace, but we do not believe any of the moves we've made will prevent our ability to participate in that inflection And yet, with all of that stated, when you talk about the progression of that playing out, Clearly, Q1 it started off with some pressure points, largely or mainly the very significant storm that took place across the entire United States over a period of several days. And so that is going to be a significant headwind in the quarter. We know that. The restructuring work that we've done takes a while that was done in Q4. Takes a while to bear fruit and we're still kind of in the final stages of that as we were in the early stages of Q1. That's why we pointed towards Q2. It's kind of where you see a more material inflection in earnings from our perspective with all of the actions that I've just spoken about. As the year plays out, clearly, we expect to gain momentum both from marketplace support, but also the internal decisions that we've taken to better position the fleet. So we don't give EPS guidance and I'm not going to try to drill in more specifically than that, but I will but hopefully that gives you some color on how we think about the ramp. Rishi Harnane: No. It does. Thanks so much. Derek Leathers: Thank you. Operator: The next question is from Brian Ossenbeck with JPMorgan. Please go ahead. Brian Ossenbeck: Hey, good afternoon. Thanks for taking the question. Maybe just a little more on the one way restructuring. When we look at the I guess trying to understand the a little bit better because I think contract renewals up mid-single digits, but the one way guidance for rate per miles is actually less than that. I know it's mix related, but I thought that would be going the other way if if you're going into higher value. Areas and whatnot. So maybe you can explain that a little bit more. And also, the pre-buy know, I think you were one of the first to talk about putting some maybe some dollars at work potentially for the prebuy. So you can bring us up to speed and terms of what's happening there because, of course, there's a lot of different moving pieces with that. On the regulation, but also with tariffs. So if you can walk through those two, appreciate it. Thanks. Derek Leathers: Yes, sure, Brian. Thanks for the question. Let's start with the rate per mile question. So just I'd like to kind of reconcile for everyone that the way contract rate renewals work we see about a quarter of those rate renewals in Q1. They don't implement immediately. There's always a bit of a lag to implementation with another third of those in Q2 with the same kind of lag implementation concern. So the guidance we issued was for the first half of the year. So what you're capturing is the portion of those contract renewals that we're able to effect change on and then a little bit of recognition of lag effect before they take place. At the same time, obviously, with a smaller, more agile fleet, we're going to be working relative to yield. And so you can get rate through both both through contract renewals, but also through simply freight mix and yield. So we'll work to exceed the guidance issued But at this point, with the visibility we have and at the starting point of the year where the market was versus as it's continued to show sort of increasing strength. We've got a lot of work to do between now and then. So flat top three is kind of the net effect of not being able to review it all at once. But but contract renewals on on an apples to apples basis mid-single digits is kind of where we're at right now. And and where we've seen some early returns. Obviously, are hard fought and we're willing to walk from some business as we go through this process. And place those trucks as if necessary into what it's currently in our network is about a 25% premium to be in the $0.25 premium, I apologize, $0.02 5 premium if those same trucks were placed into the spot market. So essentially, with our customers and how the how the process plays out, we will determine what that spot mix is. But there's a willingness on our part for that to grow if necessary. Oh, no, relative to the I'm sorry, the second part of your question. Yes, we just wanted to to acknowledge that the range was fairly wide given the the midpoint of the range and going with a $40 million plus kind of total range Then what we're really signaling there is just flexibility. We've got our order board kind of loaded to do up to certain levels. We're we may in fact pull all of those levers. As we gain increasing clarity on where the market's at. And and as we think about costing going into 2027, potentially being elevated and probably more importantly, technology being less tested. So it's really just signaling an openness to that. It's too early in the year to to talk about where we'll actually land or how we may or may not execute on that. Right now, first order of business is just fleet refreshing, making sure we keep our fleet kind of where we're at or or be because we feel comfortable with the age. In calls past, we've talked a lot about numbers that were low than where we're currently at. But I'd remind everybody now with 70 plus percent of trucks in Dedicated that really positions us in a different return to base kind of model and therefore allows for a different application of equipment. We're never gonna let our fleet get old. We always wanna run a modern fleet for recruiting reasons. But we do believe our flexibility relative to fleet age is greater as we get more and more densely implanted within Dedicated. Brian Ossenbeck: All right. Thanks, Derek, for all that color. Appreciate it. Thank you. Operator: The next question is from Jordan Alliger with Goldman Sachs. Please go ahead. Jordan Alliger: Yes, hi. Just wanted to come back to the restructuring. Just sort of curious if you could give maybe a little bit more color as to the timing of completion and if there's any whether it be cost saves that you'd expect to be attached to it or margin improvement related to it or even your thoughts on what it could do for yields as you sort of exit sort of these unprofitable businesses? Thanks. Chris Wikoff: Hey, Jordan. Yes, thanks for the question. First, in terms of timing, we started in the fourth quarter. It's continuing here through the first quarter. We expect it to be largely complete by the end of the first quarter. So you would we would start to see some of that benefit in Q2. Likely noticeable in Q2, but for sure in the second half. That would be more noticeable and accelerating. So that's kind of the timing on it. From a margin I won't get too specific with you, but certainly it's all aimed at profitability improvement, getting back to positive reinvestable margins doing it with speed and precision. And less dependence on some market factors. So that's what it's aimed to achieve getting back to positive reinvestment reinvestable margins being the key there. So probably not as specific as as you would like, but we have high confidence in the impact that will result later in the year and our ability to get that done by the end of the quarter. Derek Leathers: Relative to the cost side, obviously one of the primary objectives of this is to continue the forward march on sweating the assets better. Increasing productivity over time. So despite the fleet being smaller, the focus on network fits, density creates certain efficiencies, whether it's lower deadhead or higher miles per truck. All of which also lend themselves to better service outcomes and the ability for us to then extract the value that, that service represents. So there's a lot in the soup, but it's been something that was considered very carefully. And we're excited about kind of what we're seeing from early returns. But for it to flow through and and show through to the bottom line, as Chris indicated, we view that inflection point being in Q2. Jordan Alliger: Thank you. Operator: The next question is from Tom Wadewitz with UBS. Please go ahead. Tom Wadewitz: Yes, good afternoon and I missed some of the beginning of the call, so I apologize if you kind of touched on this. But how do you think about the kind of impact of first Fleet in terms of profitability? And whether that's something that it gets the synergies from that kind of ramp and you get more from that through the year. Mean, I I think it kinda sounded like that would be relatively low profitability coming in or or maybe the I I don't know. Just how we think about that accretion and the margin on that and how that might change through 2026? Derek Leathers: Yes, Tom. Thanks for the question. Yes, on a standalone basis, First Fleet's margins are lower than Werner Dedicated's. But at the same time, we've talked about $18 million of identified cost synergies We think about a third of those can be realized within the calendar year 2026. But by the end of the year, we'll be on kind of a two-thirds of those run rate. That alone, when fully realized, represents about 300 basis points of margin improvement. So that's something that's pretty exciting and that's the the sort of tangible cost savings that are more measurable really when you're still in the due diligence phase and you're not quite yet in the business. As we get into the business, obviously over time, we'll continue to update. But there are revenue synergies. There are some efficiencies that we know we'll gain. Our networks are extremely complementary to one another. And we do feel that we have a line of sight to First Fleet's margins converging with Werner's traditional dedicated margins you know, over the next, call it, eighteen to twenty-four months. There's gonna be some work to do, But in the but in the short term, it's not a it's not a broken asset. It's certainly got opportunity for margin expansion. It's got long-term customer relationships. And deeply embedded sort of customer structures and and infrastructure built around those those those existing customers. So lot to like, lots lots to gain from it, and we're excited about what it represents. Tom Wadewitz: I guess, and thank you for that. And in terms of broader kind of just how we think about margin playing out, is it really a function of kind of how well pricing develops? Or I mean, you have a lot a lot that's dedicated. Right? So that takes longer to kinda see it an impact from the market. But is that is it kind of as simple as that if you get stronger pricing and better freight through the year than that's the key lever for margin for TTS? Derek Leathers: Yeah. I mean, a couple of ways I'd think about that. I mean, it is it is accretive to earnings out of the gate. It is an improvement on the blended TTS margins that you see today. Because as we've stated several times, our dedicated operates significantly better than our one-way network does. And it's so it's improving sort of the net of TTS That's pre synergies. And then as we apply synergies, we can improve further from there. So there's no not not really a short-term pain for long-term gameplay here. This this comes into the building, on a positive. We can improve it from there. And our lower our lower but more nimble exposure in one way we believe positions us very well through this bid season to be disciplined. And we will and we we're committed to doing exactly that. As well as the the optionality, if you will, of our PowerLink carrier network to continue to run a lot of those miles. As we increase production, which we've shown a bit an ability to do, it's not like there's a linear relationship to the fleet size shrinking and the amount of freight we can haul. It's just gonna be a much more focused approach some of those expedited solutions we've spoken of, like Mexico cross border, some of the work we're doing with in the expedited space, overall engineered solutions and some of the verticals we've spoken of in the past. Where we're growing our exposure to sort of harder to do, higher value or otherwise one-way freight that it does operate at a premium. Chris Wikoff: And Tom, maybe just to go back to just to make sure that we're clear on the synergies and the opportunity to expand margin for First Fleet. Those synergies are largely cost synergies. So to Derek's point, there's very little that market dependent, that's any change in assumption on rate and renewals on those contracts. Certainly the market could be helpful in that regard, but that's not what's built into the $18 million of synergies. And it's not too different from our past practice and discipline around cost and identifying synergies Just as a reminder, we've identified and realized $150 million of cost savings for the Werner business over the last three years, largely structural and sustainable. And without sacrificing safety, service, and growth. So that's same approach is what we're applying to First Fleet. Obviously, we get closer to the business, and more time working alongside the business then we'll have an opportunity to refine that further and look for revenue synergies. But we have a high degree of confidence and our ability to realize those synergies and it's familiar to us in terms of how it's built and how we would go after it. Operator: Okay. Great. Thank you, The next question is from Jason Seidl TD Cowen. Please go ahead. Jason Seidl: Thanks, operator. Gentlemen, afternoon. You mentioned a lot about the retail side because obviously that's where the bulk of your exposure is for your end markets. But industrials with the acquisition is becoming a greater part of what Werner does. Maybe you can give us a little update where you see the industrial markets in 2026 as there seems to be at least thus far a little bit of a mixed bag from some of transports that are reported. Derek Leathers: Yes. Clearly, I mean, I think mixed bags from transports reporting is a rear-facing measurement as we look forward and we think about what's happened recently. With some of the data coming out relative to the ISM index and where that stands. Some of the optimism I think out there relative to overall economic conditions being better than feared. Arguably better than hoped. And then the consumer and the resiliency there, I know that's more of a retail answer, but but nonetheless, there's some optimism out there across the board. In our view. Understand too that ironically in some of our manufacturing and industrial, a large chunk of that is really some of this packaging and other things that we're involved with that feeds into directly into kinda retail channels, more more more focused on ecommerce, which is a growing vertical or growing portion of the economy. And although there's some consolidation in that marketplace, as long as you're with the consolidator, and that is who your sort of core customer exposures with. We feel like we're in pretty good place. Jason Seidl: Historically, when the ISM starts to go into expansion mode, how long do you actually start seeing some demand on your end? Derek Leathers: Yeah. Look, our exposure in that space, I mean, can ask questions about retail all day long and we'll probably be a little more versed to be frank. ISM is difficult because of the, as I mentioned, the components in which our vertical is what's composed within that portion of our portfolio really is feeder stock in many respects. To retail or in consumer kind of products. The exception to that obviously is Mexico. And so a chunk of what we do in that is into and out of Mexico. And from both what we're hearing and seeing and experiencing on our own fleet, that portion of it is doing very well because of all of the noise we've just been through relative to tariffs and other changing of supply chains, direct foreign investment taking place in Mexico to expand plant and equipment with some of the major manufacturers down there. And that portion of our portfolio is heavily tied to that. And we're very optimistic about what the future of that Mexico cross-border franchise looks like. Operator: Well, good to hear and I appreciate the color. Derek Leathers: Thank you. Operator: The next question is from Scott Group with Wolfe Research. Please go ahead. Scott Group: Hey, thanks. Good afternoon. So Derek, just following up on one of the earlier questions about like there's a lot of moving parts in the model right now. I know you talked about some weather in Q1, but is there any way to just help us think about, I don't know, from a margin or from an operating income standpoint, how to think about least just the starting point for the year in Q1? Know mean Q1 last year was pretty tough. I assume we'll have some degree of or hopefully we'll have some degree of margin improvement earnings growth but well to Q1 last year, sort of any color that can help us with Chris Wikoff: Hey, Scott. This is Chris. I'll start on that one, and then Derek can add to it. You're not wrong in terms of last 2025 was challenging. There are some headwinds and challenging challenges this quarter that we're certainly dealing with in terms of winter storm fern, the broad impact that it had throughout the Southeast where we are more heavily concentrated. In fact, a few weekends back at really the peak and the brunt of that storm, about 50% or half of our tractor fleet was parked over the weekend. So that was rather unprecedented for us. So that's a significant storm. We had a storm in the first quarter last year. We sized that of being about $0.04 drag on EPS. I would say this is a worse storm. We do have some pop-up demand with the aftermath of that storm, but hard to say how long that will be ongoing. Then in addition to that, we obviously have the the one-way restructuring that's ongoing. That's not to say that it makes the quarter worse, but it certainly doesn't make it better and it's a significant operational lift. So it's it's a further distraction. And then the margin, the logistics margin squeeze. More capacity driven, but significant increase in the buy-side rate pressure not atypical for brokers, but it's something that we have to manage through for the quarter. So those are challenges. I would say that we would view them as being largely temporary. You know, all of those, will pass, including on the logistics margin squeeze, our ability to eventually pivot and adjust customer contracts and be able to adjust that sell-side rate. So I know you'd like more information on profitability and whatnot, maybe just to level set as you know, last year the first quarter was a negative $0.12 of adjusted EPS The winter storm being worse but we also have a number of positive momentum that helps us the momentum and growth and dedicated some early rate increases momentum that we're seeing in intermodal and final mile. And obviously, the the momentum that we will see, it least for two-thirds of the quarter with First Fleet, which we expect to add to revenue growth and be accretive from an operating income perspective. Scott Group: That's helpful color. Appreciate it, guys. Thank you. Operator: The next question is from Bruce Chan with Stifel. Please go ahead. Andrew Cox: Hi, good afternoon gentlemen. This is Andrew Cox on for Bruce. We wanted to get a question about current market dynamics. We're having a difficult time trying to parse through whether or not this supply-led thesis is enough to, you know, keep the rate momentum up through year-end. Know, if we look back through January, rates pretty quickly fell off after the peak season and have since risen due to winter storm Fern. We're just trying to understand, you know, either whether it's based on historical precedents or some other anecdotes you guys want to provide, but whether or not this supply-led thesis is enough on its own to to carry rate throughout the year. We we can't seem to think of a of a previous cycle that was kick-started by supply alone. Were always coinciding with some sort of demand impact. So just wanted to get your thoughts on whether supply is enough and outlook for demand beyond that. Thank you. Derek Leathers: Yes. Thanks, Andrew. So a couple of things. One, I do believe thinking about the supply side of the equation as the kickstart is the right way to think about it. I don't think any of us are proposing that the entirety of the term will be supply and supply only. Although enforcement efforts at this point not only have remained sustainable, they've actually continued to tick up and increase further I think that momentum will continue throughout the quarter. I think it's admirable that it's not just one truck at a time at the scale enforcement type level like it began. And now it's more scalable enforcement and it's also further upstream. There's enforcement actions going on at the driver training level. There's enforcement actions going on at the electronic logging level. All of these things have a cumulative effect We know it's real because we can see it in our own network. We can see it in rejection rates nationwide, and we could see it both pre and post storm. So yes, they fell off from December to January. That is normal. That that would that would happen year in and year out. The fall was not as severe. As we would have maybe typically seen. And then the ramp was into the storm and post storm has been far more significant than we've seen in recent years, whether that be other storms, or other external factors. And so all of that would say to me that clearly some of the noise today storm related, and we need to recognize that. But when you see rejection rates as recently as today crest 14%, That's relatively unprecedented territory. We're starting to be in the world of COVID like rejection rates at a number like that. Part of it is storm related, so maybe you take two percent to 3% off four percent even for that, and you're still sitting at double the average rejection rate of what we seen for multiple years in a row. So it feels real. It feels like it's finally here. And I think when when you couple the supply constraints as the kick start to use your words, with the demand inflection of one of the largest tax rebate seasons that we've had in many, many years. And potentially with a new Fed share some increased relief through interest rate for the average consumer that plays out at some point during the year. There's a lot to to like about the setup. In the meantime, one of the reasons we embarked on this one way restructure we're not going to wait and just sit around and expect the market to solve the problem alone. We wanna take proactive steps and proactive actions to create an environment within one way to be poised and ready to make those moves, to be a leaner version of itself, a more selective version of itself, and then complement it with the work we do with our PowerLink solutions. And so that's our plan. That's what we're gonna go execute on. And that's where our focus is gonna be as we go forward. But I do understand the trepidation. Or or or the concern. It's hard to parse when you've got a big storm coming off of a normal January downdraft that's now showing itself as an abnormally strong February but I think there's more to it than just the storm. Andrew Cox: Thank you for the time, Derek. Derek Leathers: Thank you. Operator: The next question is from Reed C. With Stephens. Please go ahead. Reed Seay: Hey, guys. Thanks for taking my question. Wanted to ask one back on First Fleet real quick. When you have done these acquisitions in the past, you gain a lot of new customers, maybe some customers you do know. What does customer retention look like whenever, companies like this change hands? Do you have, some level of turnover? Initially whenever whenever there isn't an acquisition? And then I also want to follow-up on a question that was asked earlier on the negative mix within One Way. You did note that it was a negative mix shift from the fleets that the units you restructured to the ones you'll be keeping. So what what would be the force that is driving that from the mid-single digits to maybe your low single digits? Because I think what we had talked about you would be targeting more niche, differentiated freight, which we would think would come with a higher revenue per total mile. So I think that's kind of, where our confusion is. So if you could just clarify that that, that would be great. Derek Leathers: Okay. Sure. I'm gonna give that a whirl. It's lot there. If I don't answer it, feel free to follow-up. Starting with customer retention, every acquisition is different and every acquisition has a different level of incumbent loyalty and incumbent relationships with their existing customers. The first fleet has a long-standing deep relationship with the core of its its its book of business. We also know the majority of those customers prior to the acquisition. And and have previous exposure to them. So all of that gives us even more confidence. The fact it's dedicated, which is very difficult to displace and replicate, makes it even more encouraging. So every acquisition is different. This one I would say, from a customer perspective, feels better than most. As it relates to our ability to retain it. They're a high-quality carrier with very tenured drivers with very high service levels. We're only gonna enhance those abilities by bringing lower-cost trucks trailers, tires, fuel, and other items to the table. And be able to provide them now with additional portfolio options that they did not have as a stand-alone company. There's so said differently, if you're the customer, there's nothing not to like about that. So we're pretty confident in the customer retention. We're gonna work aggressively. On the drivers, associates, and others to make sure and retain the core of that. And the executive team at First Fleet is largely intact and staying on board and those meetings have been ongoing. So hopefully that answers kind of the the first part of it. The The question about a one-way trucking rate per total mile Let me let me attempt to be a little more clear here. As part of it, you're right. We're going to be more targeted. We're going to be more selective. We're going to lean into aspects of our network that we think we have particular strength. One common theme across those aspects is a longer length of haul. And we have a longer length of haul when I talk about mix, I just have to remind folks that your rate per mile, because that's what we report in one way, is lower with the longer length of haul. We're coming out of this restructuring with a significantly larger portion of the fleet, operating in sort of a team environment. We're coming out of it with a significantly larger focus on higher value, high high service expectation, longer length of haul transit. And as Mexico grows, that always will come with a longer length of haul footprint. So those kind of work against what you're doing on the contract side. And net you out a a a number with that guide of zero to 3% that may not look as meaningful and that's why we tried to apply the additional color of saying on a like to like basis, contract renewal approach that's where the mid-single-digit kind of activity is taking place. Reed Seay: Got it. That's very helpful. Thank you. Thank you. Operator: The next question is from Ravi Shanker with Morgan Stanley. Please go ahead. Ravi Shanker: Great. Thanks, everyone. So Derek, just to confirm, you've been the biggest bull on the supply side for the last year now. Just wanted to confirm that you're not turning more bearish in the cycle with this deal rationalization. And also, did you consider doing this maybe a year from now or eighteen months from now and you're potentially pass the peak? Thanks. Derek Leathers: Yeah. Thank you, Ravi. You're right. I've been consistent in my messaging on the supply side being more real. The enforcement took a lot of heart longer than I would have liked, and the scaling of that enforcement has taken even longer still. I think it's gaining momentum, and I think it's very real. As it relates to one way, why now? Which I think is a fair and great question, it really came down to the reality of accelerating the return to the margins that we believe are appropriate for our shareholders. It really comes down to the confidence we have in our PowerLink solution, sort of that variable capacity model to be able still serve a lot of that freight, work with our customers, embrace our large-scale trailer pool and assets that allow for them to have maximum productivity at the warehouse level. And we think we can do all of the above with a leaner version of One Way. It's not a turn away or abandonment of One Way in any respect. In fact, we just think it's the better application of scarce resources and scarce capital to continue to put it in long-term dedicated relationships and support one way with those customers that want, deserve, and have have and are willing to compensate for that support. And so that that's kind of how we got here. It's it was, if anything, you you mentioned wood we have waited a year longer? Perhaps we should have done it a year sooner. If anything, but better now than not accomplishing it. So I'm excited about the outcome. I'm excited where we sit. Look forward to being able to demonstrate it as we get through the other side of this Ravi Shanker: Very good. Thank you. Derek Leathers: Thank you, Robbie. Operator: The final question today is from Ken Hoexter with Bank of America. Please go ahead. Ken Hoexter: Hey, great. Good afternoon. Thanks for getting me in. Just checking Chris, the $35 million earn out, was that disclosed on the call last week? Is that new news? I just don't think I caught that. Just technical on that. And then the guiding dedicated fleet to 23%, 28%, can you differentiate that? Does that mean the core are you still looking at anything dropping on the core in terms of fleet size in order to get that growth rate Just want to understand that mix there. Chris Wikoff: Yes. First on the earnout, Ken, that at a minimum was in the eight k that we posted. That may have had slightly more information versus maybe some of the comments that we gave during the call shortly after closing. That was at a minimum. I think we also mentioned it as part of the call on the twenty-eighth. Ken Hoexter: Perfect. Chris Wikoff: And then the the dedicated fleet size? Ken Hoexter: Yeah. The, the guide from '23 to 28%. Chris Wikoff: Yes. Just is there would have thought maybe the mix would have been a little bit higher than that. I just want to understand, is there a signal there core is declining like what you're doing with One Way at all? Or is it a little bit? Or is it that just a simple add-on? Chris Wikoff: No, just keep in mind there that as a result of the one-way restructuring, which will continue through this first quarter. And that's an average by the way. So there would continue to be a reduction in the one-way fleet and in our organic business. That would be a function of that overall average TTS fleet size that includes first fleet. Derek Leathers: Okay. That's the last point I would add. Derek Leathers: Yeah. I would just add too, Ken. Part of the whole density play when you lay over two very dense dedicated networks over top of one another, it allows for and this is part of the work we are now embarking on, is increased efficiencies with how you utilize assets. And so you can get more done with fewer assets when you're doing asset sharing and the ability to kind of work across very dense portions of that network. So back to sweating the assets I've talked about earlier relative to one way, that's not unique to One Way. We want to make sure we do that across the portfolio. And so this is just where we believe is a guide for modeling sake. On what that fleet would look like as we get through to the end of the year. Ken Hoexter: And Derek, to wrap up if I can on the cutting back to Robbie's question on the one way. What happens to the trucks now, right? So if we're all kind of looking at a market that could be inflecting, are the trucks gone once you write them off you're selling them, you're dumping them somewhere else into the market? Or is there opportunity, I know, if the market really is inflecting rapidly, you shift them back into play? Can you shift them to dedicated? You're acquiring into the market? I just want to understand literally what happens to those trucks in the Derek Leathers: Yes, a little bit of all of the above. I mean, of them that we had dedicated startups in the fourth quarter. We were able to shift and move assets that direction as appropriate. We will in fact be selling some assets off and that's part of the overall restructuring as well. We've moved assets to other regions and other applications. Where appropriate within one way that was a significant part of the cost incurred as part of this restructuring when you have to move trailer pools and assets significant distances to get them repositioned to be able to you know, capitalize, if you will, on this on this market that's changing and where it's changing faster. So there's a little bit of all of the above. And just to be clear, even on the remainders, that we talk about when we say that one-way restructuring is continuing through Q1, we will be nimble as we go through that. Meaning, we're going to leave optionality open as we're moving forward. We're continue to test waters and understand, every day post storm what's happening out there relative to the tightness. And and probably more importantly than the storm, continue to monitor and acknowledge the outcomes of the ongoing enforcement enhancement. And if that continues to play out, this thing could get pretty interesting pretty quickly. And lastly, I would just tell you, like we have said for many years, we are out working and we're gonna be working with dedicated customers relative to to rates and renewals and the ability to flow them back to one way in an event that we're unable to gain agreements is another level of flexibility or another lever we can pull, especially in a one-way market that is if we were to find ourselves in one that's improving even more rapidly than we believe. Ken Hoexter: Got it. Thanks for the time, Derek. Derek Leathers: You, Ken. Operator: This concludes our question and answer session. I'll now turn the call back over to Mr. Derek Leathers, who will provide closing comments. Please go ahead, sir. Derek Leathers: Yes. Thank you. As we continue to navigate this dynamic environment, we're going to keep focusing where it matters most. On delivering superior value to our customers and positioning Werner for the long-term success. We took significant steps in Q4 towards becoming a leaner, more agile organization in one way. We recently added significant scale and capabilities to our dedicated portfolio via the acquisition of First Fleet. We remain confident in the progress towards our long-term strategic objectives, which as well as the strength of our portfolio to solve our customers' complex transportation and logistics needs. Our scale, reach, expertise, and diverse range of services position us well in this evolving market. I want to thank you all for spending your time with us today, and thank you for your continued interest in Werner. The conference has now concluded. Operator: Thank you for attending today's presentation. You may now disconnect.
Arthur Lee: Welcome, everyone, to the Monolithic Power Systems, Inc. fourth quarter 2025 earnings webinar. My name is Arthur Lee, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and founder of Monolithic Power Systems, Inc., Bernie Blegen, EVP and CFO, Rob Dean, corporate controller, and Tony Balow, vice president of finance. Earlier today, along with our earnings announcement, Monolithic Power Systems, Inc. released a written commentary on the results of our operations. Both documents can be found on our website. Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The risks, uncertainties, and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q4 2025 earnings release, the Q4 2025 earnings commentary, and in our SEC filings, including our Form 10-K and Forms 10-Q, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I would like to turn the call over to Tony. Tony Balow: Good afternoon, and welcome to our Q4 2025 earnings call. Today we made an announcement that after fifteen years at Monolithic Power Systems, Inc., and ten as CFO, Bernie will be retiring. Before we begin our prepared remarks, I would like to turn the webinar over to him for his thoughts on his time at Monolithic Power Systems, Inc. and the transition ahead. Bernie? Bernie Blegen: Thanks, Tony. As I was preparing for today, I realized that this is my fortieth earnings call as Monolithic Power Systems, Inc.'s CFO. That's a nice round number to finish up with. It's been my pleasure and honor to work closely with Michael for so long and to have been a part of Monolithic Power Systems, Inc.'s leadership team. I want to thank our investors and analysts for the trust you placed in me. It is natural for all businesses to go through cycles. Your support has been consistent regardless of the circumstances. I have greatly appreciated it. As I look ahead, Monolithic Power Systems, Inc.'s prospects remain bright. With our unique culture, our dedicated employees, and a fantastic portfolio of products, Monolithic Power Systems, Inc. is well-positioned to sustain the broad-based growth you have come to expect from us during the last ten years. I have a lot of confidence in the team I am transitioning my responsibilities to, starting with Rob Dean, who will be our interim CFO. While many of you may not know Rob, we have been partners in this enterprise for the last nine years. Like my predecessor and for myself, Rob continues the Monolithic Power Systems, Inc. tradition of transitioning from Monolithic Power Systems, Inc.'s controllership to CFO. This ensures a lot of continuity in the role. Likewise, I will remain with the company to support a successful transition. Rob, would you like to say a few words? Rob Dean: Yes. Thanks, Bernie, and I'm grateful to you and Michael for this opportunity to continue the tradition and to have been part of the Monolithic Power Systems, Inc. finance team while you have been CFO. I know I speak for the entire finance team when I thank you, Bernie, for everything you've done over the last fifteen years. You've not only helped guide the business to consistent growth and execution, but you've grown a great team around you. I've worked closely with Michael and the executive team for close to a decade. We've developed a strong relationship, which I expect to continue as we grow the company and take on the opportunities ahead. I appreciate the confidence they have placed in me in this new role. I look forward to meeting all of you in the coming days and weeks. With that, I'll pass it over to Tony. Tony Balow: Thanks, Rob. I'll now move to our prepared remarks before going to Q&A. In 2025, Monolithic Power Systems, Inc. posted its fourteenth consecutive year of growth with a full-year revenue of $2.8 billion, up 26.4% from 2024. For Q4 2025, we had a record quarterly revenue of $751.2 million, 1.9% above Q3 2025 and 20.8% higher than 2024. This performance reflected our consistent execution, continued innovation, and our customer focus. Let me call out a few highlights from 2025. Our non-enterprise data end markets grew by over 40% year-over-year, showcasing the strength of our diversified business model. We achieved our milestone of securing more than $4 billion of geographically balanced capacity and continue to add additional supply chain partners to support future growth. We had record module revenue and positioned ourselves for a further shift to solutions by sampling our 800-volt power solution for data centers. In automotive, we launched solutions for 48-volt and zonal architectures, including the first fully integrated 48-volt e-fuse and a kilowatt-level zonal controller that will support growth in 2026 and beyond. We expanded our customer base in data centers for power solutions across AI, server, memory, optical modules, and switch applications with leading-edge current density, power efficiency, and packaging. I am also pleased to announce that our quarterly dividend will increase 28% to $2 per share. For the three years ending with December 2025, Monolithic Power Systems, Inc. has returned over 72% of free cash flow to stockholders through share repurchases and dividends. Our proven long-term growth strategy remains intact as Monolithic Power Systems, Inc. focuses on innovation and solving our customers' most challenging problems. We continue to invest in new technology, expand into new markets, and diversify both our end market applications and global supply chain. This will allow us to capture future growth opportunities, maintain supply chain stability, and quickly adapt to market changes as they occur. I will now open the webinar for questions. Arthur Lee: Thank you, Tony. Analysts, we would now like to begin our Q&A session. As a reminder, if you would like to ask a question, please click on the participants icon on the menu bar and then click the raise hand button. Our first question is from Chris Caso of Wolfe Research. Chris, your line is now open. Chris Caso: Yes. Thank you. And, Bernie, I'm lucky to be the first to congratulate you on your retirement and wish you all the best. It's been a pleasure all these years. Bernie Blegen: Thank you very much, Chris. Chris Caso: So for my first question, I guess as we look into March, could you give some color on what you're seeing with respect to the different segments? What do you see within the various market segments? Tony Balow: Sure. Let me start by talking a little bit about Q4 2025. We saw a good step up in the ordering patterns in the quarter. Our book-to-bill ratio was well in excess of one, and that's really reflected in our backlog, which is starting to extend out into Q2 2026. We also finished with fairly routine channel inventory, which stayed at the low end of our range. So we feel that we're servicing real demand and that we're seeing a lot of strong ordering trends. As we look at the fourth quarter, you can see that we saw some pretty good strength, particularly as it relates to enterprise data and also to communications. We expect that those trends, along with automotive, should continue to extend into Q1 and into the remainder of the year. Chris Caso: Thank you. As a follow-up, you mentioned enterprise data, and obviously, that's been a focus of attention not just for you but for the whole market. You had made some comments on enterprise data for 2026 on the last earnings call. If I just annualize the Q4 numbers, you pretty much get to where that guidance was. So, what are your thoughts on that in the year? And perhaps is there a seasonal element to enterprise data as we go through the year? Tony Balow: Sure. I'll start off on this one. As I said, in Q4, we saw some fairly pronounced changes in ordering patterns, which has given us a fair amount more confidence as far as what the outlook for enterprise data could be in 2026. Now I think for those that have worked with me the last ten years, you know that I like to stay pretty conservatively profiled when I make an estimate. So I'd probably say that, whereas last quarter, I talked about a range of between 30-40%, maybe I can increase that to a floor of 50% growth for 2025. Michael Hsing: 50%. I thought that we can do a lot more than that, conservatively. I see no. This is what I see here. So, okay, we won many design wins across the board, not from one company, one large company. It's okay. We have multiple customers. They are very big. They call what? Magnetic fixing seven or eight or whatever. It's like, okay. We won all the designs. Okay? And we are proven well, one of the valuable AI power supplies. And also, I see the other end. Look. We have all the vie capacities. We can deliver this year to our customers' needs. And I don't see why not slowly 15%. Okay? Will you be alone? More than that. Okay. Tony Balow: Maybe just one last thing to add. Chris, you heard us talk about the drivers for growth, which was really around growing existing customers, adding new customers, seeing new platforms coming to market, and then, of course, just server tailwinds. I think we always knew those were in place, and now we're just seeing some of the backlog to go along with it. The only other thing I'd add, right, is we focus a lot on enterprise data, but I think we've seen strong data center demand, which is really also pulled through storage growth, optical modules, switches, and other areas we've talked about. So I think overall, we've seen strong data center demand through the end of the year. Arthur Lee: Got it. Okay. Thank you. All the best, Bernie. Our next question is from Joe Quatrochi of Wells Fargo. Joe, your line is now open. Joe Quatrochi: Yeah. Thanks for taking the question, and my congrats to Bernie as well. Thanks for all the help. Maybe just to follow up on that, in the enterprise data and the increase in outlook, how much of that is related to, like, traditional server CPU demand that it seems like it is accelerating as well? Michael Hsing: Well, as I said, we have a lot of new design wins in the game, particularly in the last year and a half. And we see continuously changing adapt our modules. And even from changing from silicon to modules. And we see the trend. And with our power densities, we're winning the market. Yeah. I think to go back to part of your question, which had to do with the traditional maybe CPU data center, the lines between AI, GPUs, and CPU are getting pretty blurry because they're so integral to one another these days. They're using the same kind of a power supply now. Okay. Exactly. But I would say that we've been trending very well in both categories. So I can talk to a trend line, but I can't really give you an absolute figure. Joe Quatrochi: Okay. That's helpful. And then as a follow-up, as I think about just kind of, like, storage and compute and maybe the exposure to PCs, are you seeing anything related to just kind of, you know, memory prices increasing and just kind of maybe some pressure on some demand destruction around that part of the market? Michael Hsing: Oh, you're talking about PC. The PC is a different animal than data centers. Okay? Question. He's asking about memory and the constraints there, whether we're seeing that affect us. Tony Balow: Oh, memory constraints and okay. As I said earlier, we don't have constraints on our capacity side. Bernie Blegen: Yeah. And I think where you're going, Joe, as well as also is there daily demand destruction in PCs. I think as you looked at Q4 into Q1, remember we're coming off a very strong 2025, so we expected that to be down a bit as well as we are participating more selectively in the margin parts of that business. I don't think we know how it's gonna play out through the rest of this year at this point, so I don't think it's possible to say how that market might trend. We hear a lot of the same, but I think it's too early for us to tell. Michael Hsing: Thank you. Oh, the memory constraint on the PC. On the wrist. Yes. Oh, okay. I don't know, Tanaka. We don't know those in the market. Okay. We don't know our customers do. Yeah. We deliver what our customers ask. I care less. Yeah. Okay. Our next question is from Joshua Buchalter of Cowen. Joshua, your line is now open. Joshua Buchalter: Hey, guys. Thank you for taking my question, and definitely want to echo the congrats and best wishes to Bernie after, you know, an incredible run and a long, sometimes strange trip. Very much appreciate the support over the years, and congrats and best of luck to Rob. Maybe just to start, you know, the incremental confidence in enterprise data is great to see, and it seems like you guys are suggesting you feel better about visibility there than you have in the past. Is that a fair read? And if so, is part of this just the market is maturing and scaling and also just the capacity needs are so great? Could you I was just hoping you could maybe speak to how visibility compared to maybe a year ago or something. Thank you. Bernie Blegen: Yeah. I think in prior quarters, I've said that we've been experiencing a turnaround, much of what has been around enterprise data or more broadly AI markets. But the anomaly had been that we've been seeing very short lead times. And that they were not putting a lot of backlog in our books. I'd say that the fundamental change that is also making us more confident right now is that we are seeing longer ordering patterns because some of our customers are concerned about capacity constraints. Not necessarily with us, but just in general. Joshua Buchalter: Oh, okay. That's helpful color. Thank you, Bernie. And the 40% non-enterprise data growth number for 2025 is obviously huge and above your historical algorithm of, I think it was 10 to 15% above the analog industry. Is that still the right way we should be thinking about, you know, the non-compute exposed verticals into 2026 as well? Thank you, and congrats again. Michael Hsing: Yeah. I will try to manage your expectation. We're not gonna say '26 or over 40% growth. Okay? And these growths, okay, we are still small players in the overall market compared to all the market size. Okay? And some growth, some years, and, okay, we see the opportunities that we can grow better than other years. Okay? But the long-term trend or even short-term trend in even '26, we will grow. Joshua Buchalter: Okay. Thank you. Arthur Lee: Our next question is from Quinn Bolton of Needham. Quinn, your line is now open. Quinn Bolton: Hey. Thanks for taking my question. And, Bernie, it's been a great run, a great decade. So thank you for all your help along the way. Welcome, Rob. Wanted to ask some of your competitors in the AI power space are talking about their businesses doubling in 2026. And I know business and their businesses don't overlap 100%. There's different compositions. My question is, do you guys think that you're gaining shares if you look into 2026? Broadly in the AI power segment? Michael Hsing: Yeah. I refuse to get into a pissing contest, Nugget. And the whole awareness on the stage. Okay? We let the numbers speak for themselves. As always, as our seaside appeals of what? Twenty twenty-one years history. We never do that. Okay. Tony Balow: I do think that we clearly have great products and broad engagement across the customers. We have design wins in a broad swath. So how the market then plays out, you know, remains to be seen, I think. But I think we're very confident in our product portfolio engagements we have right now. Quinn Bolton: Got it. And then, Michael, some of that That's that's a much better small talk. Okay. That's much Michael Hsing: Well, as you said, we'll see where the numbers shake out at the end of the year. Michael, I wanted to ask too. You talked about sampling rate on your call. Michael Hsing: Probably will see much early. Okay. Oh, good. Quinn Bolton: We'll stay tuned. Wanted to ask you about the 800-volt solutions for 800-volt racks. Some of the participants in the market are suggesting NVIDIA and others are looking for GaN-based solutions. I think you guys are offering a silicon carbide-based solution. And so wondering if you could talk about what you're seeing in the market. Is there a preference for GaN or silicon carbide? Do you think there'll be a mix of compound semiconductor solutions for that 800-volt to 12 or 6-volt stage in those 800-volt racks? Michael Hsing: Yeah. Yeah. Yeah. Okay. Again, okay. Well, I and this is not a good venue to talk about technical terms. And, okay, actually, I'm happy I'm happy to be a person who really knows the semiconductor device. And we are developing silicon carbide. Okay? And ten years ago, I was wrong about the GaNs and okay? But in the last few years, we developed our own GaN devices. Okay? And 100 volts since Tony's mentioning about it, and we're entering a pissing contest. And okay. But that revenue is not for this year, not for even for next year. So, okay, maybe end of the next year. However, we're the first company to sample it. Now that's a part of a pissing contest. Okay. Tony Balow: And again, we've done a good job and shown ourselves to be very adaptive to changes in the market. So whether it turns out to be, you know, GaN or silicon carbide that is what's demanded, I'm sure that we'll be well-positioned to take advantage of it. Quinn Bolton: Got it. Thank you. Arthur Lee: Our next question is from Rick Schafer of Oppenheimer. Rick, your line is now open. Rick Schafer: Oh, thanks. And I just I'll just say, Bernie, it's been a genuine pleasure. You're going to be missed. And, Michael, I just just wanna confirm for everybody that you're you're never retiring. Right? Michael Hsing: Well, it happened to me today is my '86 earnings call. I'm looking for I'm looking for double. Okay. Well, be serious. Okay? And I enjoyed this Monolithic Power Systems, Inc. immensely. Okay. We actually created this platform. Everybody can maximize their capability. And the more interesting things to me is we are we company evolve. And we form a semi we sell semiconductor power management. Now in a semiconductor, we're getting to an MCU. We're getting to a data converter. We get up to even high speed. Okay. These are a few gigahertz of stuff. And you will see the revenue sooms. And the overall marketing market segment address, we migrate from silicon to systems. To a module to systems, and you will see a lot more. I'm enjoying this process a lot. And every year, I'm a part of it. Okay? And I have own product lines. Okay. Rick Schafer: Nice, Michael. It's reassuring. Hey. I also had just had a quick clarification, and then I've got a couple follow But the clarification, Michael, you said earlier that that the CPU and GPU and server are using the same power supplies now. So does that mean that server CPU is already migrating to 48 volt? Michael Hsing: It's due they use mostly okay. If they have some advanced, okay, and high price server. Or special servers, okay, as special need. They use still use 12 volts. And but I'm aware of some models use a 48 volts My guess is they're still small. I'm not very clear. On the on that. But there's a and the majority is still 12 volts, and then now they it's clear as modules is the way to go. So they feel all want to improve efficiency, Rick Schafer: Thanks for clearing that up. So my first question really is on optical transceiver because that basically a brand new product line, a little over a year old, I believe. And by our count, in our model, it's close to roughly 5% of sales exiting last year, I think now, which is a pretty remarkable ramp. So I guess I'm out and thinking, we're asking, what are your expectations for that business this year? And what does that imply for comm segment? You know, what are sort of the puts and takes within the comm segment? Michael Hsing: I can comment on that. Give me a because we enter the module journey, since 2016 or '17. And these happen to be the highest power density product on the market. Then optical modules they wanted that. Because they have unlimited rooms. And okay. In terms of a business, I don't know the details, and maybe Bernie or Tony can answer it. Okay. Tony Balow: Yeah. I'll just follow-up. I think, Rick, we have obviously seen great growth in optical modules over the past year and a half. I think the way we look at the market, very typical for Monolithic Power Systems, Inc., is sort of interconnect. So it's not just optical modules, but engagements for CPO, active copper, other things as well because the market will then figure out what interconnect technology is actually gonna succeed over the long term. We obviously don't guide by, you know, sub end market, let alone sub end market, but we would expect optical module to continue to grow as you start to see the 1.6 ramp. As we go through and for communications, it should be an area of growth for us in '26 both on optical modules and switches because that's where our data center switches are as well. Thanks for that. And then if I could sneak in one on automotive, mean, obviously, year in '25. And I'm just curious what are the what what you see is the top driver top drivers, of segment growth this year? Know you highlighted 48 volt zonal And I didn't hear you say much about ADAS, but I assume ADAS if you could update us on how big ADAS is within that segment now or and if there's any way to quantify sort of a shift this year that you expect in in potential content per vehicle. Tony Balow: Sure. I, wanna take a victory lap on 2025 where automotive grew 43% year over year. But that's only the beginning. That's exactly the point here is that what we saw in 2025 and is going to continue is that while ADOS certainly was a strong initial ramp particularly in '23, '24, and '25. I think we saw a lot more diversification into other content opportunities on the automotive platform. And so as we look ahead here, keep in mind, we're not necessarily driven by the SAAR of the business but we are our growth is dependent upon how fast our customers implement these new technologies, particularly as it relates to zonal and 48 volt. Michael Hsing: Or even ADAS. Or ADAS. And the majority cars on the market, there's nowhere anything close to what Tesla does. Okay? And that's the car I drive. So, okay, you have a full I don't drive anymore. Okay. And think a majority of people still drive. Okay? And that adoption rate came in a large automotive company do things very slowly, much slower than Tesla does. Okay. I mean, and for futures, we are up to this point and after the next couple years, I see our products provide the complete power trip complete power supply chipsets And, also, we have all these firmware software with very much engaged with all the car all the carmakers. And I don't see why not. And, okay, and that business gonna continue to grow. Yeah. You actually guys okay. You know how many cars shipped with the ADOS. Okay? Which levels? Okay? And you can count Monolithic Power Systems, Inc. unit. Tony Balow: And, Rick, we're a little hesitant to probably call any numbers for full year just because there is a lot of macro uncertainty still. Great design wins, great engagement with tier ones and OEMs, but whether it's tariffs, whether it's the end of EV subsidies, or whether you even talk about what the impact on the auto market is from the memory shortage, think we know. I think we're a little hesitant to actually put a growth rate on it for the year. Rick Schafer: Appreciate it. Thanks, guys. Arthur Lee: Our next question is from Gary Mobley of Loop Capital. Gary, your line is now open. Gary Mobley: Hey, guys. Thanks for taking my question. And, regarding your retirement well deserved and look forward to working with you, Rob. Think everybody on the call would share the same sentiment that I have that you're definitely one of my favorite CFOs. And for my retirement gift, to you, I wanted to throw you a big softball question I think it's an important topic. You know, look looking back over the past decade when you've been CFO, you've outperformed the overall analog chip market, the overall voltage regulator market consistently every year. Seemingly for different reasons each year. But you know, thinking about the outperformance of the market in 2025, You know? Maybe if you can give us a sense of what drove that. Was that just share gains and and volts regulator die, or was it something more substantial like moving into data converters? Was it know, tied to the higher content associated with modules and related? Can you give us some KPIs that relates to sort of your module mix right now? Anything you can help us step get a better understanding of that consistent market share growth? Bernie Blegen: Sure, Gary. And thank you for the kind words. They're appreciated. When you look at the overall performance for the company in 2025, we had what had been our largest revenue end market in enterprise data. Had actually declined 2% and yet overall, the company grew 26%. And strategically, you know, how we're differentiated from our competition is that we are represented with the best technology, the best services across all of the end markets that we service. And this is really just a reflection of our execution against that strategy over all of these years. It wasn't that, pardon my saying, pulled the rabbit out of the hat. We actually are able to adapt very quickly to changes in the market. So that's what this is really a reflection of in our performance 2025. Gary Mobley: Thanks. As my follow-up, I wanted to ask about maybe some nuances in your increased visibility and comments regarding that. If I talked to you guys, you know, three months ago, I think you were thinking maybe the 2026 year was gonna be a little more second half weighted. Just given the stronger bookings that you've seen, the stronger order backlog, you know, as you sit here today, would you say the shape of the year is a little more linear less dependent on the second half? Bernie Blegen: I'd say that the first half for enterprise data in particular, but for the company, is more secure I think there's still a lot of variables that need to be shaped before we really understand what the second half trajectory is gonna look like. But, obviously, the initial signs that we saw from the ordering pattern in Q4 and continuing into this June year, have been exceptionally positive. So now we have more of the high-level issue of trying to figure out what's real demand and what may be, you know, some double ordering on the part of our customers as they try to secure capacity. They said that's a high-level issue, and we've shown, the we can adapt to that as well as anybody, but the full performance we gave in late 2020 and early 2021. Gary Mobley: Thank you. We work with the customers very especially all these large data center customers very closely. And they will give you they will give us a very good lead times and forecast. And so we have the capacities ready okay, when we just meet the demand. Rick Schafer: Thanks, Mike. Arthur Lee: Our next question is from Tore Svanberg of Stifel. Tore, your line is now open. Tore Svanberg: Yes. Thank you, and congratulations, Bernie. You're a class act. And I'm gonna miss you tremendously. My first question, Michael, I'm gonna zoom in on a market where there's perhaps less contest. Which is storage and especially SSD, power. It seems to be an area that could see quite a bit of upside and growth in data centers this year. I was hoping you could talk a little bit about the profile of that business. I mean, I think, historically, it's been more tied to, you know, client and edge devices, but again, what's the company's position SSD for data center going into 2026? Michael Hsing: Yeah. These are the power management and then also the signal processes. These are all in the consortium driven by JDAC. Okay. I mean, maybe, Tony, you're more familiar than I do. Yeah. And, we're a part of it. And DDR4, we don't have much business Very little. And DDR5 is okay. We're in DDR4, we're in a on the dining table. So I'm not gonna tell you. Before was DDR4 wasn't. Okay? And so now that this business is ramping, So, okay, I mean, memories and that came in all shifted to DDR5. And, like, again, and we clearly see the volumes now. Just and last year and then this year. And we're not stopping there. We're migrating down to where where I expanded our product lines to to to the single site. And these are all in in the memory modules. And so I think there was a portion of your question as well about the non-DDR5 part of that business, of STD and HDD. Tony Balow: We have seen an uptick in that part of the business as well. And I think you're right. Being pulled through much more by the enterprise than consumer. And that's why we generally talk about storage being data center driven. Inside of the storage and compute segment. Tore Svanberg: Yeah. That's what I was trying to get to. And as my follow-up, Michael, congratulations on getting to $4 billion in capacity, but it looks like you're gonna need quite a bit more than that. So perhaps you could give us a little bit sense of what you're doing on the capacity front especially the next three years because you're clearly gonna need much more than $4 billion. Michael Hsing: Yes. We are very aware about that. That. Okay? And as speaking, of course, and I and I work continuously expanding our capacity. And you know Monolithic Power Systems, Inc. history. Okay? The worst thing is shutting customers down. Okay? And fortunately, what happened in the Monolithic Power Systems, Inc. Okay? And now it gets a little it gets a little more more complicated. Okay. We're established the last from the beginning of the last year, we established our supply management And this is not only for silicon. And we and not for semiconductors, like, including, okay, silicon carbides and, I mean, and getting nitrites in the materials, and they can and we do a lot of modules. And all the module components. And so we established that the supply chain management. So I think it's a and also quality. Don't don't okay. It's not everybody can play that game. Every supplier can play the game. These are we go through heavy audit. And so their standards, okay, the meet our standard, ultimately, is a reflex into our margins. And so the short answer is yes. We're expanding very fast. Tore Svanberg: Great. Thank you. Congrats again, Bernie. Michael Hsing: Thank you. Arthur Lee: Our next question is from Kelsey Chia of Citi Research. Kelsey, your line is now open. Kelsey Chia: Hi. Hi, Bernie. Congratulations on your retirement. Really appreciate it. Opportunity to work with you over the past year. So I think to the on my first question is with regards to the updated guidance for enterprise data. Is there any market share gains assumption there, or is it just primarily due to this industry growth? And, also, you know, Monolithic Power Systems, Inc. has demonstrated strong execution and historically been share during periods of supply constraints. So is it fair to assume that Monolithic Power Systems, Inc. could navigate any potential supply constraints and see and to take share this environment. Bernie Blegen: Sure. And I think that, I'd be doing a disservice to this conversation if I tried to break it down into a formula that says what share gains or what's new business. And I'd rather sort of respond a little differently. That this is a large market. We talk about the large, you know, the top six, seven customers and we're fully engaged with them in a strategic manner. Where we're developing not just the release of the next generation, but the one beyond that. But this also is a end market with a long tail. And we're participating in the mid market and the small size as well. So we're still very, very early in, you know, how this market's gonna roll out and what our positioning is gonna be. And I think that, we're as well positioned as anybody to take advantage of the market opportunity but this is a long long and very big, story. Kelsey Chia: Got it. Yeah. For the companies, I'm thinking about Beyond AI. Michael Hsing: Beyond beyond enterprise centers, And we you you you have I'm not retired. Sometimes I I'm thinking years ahead. Kelsey Chia: That's great. Can continue the outperformance. And Monolithic Power Systems, Inc. outlined a gross margin target of 55 to 60%. Could you provide an update with regards to which end markets are currently above or below that corporate average or outline some of the specific gross margin drivers Michael Hsing: Yeah. Yeah. We're we're yeah. We're we're in the range, but on the low side, I noticed that. Okay. Bernie Blegen: Let me add a little bit of color there. So Michael said this earlier. When we look at all of the opportunities, we keep in mind, you know, what is the corporate model for gross margin, which is between 55-60%. And I've been fairly consistent over the course of the last, four to six quarters when we've been trending at between 55.5 and 55.8, which is Michael said, is the low end of our model. That in order for us to show improvement, we really need to have a little longer time horizon. Far as backlog to be able to manage it. So we are starting to see backlog developing, which I don't want to make too much out of what just one quarter's experience. But we should be able to resume at some time during the year the cadence that we've historically shown of incremental sequential improvements of maybe 10 to 20 basis points quarter over quarter. Kelsey Chia: Sounds good. Thank you. Thanks, Bernie. Arthur Lee: Our next question is from Jack Egan of Charter Research. Jack, your line is now open. Jack Egan: Great. Thanks for taking the questions. I'll echo the congratulations for Bernie and Rob. I had a bit of a technical one. So during last year's Investor Day, you mentioned a packaging innovation that would allow you to basically double the current density of your modules to about three amps per millimeter squared. And I was just curious, are there any updates on that? Like, is that still a work in progress, or, you know, is there kind of a timeline for that milestone? Michael Hsing: We start to sampling those products, and, again, we expect to have a shipping in this quarter and next quarter. This quarter. Yeah. Those already he said implement it. Don't really already qualified. And our customers went through a qualification on it. Jack Egan: Got it. Okay. Great to hear. Kind of from a higher level then, you know, last quarter, talked a bit about the gross margin implications of moving from a silicon supplier to a system provider over the long term. I was a bit curious about the impact on OpEx as well. I mean, that going to require you to kind of bring on new teams with experience in systems, or is there enough overlap between, you know, the chip design and design processes that you could accomplish it organically, I guess? So just any details on, you know, the impact r and d dollars or SG and A leverage would be nice. Michael Hsing: Well, we need to first thing, Okay. First. Okay. And we only gain, not lose. Okay? I never believed, like, a big dollars, like, invest Okay? And it translates to the bigger game. Okay? That's bullshit. And so look at Monolithic Power Systems, Inc. We're creating a few thousand 4 to 5,000 product, and I lost tracking a We addressed the multiple second mover market. Why we cannot pull up all these one plus one equals three? And, again, not just the two anymore. We can pull all these products put in the systems. And we can provide higher values. To to to users which doesn't mean we're building a refrigerator. We're building TVs and, like, we're building some things in a to alleviate our customers' design effort. Manufacturing effort, and that's in give us a high ASP. And I said earlier that we're sick and tired of selling silicones and, okay, but why we can't just put all the silicon together and migrate to assisting levels like modules. Okay? And the like system. You will see more and more. So at least I can say the net margins net profit had to increase. And then be a company that's gonna be a lot more lot more efficient. Bernie Blegen: Good. Certainly. Tony Balow: I want to touch on something that this transformation has been occurring now for well over ten years. If you think about, we were pretty much completely an analog design house ten, twelve years ago. And then we've been able to migrate we added both digital engineers and software engineers. And now we've had to take on new responsibilities and new skill sets related to packaging. And as Michael said, in testing. And each time we've done this, we've maintained the same level of r and d efficiency of getting the most out of the dollars spent. So just changing to develop new skill sets around the new opportunities we've identified is not necessarily mean that it's going to get more expansive or it's going to compress our operating margins. Tony Balow: And I'll just have one last comment. Even we made the model during Investor Day, Jack, that was fully aware of this transition. And so we talked about growing OpEx slower than revenue. Giving some leverage to the model. We knew this transition was happening when we put that guidance out there. Jack Egan: Got it. Okay. Thank you all for all the color. Yep. Arthur Lee: Our last question is from Sebastian Naj of William Blair. Sebastian, your line is now open. Sebastian Naj: Yeah. Good afternoon, and thanks for taking the questions. I'll just echo the best wishes for you, in your retirement. My first question is really on the shift to our vertical power solutions in the data center. As we move through 2026, what are your expectations for adoption of vertical power? And has that changed at all from your view in previous quarters? Michael Hsing: Vertical power. Oh, that's a long that's a everybody is going to a vertical power. So I Okay. I mean and or those one don't, and, okay, sooner or later, they will. Bernie Blegen: This is just where the direction of the market It's the only energy-efficient solution you can put in place if you're gonna operate in these high high voltage Michael Hsing: High current. Current Bernie Blegen: So that's just a natural evolution of the marketplace. Sebastian Naj: Got it. So would do you think that's that that starts to drive revenue in 2026 then? Is that fair to say? Oh, yeah. Yeah. Yeah. Yeah. Okay. Oh, yeah. Great. Great. That's helpful. And then maybe just as a follow-up on your optical module business. I think you talked about this a little bit in a previous question. But as we think about this shift to co-packaged optics that's getting a lot more attention these days, does that potentially change your revenue opportunity in optics? Is it more revenue per port or the ASP significantly higher? Any thoughts on that? Michael Hsing: Higher current, higher density is always good for us. And we're smiling, they increase power. And there's a lot more opportunity for us. Bernie Blegen: And a higher level of integration. Yeah. High level integrations. Michael Hsing: And why do the competition gap? Tony Balow: Yeah. I think the only thing I'd add there is, again, I think that's again, for a long term, I don't think that necessarily moves the needle on 26. Just to be sure, but it's certainly something we're engaged in over the longer term. Sebastian Naj: Okay. Got it. Makes sense. Thank you. Arthur Lee: This concludes our Q&A session. I would now like to turn the webinar back over to Tony. Tony Balow: I'd like to thank all of you for joining us today on this conference call. Our first quarter 2026 conference call will likely be held in late April. Thank you and have a great day.
Operator: Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session, and the instructions will be given at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Miss Thiessen, you may begin. Jessica Thiessen: Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President, and Richard Helle, Chief Financial Officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed forms 10-Q and 10-Ks. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper. Kemper Isely: Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results, highlight the key drivers of our performance, and share an update on our key operational initiatives. Then Rich will discuss the first quarter results in greater detail and review our fiscal year guidance. Our first quarter results were in line with expectations, including daily average comparable store sales growth of 1.7% and diluted earnings per share growth of 14% to $0.49. Based on our first quarter performance and outlook for the remainder of the fiscal year, we are maintaining our full-year guidance. There are several key underlying trends that I would like to highlight. The first quarter sales comp increase of 1.7% was cycling an 8.9% comp last year. The two-year comp of 10.6% continues to reflect a robust growth rate relative to the broader grocery retail industry. While first-quarter sales were consistent with our outlook, we believe these trends reflected cautious consumer spending behaviors, observed broadly across the grocery retail sector. Additionally, the sales comp primarily reflected trends with customers who do not participate in our rewards program. We continue to see stronger sales growth by our Empower Rewards program members. We believe that our differentiated offer of high-quality natural and organic products at always affordable prices continues to deliver strong value for our customers and reinforce our competitive position amid economic uncertainty. Furthermore, we believe that our company's initiatives position us well to achieve sustainable long-term growth. Next, I will review the performance of key operational initiatives. During the first quarter, nPower Rewards program net sales penetration increased two percentage points to 83%, supported by strong membership gains and higher traffic by nPower customers. The continued expansion of both membership and sales penetration highlights our customers' appreciation for the program's value and benefits. Empower remains an effective tool for optimizing promotional and strengthening customer engagement. Our Natural Grocers brand products represent value through premium quality at compelling prices. In the first quarter, our private label products accounted for 9.6% of total sales, up 70 basis points from a year ago. The strong growth reflects rising customer awareness, driven in part by more prominent marketing efforts as well as the impact of new product introductions. During the first quarter, we relocated one store. Relocations are a key element of our store development strategy, as they typically generate accelerated sales growth off a higher sales base. Additionally, today, we are affirming our plan of opening six to eight new stores in fiscal 2026 and are targeting 4% to 5% annual new store unit growth for the foreseeable future. Yesterday, our company released its fiscal year 2025 sustainability report. The featured topic is our differentiated nutrition education program. Since my parents founded our company in 1955, we have offered free nutrition education because we believe it empowers our customers, crew, and communities to improve their well-being. This long-standing commitment earned us the Shelby Report 2025 Sustainability in the Food Industry Award for Advancing Sustainable Practices in the Food Sector and driving meaningful change through our nutrition education program. For further information about our nutrition education program, our rigorous product standards, and commitment to our crew and communities, please refer to our sustainability report or visit our company's website. Last but not least, an important component of our differentiated model is the best-in-class customer service provided by our Good For You crew. I wish to express my deep appreciation to our crew for their continued commitment in delivering an exceptional shopping experience. Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance. Richard Helle: Thank you, Kemper, and good afternoon. Our first-quarter net sales increased 1.6% from the prior year period to $335.6 million. Daily average comparable store sales increased 1.7% and on a two-year basis increased 10.6%. Our daily average comparable transaction count increased 1%. The daily average comparable transaction sizing increase of 0.7% included annualized product inflation of approximately 2% to 2.5%. Items per basket were down less than half an item year over year. We continue to see the greatest sales growth in meat, dairy, and produce, which are some of our most differentiated offerings. We saw a modest decline in the number of transactions using SNAP EBT in the first quarter. SNAP represents approximately 2% of net sales, and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter. Gross margin decreased 40 basis points to 29.5%, driven by lower product margin primarily due to higher inventory shrink, the majority of which was driven by isolated events. Store expenses decreased 0.7%, primarily driven by expense management. Administrative expenses decreased 5.9%, primarily driven by costs incurred in the prior year period related to the Chief Financial Officer transition. Operating income increased 97% to $14.6 million. Net income increased 14% to $11.3 million, and diluted earnings per share increased 14% to $0.49 in the first quarter. Adjusted EBITDA increased 3.1% to $23.5 million. Turning to the balance sheet and cash flow, we ended the first quarter in a strong liquidity position, including $23.2 million in cash and cash equivalents, no outstanding borrowings, and $67.6 million available for borrowing on our revolving credit facility. During the first quarter, we generated cash from operations of $21.1 million and invested $9.6 million in net capital expenditures, primarily from new and relocated stores, resulting in free cash flow of $11.6 million. Today, we are affirming the company's fiscal year outlook that we originally provided in November. It continues to reflect both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. Our outlook includes the following: open six to eight new stores with the pace of openings weighted towards the back half of the fiscal year, relocate or remodel two to three existing stores, achieve daily average comparable store sales growth between 1.5% and 4%, achieve diluted earnings per share between $2 and $2.15, and direct $50 million to $55 million towards capital expenditures to support our growth initiatives. In addition, our current expectation is that sales comps will be at the low end of our outlook range through the second quarter as we cycle strong comps in the prior year while increasing slightly in the second half of the year as we cycle lower comps. Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percent of net sales will be relatively flat to slightly lower. Lastly, in fiscal 2026, we are investing approximately $0.12 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses. Now we'd like to open the line for questions. Thank you. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to attend our roster. And the first question will come from Scott Mushkin with R5 Capital. Please go ahead. Scott Mushkin: Hey, guys. Thanks for taking my questions. So I actually wanted to start off where you guys left off on the $0.12 headwind from the new stores. As we think about that going forward, is it gonna be as dramatic? I would think it wouldn't be as dramatic the kind of the headwind as we think about next year and the year after. How should we think about that type of drag as we move out beyond this year? Kemper Isely: Well, you know, this year, we're accelerating our growth from two new stores to eight. So that definitely gives us quite a bit of more preopening expense for, you know, six more stores with preopening expense. So that's where that 12 basis points came from. Next year, if we open a consistent eight new stores and do a couple remodels, it should be fairly flat going forward. If we add, you know, if we accelerate it to 10 or 12, then there would be a little bit more headwind. But it'll probably be flat next year to eight. Again, eight to nine new stores again next year. Scott Mushkin: Was it 12¢ or 12 basis points? I just wanna make sure I... Kemper Isely: Twelve. Twelve. Wasn't it 12¢? 12¢. 12. Yeah. $12.12 cents. Okay. Kemper Isely: Yep. Scott Mushkin: K. So, you know, conceivably a pretty good tailwind, I guess, as you look out depending on what happens with the rest of the business. Okay. So then switching gears to get some more thoughts on the shrink. I know you guys said that was kind of the biggest issue with the gross margin. And you called out, I think, some onetime isolated events. Can you give any more color on that? And are those isolated events gonna continue, or is that it was just, hey. This gross margin is actually would have been a lot better if it this hadn't happened. Richard Helle: Yeah. Scott, this is Rich. Scott Mushkin: Hey, Rich. Richard Helle: Hi. And one of the big items was recycling. Fairly low shrink in Q1 of last year. So last year was probably running about 15 below our three-year average. This quarter, we're probably running about 10% above our three-year average. So, you know, I would say a lot of that is sales velocity. And then we had some onetime items related to weather-related power outages that were obviously unexpected. Had some incremental shrink related to store closures as well. So that would be, you know? And then I'd say, yeah, a little bit of execution, operational execution that you tend to see quarter by quarter, but nothing overly material. Scott Mushkin: So it sounds like a lot do you have any size of that of the percentage of the decline in gross margins that would be attributed to power averages and stuff like that or no? Richard Helle: Well, I think in terms of just the cycling, the cycling was about 50% of that variance. And then, you know, and then I would say some of these anomalies probably another 25%, and then the balance of it would have been, I'd say, just, you know, standard variances. Scott Mushkin: Right. Alright. That's great that's great color. Then my final question is just around the environment. And, you know, I've been doing this a long time, and I think a stack comp is useful, but also not necessarily the end all be all when a and when an industry should be generally growing faster than it is right now, and this is not as statement to you guys. It's kind of a general thought. And I was just if you kinda look at your customer base, you guys gave some good color on the Npower. But if you look at it, by segment, by age, who's coming in and driving a lot of that growth? Are there any consistencies there that you would say, hey. Like, this demographic has definitely pulled back a little bit. Kemper Isely: Well, the demographic that's income constrained has pulled back. And that's where you're losing customers right now. They're just nervous, and their paychecks aren't keeping up with the rate of inflation, and they're looking for as inexpensive of alternatives as they possibly can find. And so that's where you... Scott Mushkin: Is there an age where we've lost customers right now? Kemper Isely: Have you seen an age reflection there? We've seen some data that, you know, suggests that the younger households are the most impacted, or you guys not really seeing that? Kemper Isely: Not really. I mean, there's a definite, you know, if they're income constrained, then there's they're pulling back. Scott Mushkin: Right. Does that make sense too? Richard Helle: Yeah. But with demographic wise, I mean, you know, great data. We haven't seen sort of a shift in our demographics from third-party data that we get. So nothing material there. And I think that, you know, the shrinking basket that we've been seeing is really all around sort of cautious consumers were very much seeking value. And, you know, the pullback that we've seen is not been in our Empower customers, but our less engaged customers. Scott Mushkin: Okay. Alright, guys. That's our our our our customers actually were really robust. Kemper Isely: Yeah. In this tough environment out there, so I was glad to see the numbers you put. So, anyway, alrighty. Appreciate it. Scott Mushkin: Thanks, Scott. Operator: The next question will come from Chuck Cerankosky with Northcoast Research. Please go ahead. Chuck Cerankosky: Good afternoon, everyone. I wanna dive in a little bit on the new store opening program for this year. You've got six to eight new openings. You've done one relo. So far. Now that would that would count as a new opening and a closure. Any net closures for the year and what's your definition of a relo and a remodel? Are they are they coincident events as we as we look at the the storing? Program for this year? Kemper Isely: No. We've had the one close we had a one closure in our Austin Arbor store in Texas in October, and we don't we won't have any more closures this year. Probably not any next year either. Anyway, the one relocation, that's a relocation. So we'll have 68 actual new stores then. One, three relocations or remodels. This year. So overall, be from eight to 11 I mean, six ninth Yeah. Think about that. The eight eight to 11 actual remodel moves and new stores. Chuck Cerankosky: Okay. That's helpful. And as you're talking about the three strongest categories, which tend to be some of the more expensive purchases, how does that square with the cautious consumer? Or is that reflected in the reduction in the items per basket? Kemper Isely: Well, supplements, which is our highest margin category, had a slight decline in sales for the quarter, but there was zero inflation in the supplement sector, which kind of explains the decline in the category. So we had a slight very slight drop in items sold in the supplementary because we had zero inflation in that category. Our other I would guess, what would the other ones be that you would Body care. Body care was similar. And grocery, we actually had good growth. Chuck Cerankosky: Growth in units? Kemper Isely: Yes. Chuck Cerankosky: K. Great. Kemper Isely: Yes. I mean, yeah, it was it was definitely body care and supplements where we saw the biggest decline in units. Then also also household items. Chuck Cerankosky: Okay. And with the and with supplements being up? A high gross margin category that showed up in the overall p and l then? Kemper Isely: Yes. It did. Chuck Cerankosky: It had a slight impact. Kemper Isely: But, I mean, overall, our our our our cash register ring margin was flat for the quarter. So we got we had some pickup in margin in some of the other categories. Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kemper Isely for any closing remarks. Please go ahead. Kemper Isely: Thank you for joining us. We are committed to our differentiated business model of offering high-quality natural and organic products at always affordable prices. And we are confident in our ability to continue to drive profitable long-term growth and enhance value for all our stakeholders. Thank you, and have a great day. Operator: Bye now. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Björn Tibell: Good morning, everyone, and welcome to the presentation of ASSA ABLOY's Q4 report for 2025. My name is Bjorn Tibell. I'm heading Investor Relations. And joining me here in the studio are ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. We will now, as usual, start this conference with a short summary of the report and then open up for your questions. And with that, I'd like to hand over to you, Nico. Nico Delvaux: Thanks, Bjorn, and also good morning from my side. We can report a strong end of a very good year for ASSA ABLOY. We had a good organic sales development in Q4, an organic growth of 4%. We have strong growth in Global Tech and Americas, good sales growth in EMEIA and in Entrance Systems and a sales decline in APAC, mainly again related to depressing market situation in Greater China. A good organic sales complemented with also good growth through acquisitions, net 3%. And then strong operational execution with a record EBIT margin of 16.8% in the quarter and an operating leverage of 80 basis points. Good work done on the working capital side, also giving us a strong cash flow and a cash conversion of 137% in the quarter. Also this quarter, again, the shift from mechanical to electromechanical continues, and we have seen an electromechanical organic sales growth of 8% in our regional divisions. We've been also active on the acquisition front in this quarter with seven acquisitions complete. If we look a little bit into the numbers, sales north of SEK 38 billion, 4% organic, like I mentioned, 3% net acquisition, and then unfortunately, hit in a strong way by FX, mainly weak dollar versus strong SEK. So 10% negative effect on top line. Therefore, sales top line minus 3%. And EBITA margin also at record level of 17.9%, and we see the gap between EBIT and EBITA further growing as we continue to buy quality technology companies. It's important to look also at that 17.9% EBITA margin. And the EBIT margin, like I mentioned, 16.8%, 30 bps up, and EBIT at SEK 6.5 billion. Look a little bit in the world, I would say I can say the same as I said in previous quarters. We continue to see a good momentum on the nonresidential side, on the commercial side in our three main areas, in North America, in Europe and in Oceania as well on the normal commercial side as on the institutional side. Whereas also in all three, we continue to see more weakness on the residential side. And there is two markets we have seen a pickup on residential that is in Sweden and in New Zealand. In New Zealand, we see good recovery as well on new build as on R&R. In Sweden, we see that recovery mainly on the R&R side, not on the new build side. That's the two markets that start to cut interest rates first. So we will have to wait a little bit longer for Europe on the ECB-related countries to see that recovery. And the same thing is true in the U.S. where interest rates stay around at 6%. And you know that 72% of the households in the U.S. that have a loan on their houses have an interest rate below 5%. So there is still that gap. On a positive note, we see -- that's an interesting statistic that 55% of the houses in North America are older than 40 years. So that R&R really should start to kick in on the -- hopefully in the near future. You see the numbers by region. Another important vertical for us is the logistics vertical, where we see a recovery in North America, not really a V recovery, more a U kind of recovery, slower recovery, which in a way is also easier from an operational perspective. Unfortunately, we don't see that same recovery in Europe. As a matter of fact, we believe that logistics market in Europe is even further down. So our numbers, plus 4% in North America; plus 12%, very strong Latam; and plus 3% organic growth in Europe; minus 2% in Africa; strong Australia and New Zealand, plus 8%; and then a very mixed picture in Asia, where we have seen good growth in the rest of Asia and higher double-digit negative growth in Greater China. A couple of highlights. This new product. It's a new range of garage door openers that we sell under different brands also under the Kwikset brand, and integrating this garage door opener in the home automation ecosystem from Kwikset together with our digital door locks. Very good collaboration between the Americas division and the Entrance Systems division. And also good to see that in a, you could say, a more mature market with mature products, our R&D team still found ways to really differentiate. We've announced a unique security feature. So quite excited about this new product range. A couple of project wins. Circle K in Germany, Entrance Systems won a service contract from around 2,000 industrial doors. Comcast U.S., our new recent acquisition, InVue in Global Solutions, equipped their stores with a total of 17,000 units for secure display of their electronic equipment. And then here in Stockholm, HID, public transport, access to metro bus lines, trains, interesting project. And just to clarify, this is not the wrong picture. It's just a picture with a lot of ice on our reader, and that's one of the reasons why we were chosen for this project, our capability for our equipment to work in extreme weather conditions. So I'm also quite happy with that project. So you see now that since 4 quarters, we have seen an acceleration of our organic growth, also an acceleration of our organic volume growth, and we continue to complement that organic growth with good growth through acquisitions. Our sales is up 65% over the last 5 years. And then our operating margin, well within the 16% to 17% bracket on a 12-month moving trend at 16.2%, and an EBITA margin even above that bandwidth at 17.2%. Therefore, also a good operating income, 107% up compared to 5 years ago. As mentioned, we continue to be active on the acquisition front with seven acquisitions completed in the quarter, 23 acquisitions over the full year. They represent an annualized sales of around SEK 6 billion. If we highlight two of them: Sargent and Greenleaf, an acquisition for the Americas division, a U.S. manufacturer of high security mechanical and electronic locking solutions and safe hardware, really strengthening our access portfolio for the Americas. They had a sales of SEK 430 million last year. And then International Door Products, IDP, U.S. manufacturer of standard and custom fire-rated steel door frames and doors. Also for the Americas division, complementing nicely our door offering. They had a sales of SEK 220 million last year. If we then zoom into the different divisions, starting with EMEIA. EMEIA had a very strong Q4 with an organic sales growth of 4%, with strong sales growth in the Nordics and in Central Europe, good sales growth in Middle East, India and Africa. Sales declined in U.K./Ireland and South Europe. U.K./Ireland, mainly related to delay on the commercial project because some new government legislation. And then inside Europe, mainly because of France where the residential market remains challenging. Also very good EBIT margin at 15.3%, with good operating leverage helped by FX 90 basis points accretion. It's the only division that profits from the stronger SEK. And then M&A dilutive 50 basis points. That's mainly related to transactions of acquisitions we did in EMEIA, so more you could say one-offs. Americas, another very strong quarter for the Americas with an organic sales growth of 5%. We have a strong high single-digit sales growth for the North America Non-Residential segment. Good sales growth in Latam, and then a stable sales development for the North America Residential segment. Strong EBIT margin at 17.9%, with an excellent operating leverage of 120 basis points. And then dilution, 50 basis points FX, dollar-SEK again, and M&A dilution also 50 basis points. Also here, mainly related to the acquisition-related costs that -- for the two acquisitions that I showed earlier, so some more one-offs, you could say. APAC, an organic sales decline of 2%, with a good sales growth in Pacific, Northeast Asia and a sales decline in Greater China and Southeast Asia. Greater China, Southeast Asia is really a mixed different picture. Greater China, high double-digit negative growth, and Southeast Asia, high double-digit positive growth. A good improvement of the EBIT margin at 7.6% versus 5.4% last year. Excellent operating leverage, and also here, hit by currency, 70 basis points. Then we go to Global Tech, I would say extremely good quarter for Global Tech, with an organic sales growth of 9%, with strong performance as well in HID as in Global Solutions, and then also a very strong EBIT margin at 18.9%, with good operating leverage despite a strong hit of FX, 90 basis points, and a small accretion on M&A of 20 basis points, that's mainly linked to InVue. And then last but not least, Entrance Systems, a bit lower organic sales of only 2%, where we've seen strong sales growth in Pedestrian, good sales growth in Doors & Automation, but stable sales in Industrial and Perimeter Security, and good but lower sales growth in service. And then still strong execution with an EBIT margin of 18%. And a very good operating leverage, I would say, despite only 2% organic sales of 90 bps. FX hit us with 40 basis points and M&A has been neutral. And with that, I give the word to Erik, our CFO, for some more details on the financial numbers. Erik Pieder: Thank you, Nico. And a very good morning from my side as well. I think you've heard a lot about the quarterly numbers from Nico. So if I focus a bit on the full year. On sales, we were up with 1%. If we then dissect that, 3% organic growth for the full year. We reached our target when it comes to acquired net growth of 5%, but then we were hit by the currencies for the full year 2025 with minus 7%. You see here the FX calculation that we did end of December, where we then for Q1, thought that -- I mean, when we did the calculation was minus 11%. Now end of January, we are for the first quarter in our calculation, minus 13%. And for the full year, we are at minus 8%. EBIT full year, we are up with 2%. EBITA margin for the full year, up with 10 basis points. And on EBIT, we are at the same level. Income before tax, net income and EPS, we are up with 2% for the full year. We had -- as mentioned before by Nico, we had a strong cash flow. Okay, we're a bit also there hit by the currency. So we are minus 2% in actual value. But of course, if you look on our cash conversion, it was 137% in the quarter. And for the full year, we were at 106%. Return on capital employed, minus 20 basis points year-on-year. We have now added, as we have talked a lot like on the Capital Market Day about the Operational Value Added or OVA. For me, I think it's a very good measurement because you combine the income statement with the balance sheet. So what you do is that you take your EBIT and then you deduct the interest rate on your capital employed. We also include goodwill there. And our weighted average cost of capital or our interest rate there that we use are 8%. And as you can see, we are at the same level end of 2024 as we -- we are at the same level at the end of 2025 as what we were end of 2024. If we look on the bridge, dissect first the 4% organic growth. We had a weak 3% on price, and consequentially then, you get a strong 1% that you have on volume. The flow-through, very good at almost 40% or an accretion of 80 basis points. This comes from the, let's say, the difference between price cost, which I will show you on the next slide. We had MFP savings in the quarter of roughly SEK 180 million. And then you have other operational efficiencies as well. The currencies, you've seen on the top line, minus 10%, but you also see that it has a negative impact because of the dollar versus the SEK, also on the bottom line. This quarter, it was 30 basis points. And this is something that will continue at least on the same level, I believe, in the quarters to come. But if you take acquisitions aside, we reached actually an EBIT margin in the quarter of 17%. The acquisitions are slightly dilutive. It comes mainly from acquisition -- costs of acquisitions that were closed during the quarter. If we then move to the next slide, direct material continues to sort of -- we continue there to have a tailwind versus last year. So we were 70 basis points better than a year ago. The mix impact of that is roughly 20 basis points. So if I call it the true sort of -- the true impact is 50 basis points. It's positive to see that the conversion cost is, also this quarter, better than what it was a year ago with 30 basis points. You can see for the full year, we are actually 20 basis points better than the year before. This, of course, comes with when we can have volume growth, you see it immediately that we can sort of have a positive conversion. SG&A, negative with 50 basis points, but this comes from investment in R&D as well as investments in our sales organization. Cash flow. We are now for the third year in a row, we have a cash conversion above 100%. This year, it ended at 106%. We sort of continue to do a good net working capital management. If you look between the years, you would see that CapEx, that it looks at least slightly higher this year than what it was a year ago, but that is due to that last year we had some divestments or sell -- we sold some buildings in EMEIA as well as in APAC. But all in all, I mean, a cash conversion of 137% in the quarter is strong. If you look on the gearing, continue to sort of have a positive trend here. If you compare versus last year, we are down from -- on the net debt to equity from 65% to 63%. And on net debt versus EBITDA from 2.3 to 2.2 (sic) [ 2.1 ]. So we still have a very strong financial position and we can continue with our acquisition strategy going forward. If we look on the earnings per share, as mentioned before, it's up versus last year. We will propose a dividend. The Board has proposed a dividend that, of course, needs to be approved by the AGM of SEK 6.4. And if you look on the dividend of percentage of EPS, it's over a period since 2020, it's at 43%, and the EPS growth -- yearly growth is 14%. And with that, I hand it back to Nico for some concluding remarks. Nico Delvaux: Thanks, Erik. So like we said, a very strong end of a very good 2025. We have very strong execution in, you will agree with me, challenging market conditions. So a good organic sales growth of 4%, complemented with good growth through acquisitions of 3%. A record EBITA and EBIT margin in the quarter, an EBIT margin of 16.8% with excellent operating leverage, and then also very good working capital management, giving us a strong operating cash flow and a very strong cash conversion. Like Erik mentioned, the Board then proposes a dividend of SEK 6.4 per share that we propose to, again, pay out in two equal tranches like we have done in recent years. And then last but not least, Bjorn has asked me to remind you that there is, at least for those that are interested, a sustainability seminar on March 20, where you can also find the registration link on this slide. So as a conclusion, I think 2025 was a good year. And again, what we always say is that whatever the market conditions come to us, our decentralized model, our proven strategy, we are convinced that we will also continue to deliver good results going forward, whatever market conditions come to us. And with that, I give the word back to Bjorn for Q&A. Björn Tibell: Thank you, Nico. Well, yes, that means it's time to open up for your questions. And as usual, could we ask you to limit yourself to one question and one follow-up. And when we've been through the list, then we can start over again with you can register yourself to ask a question again. So with that, operator, it means that we're ready to kick off the Q&A. Please go ahead. Operator: [Operator Instructions] The first question comes from the line of Daniela Costa from Goldman Sachs. Daniela Costa: I'll ask them one at a time. But mainly starting out in terms of sort of where we've seen some strong steel moves, especially in the U.S. We have also seen PPI of locks going up. There's FX. Can you talk a little bit about how you see the cadence of these potential headwinds or tailwinds from raw materials and FX panning out throughout the year? And also, you mentioned U.S. resi is stable, maybe also comment on that. Nico Delvaux: Perhaps if we start with market conditions, if I understood the question correctly, Daniela, so we -- like I mentioned earlier, we continue to see good momentum on the nonresidential side, especially on the institutional side. But our spec business, for instance, was again double digit up in Q4 with most, if not all, verticals showing positive growth. And again, our more important verticals, education, K-12, universities and health care, driving that growth. So on the commercial side, we remain positive, and was also translated in a high single-digit growth in Q4. The residential side, like I mentioned earlier, remains more challenging. We definitely believe that the residential market has bottomed out. And that from here on, hopefully, confidently, we will start to see some recovery. We don't believe that we will see the recovery on the short term on new builds because of the gap on the interest rate mainly. But the fact that the housing installed base, so to speak, starts to age, should lead sooner than later to some recovery on the R&R side. And if you can believe the economists that forecast the future, they at least start to see some recovery in the R&R side already this year. And then the other thing on the logistics vertical in the U.S., as we mentioned, we have seen a recovery, not a V recovery, but a slower U recovery. In a way, we are happy with the slower U recovery because that helps you also on the operational side to ramp up in a more easy way. When it comes to some headwinds. Of course, yes, some natural things that we can't change. We had quite some bad weather, as you know, also in January that affected temporary, I think, to a certain extent, the business. That, of course, should just be a temporary thing and I'm quite confident that if you look over the quarter, longer period that, that will not be significant. US dollar-SEK, we can only look back at the past and see where currencies stand today. We don't know how they will evolve in the future. But like Erik mentioned, they will continue to have a very important effect on the top line. He mentioned the number in the call. It will also have a more important negative effect on the bottom line definitely now in Q1. You've seen it was 30 basis points in Q4. We believe it might, and it will be even a bit higher now in Q1. And going forward, we will see what happens with the currencies. Daniela Costa: And then on the steel side? Nico Delvaux: Yes, right. If you look at material indexes in general, I think they are going up in a significant way, copper, zinc, nickel. Steel has been more stable, and you know that we are most exposed to steel. But we will do like we have done in the past. I mean if material indexes go up, we will try to compensate them through price increases. We have already increased -- announced price increases end of last year and beginning of this year. And we will see. If the market follows, we obviously will continue to do price increases, and we are confident that we will be able, like we did in the past, compensate for material increases through price increases and defend the margin. Daniela Costa: Perfect. My follow-up is just on your comment now. You're right on the 16% to 17% that you want to be on the long run margin at the top end of that. What would have to happen to see you above that? Is that something that you definitely don't want to go above because M&A will always dilute you back? Or would you have to see it for a number of years above it, and then you would consider changing the target? Is there a possibility that at some point you would consider increasing the target? Or you rule that out given the structure of the business model? Nico Delvaux: I would say let's not answer hypothetical questions. I think let's work hard first to get more higher up into that bandwidth. That's also what we have said in the Capital Markets Day. We are today at 16.2%. We have the ambition to get more comfortable in that bandwidth, perhaps also more to the higher end. And of course, there is a couple of main drivers there. Clearly, if you take the Americas, we have our residential business, where we have said that within the first 5 years after the acquisition of HHI, we will realize $100 million bottom line synergies. If that happens, we can bring HHI to that 16% EBIT margin, including PPA and so on. So that is definitely is something that, over time, will move the needle for the Americas division. Of course, we will need some help of the recovery of the market for achieving that. I think the second important driver is SKIDATA, where we know that we bought SKIDATA at very low single-digit margin and where we have the ambition to bring it to, let's say, around 14% over the first 5 years. If that also happens, then, of course, also because it's a EUR 300 million business that also has a more important effect on the margin. And the third one, as we mentioned at several occasions, we still believe that we have upside on the EMEIA margin, where over time, that should come closer to that 16%. So I would say that are the three main drivers that should help us to further improve EBIT margin. Operator: The next question comes from the line of Andre Kukhnin from UBS. Andre Kukhnin: Can I just start with a follow-up on the -- so on the pricing intentions for 2026, can you tell us at this stage what we should be thinking about with current raw materials and FX for pricing for 2026? Nico Delvaux: So like you rightly said, it will depend a bit on where material indexes go going forward. And under the assumption that tariffs stay where they are today because also that seems to be moving target, I think you should calculate with a price somewhere, I would say, between 1.5% and 2%. Of course, we live in a slightly higher inflationary world than, let's say, prior to COVID. Prior to COVID, our price component was perhaps a low 1%. This obviously should be a little bit higher with higher inflation. And then we have, of course, some price carryover from last year still on -- mainly on the tariff side. Andre Kukhnin: And can I just ask about the demand trends as you started the year compared to kind of the exit run rate of Q4. I think you've covered the U.S. but if we could just go around maybe EMEIA and Asia on kind of which way we're trending as we go into the year. And I guess part of that, could you comment on the specified activity in EMEIA as well, please? Nico Delvaux: Yes. So I mentioned already for North America that we have seen double-digit growth of spec quotations. The same is true in EMEIA, and we have seen high single-digit spec growth for Oceania. So on the spec side, we continue to see good momentum. I would say the answer is the same as we gave the last 3, 4 quarters. So a good healthy commercial activity level I think also translated in good organic growth in all three regions. And a comment on the residential side would be also similar still, yes, definitely bottomed out, but no real recovery yet for the residential market. With the exception, like I mentioned earlier, for New Zealand, a smaller country, and then Sweden, where we have seen the recovery in the R&R side, but don't see the real recovery yet on the new build side. Operator: The next question comes from the line of Gael de-Bray from Deutsche Bank. Gael de-Bray: The first one is on the M&A side. I mean, I think that based on the already announced acquisitions, the M&A contribution that's baked in for 2026 is just around 1%, which is lower than it was at this point in the previous 2 or 3 years, I think. So I'm wondering if you could provide any -- a bit more color on the M&A pipeline and perhaps a range of the potential M&A contribution for 2026? Nico Delvaux: So it's true that the carryover on the M&A side is 1% for the full year. It's around 3% for Q1. We have an active M&A pipeline. As you know, we have identified more than 900 potential targets. We are not talking to all of them, but we are talking to many of them. We are confident we will continue to close some of the acquisitions we are talking to in the coming months and quarters so that growth through acquisition for the year will go up. And as you know, we have the ambition to grow through acquisitions 5% per year over a business cycle. We realized that 5% last year. We will do our best to come as close as possible to the 5% or so this year. Like I mentioned, we have high activity then. To close the deals, you depend on two parties. Both parties have to agree. But we are happy, never satisfied, but happy with what we have in pipeline for the time being. Gael de-Bray: Okay. And the second question is on the organic growth dynamics or more specifically on the volume momentum. So I think it was around 1%-ish this quarter. So roughly the same as in the previous 3 quarters, really. So I guess my question is whether you kind of see any signs of acceleration going into 2026 or whether that's too early. And if basically, you're comfortable with the consensus expectations for volume growth of 3% to 4% in 2026? Nico Delvaux: But it was not really the same over the last 3 quarters. If you look 3 quarters back, it was very low, 1%. In Q2, it was closer to 1%. And now in Q3, it was above 3%. So you see an acceleration of the volume growth. It's true that you don't see an acceleration to 2%, 3%, 4%, whatever. But at least you see an acceleration over the last 3 quarters. Then of course, going forward, if you now look in Q1, the comparison is more difficult than in Q4, because I think last year, in Q1, we grew 2%, where in Q4, we had a slight negative growth. So that is one difference. And I think market conditions, like I mentioned earlier, are still very similar. So there's two things to take into consideration if you look now for organic growth in Q1. Operator: The next question comes from the line of James Moore from Rothschild. James Moore: Nico, I don't know if you mentioned it earlier, my line was dead for the moment. And Elmech, is it possible to talk about the organic growth speed in the quarter for the global and the regional picture? And then I have a follow-up I'll come back to. Nico Delvaux: Yes, the organic growth for the geographical divisions in the quarter was at 8%, with good contribution from all three regions. And the growth for Global Tech was higher, around double digit. James Moore: And I wondered if you could talk about the opportunities and the threats of the Aliro smart lock digital key wireless ultra-wideband near-field standards that are coming. I mean, I see pluses and minuses, and I wondered if you could help us navigate it in the sense that it enables digital smartphone key wallets, and maybe that helps with Elmech adoption. But is there a risk? And how should we think about the loss of proprietary ecosystem lock-ins with crossband interoperability? Does it commoditize the software layers? Do you worry about Apple and Google becoming gatekeepers? Just trying to think about what this means. Nico Delvaux: I think you should -- if you look at our Elmech business, which is around, what is it, 32% of sales. If you look at that part, more than 90% is on the nonresidential side, on the commercial side. And of course, all the things you talk about have an effect in the first place on the residential side. And on the residential side, those standards, we see it as an opportunity because, like you said, it will accelerate adaptation. And I mean, really as one of the strong players in this field, if you see an acceleration of that market, we will obviously profit from it together with the other players in the market. And then if we can do a good job and come with more innovative products and wider product ranges, then hopefully, confidently, we will also take a bigger part of that market. James Moore: Great. Lastly, I wondered if you could just talk a little bit about software recurring? It's obviously been a great growth engine. Does that continue in the quarter? And do you feel happy with the pace going forward? Nico Delvaux: You know that I can be happy but never satisfied, and that is the same, James, with recurring revenue. I think we see recurring Software-as-a-Service as the fastest growing, you could say, product or solution. That continues. When I started back in 2018, recurring revenue was around 2% of top line. Today, it's close to 6% of top line. So very strong acceleration and relatively becoming more and more important, and you know that you also make very good margins on that type of business. You see that as well in the geographical divisions and then also mainly in Global Tech as well on the HID side as on the Global Solutions side. And as we move more and more from mechanical to electromechanical, on, I would say, the nonresidential commercial side, we get more and more opportunities for that Software-as-a-Service. So we are confident that we will be able to continue that trend also for the foreseeable future. Operator: The next question comes from the line of Lush Mahendrarajah from JPMorgan. Lushanthan Mahendrarajah: It's on Entrance Systems and just a commentary around perimeter security and sort of the stable development there. And I think maybe that's sort of a slight change of toe versus sort of Q3, and I guess, particularly given sort of data center growth, I thought that was an area that benefited. So just kind to understand, I guess, what you're seeing there in the quarter. Nico Delvaux: I didn't understand the question. Björn Tibell: Data centers, how that's impacting Entrance, I think. Nico Delvaux: So as we also mentioned on the Capital Markets Day, data centers today represents around 1% of our top line sales. And if you consider that data centers are growing 50%, you pick the number, that means that data centers can give us an extra 0.5% organic growth. That 0.5% organic growth comes in the geographical divisions because they sell doors and door hardware to data centers. But the one most exposed, which will profit the most, is indeed perimeter security because they do all the fencing around the data centers and they have done also a very good job in coming with vertical-specific solution around fencing for data centers. The quarter had been a little bit weaker from an organic growth perspective. It's more a timing issue and a more difficult comparison with last year. If you look to perimeter security, they have been growing close to double digit for the last 2, 3 years. And we are confident now, not only with the data centers, but also with need for fencing around high security applications and also with warehouses coming back that perimeter security growth will also continue now this year. Lushanthan Mahendrarajah: And just as a follow-up on the Entrance Systems margin as well, obviously, strong performance there. I mean, is there something going on there with the steel component and maybe some of your competitors importing more of their steel? Have you been able to sort of price a bit better and take some of that margin? Nico Delvaux: So yes, Entrance Systems is exposed in an important way to steel and I would say, aluminum. And there, the same answer as before. If material indexes go up for steel and aluminum, we will increase prices and try to compensate for those cost increases through price increases with the ambition to maintain margins. Operator: The next question comes from the line of Vivek Midha from Citi. Vivek Midha: My main question is on EMEIA. Nice to see that the growth recovery is continuing, led by the Nordics. You mentioned that Southern Europe remains relatively weak within EMEIA. Can you maybe talk about whether you see any visibility on a recovery there, the sort of expectations on the shape of any recovery? Nico Delvaux: So if you take EMEIA, I think we have two important growth drivers, that is North Europe with Finland and Sweden, in particular. And then we have the DACH region with German, in particular. I think both are also profiting from the NIS2 legislation, cybersecurity legislation, but you also have to improve your physical security. And we see this is a European legislation that then has to be translated into a local law in the different countries. But you see that Germany and the Nordics are perhaps a little bit ahead of the other countries. And you see more activity there. So that NIS2 is an important driver in those two markets. And then like I mentioned, in Sweden, of course, you have, to a certain extent, the recovery on the residential side. What is also a good driver in EMEIA is emerging markets. So India and Middle East, Africa, and some markets in East Europe. Two challenging markets are the U.K., but we have said at a couple of occasions that we were confident that they had bottomed out and that we would see a recovery. We still believe that is the case. On the commercial side, there is a challenge with some of the legislation -- government legislation that has changed, and therefore, some of the bigger projects are on hold. Once those are released, we are confident we will see that growth on the commercial side for U.K. and therefore, that recovery that we mentioned already a couple of quarters ago. If you take South Europe, it's little bit a mixed picture, where Spain, Portugal and Italy, to a certain extent, show good results. It's mainly France that is down. France is also in Europe, one of the countries where we are most exposed to the residential business, and it's still the residential business that is challenging in France. There again, we believe we are confident that we see light at the end of the tunnel and that in the foreseeable future, we should start to see recovery of that business in France. Vivek Midha: And my follow-up is just a quick one on one of the small divisions. But in APAC, actually, quite a good margin print. I think it might be the best margin for the full year since 2019. Do you see a path to recovery to a 10% margin over the midterm here? Nico Delvaux: Yes. I think because if you look at APAC, again, you should make a difference between Greater China and the rest of APAC. I would say the rest of APAC has margins, let's say, similar to EMEIA, whereas in Greater China also last year, we had a small loss. And as in the mix, Greater China becomes also less important and the rest becomes more important. And as in the rest, we also continue to see good operational efficiency gains. Yes, we aim to further increase that margin for APAC. Over time, I think it should be possible to go to double-digit also in APAC. Operator: The next question comes from the line of Aron Ceccarelli from Bank of America. Aron Ceccarelli: My first one is on U.S. residential. You talked about the market bottoming out. I was wondering if you can provide a little bit of an idea of how pricing within different part of the market? If you can talk a little bit about perhaps the Kwikset brand versus Baldwin, it would be great. And also talk a little bit how the pipeline is shaping up as we enter the first part of the year. Nico Delvaux: Yes. So first on the market, to repeat what I said before, we don't believe that we will see, on the short term, a recovery on the new build because of the gap on the interest -- mortgage rates, where perhaps we are a bit more positive on the R&R side because of different facts. And the main fact what I said earlier is that 55% of the houses in the U.S. are more than 40 years old, so sooner or later, that R&R has to come back. And there for us, as a strong market leader in that field, it's very difficult to do better than the market. What we try to do is come with a lot of new product development. If you take, for instance, the Kwikset brand, on the digital side, I think we launched, over the last 6 months, more products than Kwikset had launched over the last 5 years. So really a very strong acceleration of new product development. And I would say the most extreme example is the digital side for Kwikset, but we are doing the same thing for Baldwin and for all the other verticals on the residential side. And that's also an indirect way, obviously, to get price increases through into the market. Because if you can come with a new product that you then also can develop at a lower cost, you can create a new price positioning for that in the market. That's not directly calculated in our price, but it's obviously an indirect way to increase prices. And that is also translated in our bottom line where we continue our trajectory to the ambition that we have set over time of 16%. Again, there, it would -- that will not be possible if we don't see the recovery also of the market and get a little bit help of the market because only the synergies, the $100 million bottom line synergies that we have identified, will not do it. Because if you look at the top line today, we are 60%, 70% below the peak from some years ago. That's also why we have taken extra measures in the residential segment in North America last year. We took out and we had to take out, unfortunately, more than 1,500 people to adapt our cost to the local reality and defending and further improving our margin. And that's things that we will continue to do now. Also this year, we will adapt our cost structure to whatever top line we will see. Aron Ceccarelli: And my follow-up is on Global Tech. The organic growth was very strong in Q4 despite the 2-year stack was relatively easy. But can you unpack perhaps the main drivers behind the performance? I would like to understand if you're seeing a tangible market share gains or our performance is mainly coming from white space opportunities created by new technology adoption? Nico Delvaux: If you look at the two main business in Global Tech, on the HID side, we have PACS. PACS after all the turbulences with semiconductor shortages, recovery and so on, I would say is back on that, I call it, decent growth path. So mid-single-digit growth, steady growth with good profitability, and we believe that it's going to continue. But what's good in HID is that we have seen very good growth for the other verticals, the smaller verticals where we invest a lot in feet on the street, a lot in R&D to make them significant bigger, then also helping them on the margin side. And so we have seen good development of those verticals in the quarter. And the same is true for Global Solutions, where obviously, hospitality is the biggest vertical where we have also seen a good continued high single-digit growth momentum, but where also the other verticals delivered on a high level in the other business areas -- segments delivered on a high level in the quarter, contributing even more to the overall organic growth. So you could say, in that sense, it was all stars aligned from an organic growth perspective for the different business areas as well in HID and in Global Solutions. Operator: The next question comes from the line of Rizk Maidi from Jefferies. Rizk Maidi: Just going to start with a follow-up on the hospitality side. I think some of your peers have flagged that U.S. hotel occupancies have dropped, and this is affecting the appetite of hotels to invest into their own assets. So I'm just wondering whether it's something you're seeing or not? Nico Delvaux: We have seen good momentum of our hospitality business around the world and also in the U.S. So we have seen good growth of our business in U.S. in the quarter. Rizk Maidi: Perfect. And then second one is just if we could elaborate on the -- your pricing commentary. How much did you achieve in the U.S. out of, I think, the 3% to 4% sort of targeted? And if you could just give us a split of that 1.5% to 2% for full year '26%, how much of that is carryover versus incremental price increases? Nico Delvaux: So as Erik mentioned, our price component in Q4 was a low 3% for the group. And obviously, a good part of that has been related to tariff compensation, and tariff compensation is only in the U.S. So the two or the three divisions that had a higher price component than the group average are obviously Americas, Entrance Systems and HID because they have relatively important part of their business in the U.S. So the price increase for Americas was a little bit higher than the average for the group. We've always said that on the tariff side, price in the U.S. should be around, let's say, 3%, prefers a little bit higher than 3%. We now have seen that it's a little bit lower than 3% because we were able to further move parts, subassemblies and products to more tariff favorable destinations. So if you calculate with, let's say, 1.5% tariff impact for the full year 2025 on group level, and if you take into account that most of that has come in Q2, Q3, then you can also see what that gives us now in 2026. And then the rest of the 1.5% to 2% I mentioned for the full year is then the normal price increases that we do at the beginning of the year to compensate for general inflation, material inflation, labor inflation, you name it. And then depending on where material indexes go, we will continue to try to increase prices as we go. Operator: [Operator Instructions] The next question comes from the line of Andreas Koski from BNP Paribas. Andreas Koski: I just want to follow up on the price discussion here because when I look at your price development through 2025 and now your comment about new price increases at the end of last year and the beginning of this year, I get to a price component in the beginning of 2026 of around or even above 3%, again, which means the price component at the end of the year must be around 1% to get to 1.5% to 2% for the full year. Is that the right thinking? Or what am I missing? Nico Delvaux: I think in global terms, I think it's a good thinking. It's more or less in line with how we see things then. Again, everything will depend how costs evolve going forward and how successful we are or not in realizing the price increases that we have announced and are announcing and that should kick in later in the quarter. Andreas Koski: Understood. And if -- I mean, in 2025, you've had a very strong drop-through -- organic drop-through of around 50% for the full year and it was close to 40% now in the fourth quarter, which was also a very good number. But if volumes will account for a larger share of organic growth in 2026, what do you think is a reasonable drop-through for you? Do you think that should come down towards 30%? Or what is a good guess? Nico Delvaux: I think everything depends on organic volume growth, and there is most probably somewhere an ideal organic volume growth where you get the best volume leverage. And that's most probably somewhere around perhaps 2%, 3% because if it's lower, it's more difficult to compensate for inflation. If it's much higher, you put too much pressure on your supply chain, on your factory, you have to work with over time, you have to expedite deliveries and so on. So most probably that 2%, 3% organic volume growth is an ideal place to be. And if you are there in normal conditions, drop-through around that 30% should be realistic, yes. Andreas Koski: And if -- okay, Bjorn, to squeeze in one just follow-up because you mentioned that comps will now become more difficult in Q1 and that market conditions are still very similar. Normally, you get the question how the current quarter has started. But does your comments around the tougher comps mean that you are now seeing slower organic growth in Q1 '26 compared to Q4 '25? What are you seeing? Nico Delvaux: Yes, perhaps on how that the quarter started, how January started, it's a bit difficult to compare. Of course, January had one working day less. If you compensate for that, January was a little bit lower than Q4. And that was mainly, we believe, linked to two things. The weather conditions in general and the weather conditions in the U.S., in particular. We believe this is a temporary thing. And over the quarter, we don't think that is going to be a significant reason. And the second reason was that we have a more important factory in Berlin. And you know that there was a sabotage -- electrical sabotage in Berlin that they were without current. Our factory was without current for 5 days. We could not produce an invoice for 5 days, had a negative effect in January. But again, there, this will pick up, and we don't think that it's going to be a notable negative thing in the quarter. So that is on how the year started. On -- the comment on the comparisons is as well top line as bottom line. Like we mentioned, we had a strong organic growth in Q1 last year than in Q4 the year before. Therefore, the comparison is more difficult. But also bottom line, the comment was always there because we have the normal seasonality, but we also want to highlight that now with SKIDATA coming in, we have a much higher seasonality. SKIDATA will give an extra around 50 basis points seasonality in Q1, negative seasonality in Q1. And then like we mentioned on the currency side, which will have an important negative effect in Q1 top line but also bottom line. And that's perhaps the two deviations if you look at historical numbers. Björn Tibell: So I think we have time for one more question. Operator: The next question is from the line of Andre Kukhnin from UBS. Andre Kukhnin: Well, just on SKIDATA, when you said 50 bps, is that at the group level? Is that EMEIA? Nico Delvaux: That's on group level. Andre Kukhnin: Okay. And I just also wanted to ask about the Americas dilution to margin from M&A through the year looks like 90 basis points. And I think from discussions before, I understand this is mainly investments in the Level Lock acquisition where you're rolling out that technology across bigger brands. Could you just comment on how that's going and what the outlook is for 2026? I noticed that dilution has kind of come down a bit or quite a bit in Q4 versus the prior quarter's run rate. Does that mean you're kind of now at the run rate of investment? And what kind of payback do you expect in 2026? Nico Delvaux: Yes. So if you take Q4, the acquisition -- the dilution of acquisitions in Q4 in the Americas has nothing to do with Level Lock because we own it now more than a year. And so therefore, Level Lock is in the organic part. The dilution in Q4 is mainly transactional related costs for the two acquisitions that we also mentioned in the presentation. So you could say it's more one-off type of thing, whereas it's true that Level Lock has around 100 bps dilution for the Americas. Level Lock -- it's fair to say that we are not entirely happy with the performance of Level Lock after the acquisition. We are struggling a little bit on getting the sales up in line with our expectations. We have been taking measures to do that because we should see more sales as well on the residential side as on the light commercial side, and we have put now the right resources in place and the right focus in place to do that, but that was a bit later than anticipated. And I think we have also been perhaps a bit too slow in adapting the cost to a lower top line because we, on one side, wanted to continue and finalize some of the R&D projects that they are working on because we have bought them in the first place as a, let's say, R&D machine coming with very exciting new products. And on the other hand, we wanted to understand first a little bit better the commercial momentum. So we have now taken actions also on the cost side. So that dilution should gradually reduce now over the coming quarters. But it will remain dilutive for the quarters to come. Björn Tibell: It's time for us to round up. Thank you, Andre, and thanks, everyone, for your participation. We -- if there are any follow-up questions, please feel welcome to reach out to us at Investor Relations. And we look also forward to meeting and seeing many of you in the coming weeks. Thank you again, and have a good day. Nico Delvaux: Thank you. Erik Pieder: Thank you.
Operator: Good afternoon. Thank you for attending today's Alpha and Omega Semiconductor Fiscal Second Quarter 2026 Earnings Call. My name is Victoria, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Steven Pelayo. Thank you. You may proceed, Steven. Steven Pelayo: Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2026 second quarter financial results. I'm Steven Pelayo, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO, and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for March. Finally, we will have a Q&A session. The earnings release was distributed over the wire today, 02/05/2026, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided in today's call. Now I'll turn the call over to our CEO, Stephen Chang. Stephen? Stephen Chang: Thank you, Steven. Welcome to Alpha and Omega fiscal 2026 Q2 earnings call. I will begin with a high-level overview of our results and then jump into segment details. We delivered fiscal Q2 revenue results slightly higher than the midpoint of our guidance, primarily reflecting seasonality across several end markets, including PCs, wearables, tablets, and gaming. Inventory digestion in AI further impacted by shifts in GPU allocation to prioritize data centers over graphic card markets. Strength from our tier-one US smartphone customer and sequential growth in e-mobility power tools, and home appliances. Overall, total December revenue was $162,300,000, down 6.3% year over year and down 11.1% sequentially. Non-GAAP gross margin was 22.2%. Non-GAAP EPS was a loss of 16¢ per share. In addition, we repurchased approximately $13,900,000 of AOS shares during December, representing 728,000 shares as part of our recently announced $30,000,000 share repurchase program approved by the board. Following these purchases, approximately $16,000,000 remains available. This balanced approach to capital allocation reflects the board and management's confidence in our strategy and execution while maintaining the financial strength needed to invest for long-term growth and deliver shareholder value. Several years ago, we launched a deliberate strategy to transform AOS from a component supplier into a provider of application-specific total solutions. From the start, our focus has been on higher performance markets where system-level differentiation matters. Barriers to entry are higher, and we can meaningfully expand BOM content. We believe this strategy is working. We have seen tangible results in AI and graphics in smartphones through a mix shift towards premium platforms and higher charging terms. And more recently, this momentum has extended into our high-performance medium voltage MOSFETs used in applications such as hot swap and intermediate bus converters for AI data centers. Just as important, this focus helps offset competitive pressure at the lower end of the market and reinforces our confidence in the direction we are taking. We have remained disciplined in how we execute this strategy, making targeted long-term investments rather than reacting to short-term noise. As applications continue to evolve towards higher performance and greater system complexity, we believe the right response is to accelerate investment in the technologies, products, and engineering resources required to win. Consequently, we are increasing critical R&D investments. These are not broad-based investments. They are highly focused where we hold clear differentiation, strong customer engagement, and a clear roadmap to higher BOM content and sustainable margins. To support this strategy, we strategically optimized our balance sheet. As part of a planned capital allocation approach, we monetized a portion of our equity interest in the Chongqing joint venture, retaining a meaningful ongoing stake. As previously announced, we sold approximately 20% of our equity interest in the joint venture for an aggregate purchase price of $150,000,000 payable in installments, and we continue to hold an 18.9% equity interest in the joint venture. We received $94,000,000 in September followed by an additional $11,000,000 in December and subsequent to the quarter end, received $30,000,000. There is an additional $15,000,000 remaining that will be received later this calendar year. This financial strength allows us to invest decisively and strategically in technology development, manufacturing capability, and engineering talent as we continue to shift the business towards higher value, higher margin opportunities. We are already realizing the impact of our strategy on revenue. For example, while overall PC unit demand in calendar 2026 is expected to be constrained by tightening memory supply, our total solution strategy is gaining traction and we are seeing increased BOM content on new platforms such as Intel's Camberlake. In communication, we are witnessing the fruits of our earlier investment in silicon and packaging technology, in smartphone battery protection. Our technology differentiation coupled with the industry move towards higher charging currents enabled us to secure increased BOM content and deepen our relationship with top-tier customers. Factors that are expected to contribute to our growth in 2026. In advanced computing, including AI data centers, server, and graphics, we are encouraged by an expansion in demand across a broader array of AI data center applications and a broader set of customers. We are seeing near-term demand for high-performance medium voltage solutions used in applications such as hot swap and intermediate bus converters for leading ODMs for major hyperscale customers. Advanced computing is becoming a core growing element within the computing segment. The key takeaway is that we are continuing to see the benefits of our structural transformation. We will see tangible results this calendar year, and we expect more meaningful acceleration in 2027 and beyond as new platforms and programs ramp. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing. December revenue was up 5.9% year over year, and down 17.1% sequentially and represented 49.6% of total revenue. The sequential revenue decline was in line with our expectations. Within computing, we saw softness following an unusually strong September that benefited from tariff-related PC pull-ins as well as earlier AI and graph shipments. Seasonality also affected sales of tablets. As we mentioned before, during September, AI and graphics customers entered a digestion phase that extended into December, which was further influenced by increasing prioritization of production by our customers towards GPUs for AI data center over traditional graphics card platforms. Looking ahead to calendar 2026, visibility into the PC market remains limited driven primarily by uncertainty around memory shortages. While memory availability may impact end PC demand, center investment continues to provide an important offset. As mentioned before, we are shipping our high-performance medium voltage MOSFET products into infrastructure programs, including hot swap power solutions and are now moving into the build phase asset leading ODM, for major hyperscale customers. We are also expanding our presence in AI platforms through medium voltage solution supporting 48 volts to 12 volts intermediate bus conversion. Looking ahead to March, we expect computing segment revenue to decline in the low single digits sequentially. This reflects softness in the PC market mostly offset by strength in AI data center applications as well as growth in graphics cards and tablets. Importantly, we have clear visibility into demand for our new VDN voltage MOSFET across an expanding list of applications and customer base that includes power supply providers, module makers, cloud service providers, and major hyperscalers. Turning to the consumer segment. December revenue was down 14.9% year over year and down 18.3% sequentially and represented 11.8% of total revenue. The results were in line with our original expectations for a high teen sequential decline. While wearables experienced a normal seasonal decline, the overall year-over-year revenue decrease in consumer was primarily driven by gaming. With a smaller impact also from home appliances. In wearables, we continue to see underlying momentum supported by share gains, new customer engagement, higher BOM content, and a broader mix of end applications. In gaming, we remain closely aligned with our key customer as they progress through their next product cycle for our existing relationship and strength in high-performance power solutions positions us to participate in the next generation platform. Home appliance demand was modestly lower year over year though new design activity in 2025 supports longer-term opportunities. Particularly in emerging markets. For March, we forecast mid-single-digit sequential growth in the consumer segment, primarily driven by a recovery in gaming after a sharp inventory correction in December. Next, let's discuss the communication segment. December revenue increased 1.1% sequentially and was flat year over year, represented 20.4% of total revenue. The results were supported by strong year-over-year growth from our tier-one US smartphone customer, driven by continued expansion of BOM content. While demand from China smartphone customers remains uneven as we prioritize US customers, we are sustaining high market share in the premium phone segment. We see additional growth coming in calendar 2026. As new models launch with higher charging currents, and our investments in differentiated silicon and packaging technologies for battery protection further enable BOM content expansion. Looking ahead to March, the communication segment will likely decline mid-single digits sequentially. This is due to typical seasonality from our tier-one US smartphone customer, partially offset by sequential growth from China smartphone. Korea is expected to remain relatively flat. Now let's talk about our last segment, power supply and industrial. Which accounted for 16.7% of total revenue and was down 22.5% year over year and down 3% sequentially. Overall, the results were below our expectations for mid to high single-digit sequential growth as quick charger demand came in weaker than expected. But were partially offset by a rebound in power tools and e-mobility. Looking ahead to March, we expect power supply revenue to increase mid-single digits sequentially driven primarily by quick chargers and DC fans. Offset by softer power tools and e-mobility. In closing, we are guiding March to be down slightly sequentially. We expect March to mark a near-term low point for revenue and margin. With the business returning to growth beginning in June and into the peak season. Supported by improving mix and a more favorable contribution from higher value applications. Consistent with the strategy we have outlined, we are accelerating targeted investments in performance-driven applications where we have strong positions. Clear differentiation, and expanding customer engagement. While calendar 2026 may reflect modest growth, as markets work through near-term constraints, our application-specific total solution strategy is yielding results. And we are already seeing a positive impact. Today. As we continue to move higher value programs towards production, we expect these benefits to become increasingly visible through the course of calendar 2026 which we expect to support stronger growth as we move into 2027 and beyond. With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Yifan? Yifan Liang: Thank you, Steven. Afternoon, everyone, and thank you for joining us. Revenue for December was $162,300,000 down 11.1% sequentially and down 6.3% year over year. In terms of product mix, DMOS revenue was $101,000,000, down 6.9% sequentially and down 10.6% over last year. ROIC revenue was $58,800,000, down 19.1% from the prior quarter and up 9.5% from a year ago. Assembly service and other revenue was $2,500,000, as compared to $1,300,000 last quarter and $1,100,000 for the same quarter last year. Non-GAAP gross margin was 22.2%, compared to 24.1% last quarter and 24.2% a year ago. The quarter-over-quarter decrease was mainly impacted by higher input and operation costs. Non-GAAP operating expenses were $41,300,000, compared to $41,400,000 for the prior quarter. And $39,000,000 last year. Non-GAAP quarterly EPS was a 16¢ loss compared to $0.13 earnings per share last quarter, and $0.09 per share a year ago. Moving on to cash flow. Operating cash flow was negative $8,100,000 including $4,000,000 of repayment of customer deposits, and $8,700,000 income tax paid by one of our entities on the gain from the sale of CQ JV equity interest. By comparison, operating cash flow was positive with $10,200,000 in the prior quarter, and positive $14,100,000 last year. We expect to refund $1,000,000 of customer deposits in the quarter. EBITDAS excluding equity method investment loss was $9,700,000 for the quarter. Compared to $19,400,000 last quarter and $16,800,000 for the same quarter a year ago. Now let me turn to our balance sheet. We completed December with a cash balance of $196,300,000 compared to $223,500,000 at the end of last quarter. Net trade receivables decreased by $8,100,000 sequentially. Day sales outstanding were twenty-five days for the quarter. Compared to twenty-one days for the prior quarter. Net inventory increased by $3,900,000 quarter over quarter. Average days in inventory were one hundred and forty days for the quarter. Compared to one hundred and twenty-four days for the prior quarter. CapEx for the quarter was $15,000,000 compared to $9,800,000 for the prior quarter. We expect CapEx for March to range from $15,000,000 to $18,000,000. With that, now I would like to discuss March guidance. We expect that revenue to be approximately $160,000,000 plus or minus $10,000,000. Yep. Gross margin to be 20.2% plus or minus 1%. We anticipate the non-GAAP gross margin to be 21% plus or minus 1%. GAAP operating expenses to be $52,000,000 plus or minus $1,000,000. Non-GAAP operating expenses are expected to be $45,000,000 plus or minus $1,000,000. The sequential growth in the operating expenses is mostly the result of increased spending for R&D. Interest income to be $1,000,000 higher than interest expense, and income tax expense to be in the range of $1,100,000 to $1,300,000. With that, we will now open the call for questions. Operator? Please start the Q&A session. Operator: Of course. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from the line of David Williams with Benchmark. David, your line is now open. David Williams: Hey, good afternoon, everyone, and thanks for taking my question. I guess maybe first, Stephen, you talked a lot about the strategy and that's really starting to show here. But I wanted to first maybe about the AI opportunities and on the GPU track. In those design wins. Can you maybe talk about how that tracking? Is it to your expectations? I know there's been some push and pull between the segments there, but just kind of curious how you're seeing your how that AI opportunity is tracking and what your expectations are. Stephen Chang: Hi, David. Yes. Good to hear from you. Yes. The AI opportunity that we've been pushing for it is less than what our original expectations were for regarding creating selling solutions for going into the VRM powering the GPUs directly. However, actually, we've been talking about, in this earnings as well as in the previous season is that our AI opportunity is actually expanding. The breadth of our offerings into this AI opportunity is going beyond even just the, you know, the total solutions that we're offering for the VRM solutions. We are excited to see that we can already start to address the medium voltage MOSFETs that are being used in the power conversion that happened even before that stage. And that's and then we can see that already in our results for this this quarter already, which is encouraging for us. David Williams: Thanks. Certainly appreciate that. And then maybe from the OpEx perspective, when should we think that kind of normalizes? Is this a good base rate to kind of consider going forward? Or are there some expenses maybe in this next quarter that won't flow into the following quarters? Yifan Liang: Well, sure, Dave. Yes. For the March quarter, we guided about $4,000,000 up in, you know, in operating expenses compared to December. Three out of that $4,000,000 increase for the R&D. So, yes, and, like, Steven said that that we are increasing, you know, our investment in R&D. Some critical areas. This year. So those those new products are focused on where we we have strong foothold in that and strong customer engagement and then and where we have a big potential. So so so we're going to double down and step up the R&D investment. So you know, our divestiture of the the CQ JV equity share, then you know, that provides the some means for us. So So we'll we plan to spend around, like, $20,000,000 or so in you know, from this proceeds on some new R&D projects this calendar year. So so not translate to about 25% R&D expense. Increase. This calendar year. So so March reflect in the a little bit lower. So gradually, you know, in the June, September, it will interrupt. So on an annual basis, we expect them about 25%. Increase compared to prior calendar year. David Williams: Okay. Great. Thank you. And then just one last bit, if I can sneak it in here. Just on the capacity side, just kind of given the balance sheet, are there areas within maybe your existing footprint that you could add capacity? Or areas that that you might be able to to do something there in terms of helping maybe on the gross margin front or, any other just maybe uses of that cash as we look forward? Thank you. Yifan Liang: Yes. And, I mean, that if you noticed that our CapEx investment in December was about $5,000,000 higher than the prior quarter, and Stephen Chang: March also Yifan Liang: inched up compared to December. So the so we are investing in CapEx to prepare for the for the calendar year 2026 and, you know, growth, you know, some new new products and new products and started rolling out. So we are building up some capacity right now. Operator: Thank you for your questions, David. Thank you. Oh, apologies, David. Give me one moment. Let me open your line back up. Stephen Chang: There you go, David. Sorry about that. That's all for me. Yeah. No no problem. That that was all for Sorry. Operator: Alright. Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open. Stephen Chang: Hey. This is Solomon Wang on for Tore Svanberg. Thanks for taking my question. Looking ahead to the March revenue guide implies a pretty healthy top line momentum, gross margin comes in a little bit lower than than than what we're expecting. Could you share a little additional color regarding what's causing that, and where do you kinda see gross margin longer term as you try to reach that 30% target? Yifan Liang: Sure. Yes. March guidance is about 10.2% lower than the December margin. It's mainly reflecting the you know, the the lower Stephen Chang: UTI. Yifan Liang: Utilization in March, especially during the you know, lunar New Year time frame. So, typically, you know, each year, those still that's the time know, some operators, and they will go back to their hometowns we also reduce our production. So money impacted by the utilization. So I would expect that, you know, for June, we we expect to see the margins rebound and, you know, would expect to probably back up to the December 2025 or September 2025 in the quarter. The margin level. So somewhere that neighborhood. So and then going forward, yes, you know, our midterm target model is a still $1,000,000,000 in revenue and 30% non-GAAP gross margin and then 20% all packs. And so that's still our midterm target model. So from where we are now, then, know, back up to to the 30% gross margin level, yes, We we expect, you know, those new products and to contribute to this. To the margin growth and then better product mix and and that's and then some normal pricing environment, and that would also help. So that's the the way we see we can get back to the 30% gross margin level. Stephen Chang: Great. Very helpful. Thank you. And and kinda following up, on on R&D. And so as you're utilizing the proceeds from twenty team's JV stake monetization to help accelerate and fund the R&D. Could you share a little bit more regarding your what specific programs the increased R&D is going to? And and what revenue scale does this increased R&D really begin to offer some operating leverage? And yeah. Yeah. Let me let me take a stab at that first. So as we described in in in our in our our prepared remarks, yes, you know, our investments is not gonna be in, you know, in all different Steven Pelayo: directions. It's in very focused areas. Stephen Chang: We want to invest in the areas that that we have strength, that we have competitive leverage, and we want those areas to be even stronger. And we chose those areas because we've already seen success in those areas, whether it's in PCs with, total solutions for that, and then expanding that, to AI applications going into graphics and AI. And now and expanding the breadth of that to go not only covering the ICs, but also the high-performance MOSFETs. So we're you know, in the AI space, this is pretty exciting for us because it's the expansion of the product breadth. But on top of that, it's also the expansion of the customer base. So not only are we going out after the top AI guy, but we're also going that whole ecosystem. And our solutions can also be used and are actually already being sold into servers, other data center servers going to cloud service providers. It increases that that customer base for us, to, you know, go after a bigger TAM. With the expansion of our products. Of course, you know, we still we are still seeing the expansion of our smartphone battery business this is because the underlying trend there is moving towards higher charging currents And with that, they basically, the solutions have to physically be bigger. They have to handle quite a bit more current, and and this requires a lot of technology both in silicon as well as in packaging to to in order to meet the space constraints as well as the the performance constraints. Business for us means and the impact on our business is that the BOM content will increase as well as the margins for those areas. So all three of those areas, you know, we are already seeing results now. We'll see more results even on later in this calendar year. But the bigger bigger impact from the additional R&D investment will come in 2027. Thank you so much. That's very helpful. Operator: Thank you for your questions. There are currently no questions registered So as a reminder, it is star one to ask a question. Our next question comes from the line of Craig Ellis with B. Riley Securities. Your line is now open. Stephen Chang: Thanks for taking the question, guys. I wanted to Steven Pelayo: go further on what's been topical on the call, which is the Stephen Chang: investment in advanced compute product. The first one guys, I appreciate the the clarification Craig Ellis: that 25% year on year in calendar '26. I I was hoping to ask kind of a higher level theoretical question or maybe a business strategy question Steven. As you as you look at investing in new opportunities, what are the gating factors that determine where you will invest and and what would be too far away from your low voltage and mid voltage core competencies so that we have a better understanding of where the targets set on a range of things you might be looking at. Stephen Chang: Hello? Yifan Liang: Kim, are you still on boarding? Stephen Chang: I'm sorry. I didn't hear my question. So let me let me ask that question. You know, I I heard the question. I just thought I was on mute. I was talking about it. I'm sorry. So regarding the the the the our investment into AI, is it started with our total solutions for PCs. And with those total solution controller, paired together with the driver MOS, that's what helped us to get into the graphics space as well as going into now the various AI platforms. Our investments there will continue, and we are going you know, when we would mention both total solutions for PCs as well as going after AI applications, that's still you know, that is still a core target of ours. And it fits in very well with our technology strengths. You know? With our ability to create these drivers, controllers, well as the best that are used inside these power stages. But that said, you know, we're also expanding. We're going after that that medium voltage power conversion, in that 48 volt to 12 volt space. Where, you know, we can use our solutions now. We don't have to wait for future platforms And this is because, you know, we are going after not only, our onboard solutions, but also going after the ecosystem partners, even going after solutions that go into into, into a cloud service provider too. This is, has, you know, broader reach beyond, just the specific AI application. This is why it's exciting for us to see the impact even now in a little bit in the December, but more so in the March. Even you know, we don't have to wait till for 2027 to see some of those results. This will be one of the key growth growth drivers that see in this calendar year. But, you know, regarding kinda the bigger direction, yes, we're gonna go after e and then tackle more of the sockets in going into the AI applications. We look forward, to the 800 volt solutions, we are preparing solutions for wide band gap to go the the high voltage aspect of that. There's other off also other solutions other products that that we're developing to cover that space, including medium voltage. And we're also looking at various IC sockets as well too. Craig Ellis: Thanks, Steven. If I could ask a follow-up that relates to that. Understand what you're seeing in terms of revenue return on the investment, how big is advanced compute as a percent of the compute segment now? What do you think it would be a year from now as you start to get more benefit from all of the investment since you said it'd be pretty quick if we look down the road eight quarters, to '28, '28 how big would the business be by then? How much return are we gonna see you know, two years from now on this 25% R&D increase for we're we're making. Stephen Chang: Sure. And at least for the portion of know, R&D will be invested in three core areas. One, of course, is this AI opportunity. The second is is the PC total solutions, which is a close cousin for AI. And then also for our smartphones, going after the high-performance battery protection, there's also a lot of opportunity there. But with regards specifically to the proportion of AI graphics related, that port that portion of computing in the past you know, has has been has hit somewhere, like, 20 to 25% of computing in some of the quarters of this of the calendar 2025. So going forward, actually, we see much more potential So we see opportunity not only for the CRM solutions, directly powering the the GPUs, But, also, again, the SAM going into the medium voltage is a new area that we didn't start to really have meaningful revenue until recently, and this is an area that we believe can have some quicker returns even in this calendar year. So, you know, I I can't give a hard number, but, you know, I I I certainly can see it going to 50%. In fact, it could be higher than that. Depending of depending on how successful, how quickly we can penetrate all all the opportunities here. Craig Ellis: Got it. Thanks for that color. And and then one over to you, Yifan. We've Been Hearing From Companies In The Equipment Space That Their Readings On Southeast Asia China foundry utilization are now in the 80 to 90% range, which should be a range that starts to support less severe pricing. I know pricing's been at normalized level, the last quarter or so, but you see an environment where pricing starts to help your ability to move gross margins up from I think, that 21% guidance level in the current quarter where is pricing and how much of a headwind or tailwind to what you see going through this year? Thank you. Yifan Liang: Okay. Sure. December pricing was was I would say, was in line with historical trend. And a little bit better than the September. So put in that way, March, was factored in normal historical trends in the price erosion and at this point. So, yeah, we we are closely monitored in the market, see what Stephen Chang: market it is. Yifan Liang: Going to go, and then and then I will adjust the ourselves accordingly. So the based on the business, customers, the products, like, you know, all those factors. So see. Yeah. Definitely. But company, you know, better pricing. Environment. Craig Ellis: That's real helpful. And if I could just ask one more, bouncing it back to Steven. Steven, the commentary in the press release, and I think within the script, on expectations for PC growth and smartphone growth this year. Helped my content gain. So good for you guys for getting even more of that because that's been part of the story for a long time. The question is, lead time stretched out enough that you've really got long term visibility or what gives you the confidence to make a comment that goes all the way through the end of calendar year '26. Thanks, guys. Stephen Chang: Yeah. For us, you know, we we do see that the impact of the memory shortage and memory supply that will be a headwind for those markets. But we also believe that, you know, we are increasing bot content and in PC side, again, you know, our our total solutions still have a lot of room to grow in terms of penetrating, the market. You know, we've been selling, our discrete, MOSFET, discrete, separate individual driver mosses. But, you know, we are looking forward to having a bigger adoption of our total solutions include including our controller solutions onto more platforms. So that that can help there. Of course, yeah, we have to deal with the our customers have to contend with the memory supply. But that, you know, I I feel confident at least in our ability to to to penetrate further with our total solution strategy. And on the smartphone side, you know, we we do see that especially on in in the big US customer that the move towards higher charging currents is is is going going to be more widely adopted. And this is helping to to support the quick charging features on these big smart batteries. And, you know, we are in a good position there with a leading technology as well as a strong share. Craig Ellis: That's great. Good luck with that. Thanks, Steven. Stephen Chang: Thank you. Thank you for your questions. Operator: There are currently no questions registered, so I'd like to pass the call back over to Steven for any closing remarks. Steven Pelayo: Okay. It's Steven Pelayo here. Before, we conclude, I wanna highlight a few upcoming investor events. Management team is gonna be participating in. So first of we have the fifteenth Annual Technology Conference on February 26 in New York City. And we have the Loop Capital Seventh Annual Investor Conference on March 9. This is virtual. And with the Jefferies Semi's IT hardware and Comtech Summit, on August 26 in Chicago. If you wish to request a meeting, please contact the institutional sales representatives at sponsoring banks. This concludes our earnings call today. Thank you for your interest in AOS. And we look forward to speaking with you again next quarter. Yifan Liang: Thank you. Operator: That concludes today's call. Thank you for your participation. Have a wonderful rest of your day.
Operator: Good afternoon, everyone. Thank you for standing by. My name is Tamiya, and I will be your conference operator today. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Jason Starr, Head of Investor Relations. Jason Starr: Thank you, Tamiya, and good afternoon, everyone. Welcome to Gen's third quarter fiscal year 2026 earnings call. Joining me today are Vincent Pilette, CEO, and Natalie Derse, CFO. As a reminder, there will be a reminder of this call posted on the Investor Relations website along with our slides and press release. I'd like to remind everyone that during this call, all references to the financial measures are non-GAAP. And all growth rates are year over year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release and earnings presentation, both of which are available on our irwebsite@investor.gengendigital.com. We encourage investors to monitor this website as we routinely post investor-oriented information such as news and events, financial filings. Today's calls contain statements regarding our business, financial performance, and operations, including the impact on our business and industry, that may be considered forward-looking statements. And such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on our current beliefs, assumptions, and expectations as of today's date, 02/05/2026. We undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the cautionary statements in our press release and the risk factors in our filings with the SEC, and in particular, our most recent reports on Form 10-K and Form 10-Q. And now I'll turn the call over to Vincent. Vincent Pilette: Thanks, Jason, and thanks everyone for joining us. We continue to make steady progress toward our long-term vision. Building a trusted AI-powered platform that keeps people safe online and helps them manage their financial lives. Our results show the strategy is working. We delivered another quarter of double-digit bookings growth, grew our paid customer base to more than 78 million, and increased non-GAAP EPS 14% year over year. What matters most is what these results represent: growing trust. Millions of people choose Gen to stay safe online, protect their identity, and manage their financial lives. Everything we build is designed to earn that trust every day. Today, I'll focus on three things: how AI is reshaping the threat landscape, how cyber safety and financial wellness needs are converging, and how our unified AI-driven platform underpins durable long-term growth. And after that, Natalie will review our financials. So let's start with the threat landscape. The most dangerous attacks today no longer look like traditional hacking. They are embedded into everyday digital experiences. Shopping, social feeds, search, or payments, consumers are not being breached through technical exploits; they're being redirected from trusted behaviors into outcomes that look legitimate and feel safe. A sponsored ad, a realistic video endorsement, a QR code at checkout, a device pairing prompt, any one of these can trigger a scam that compromises both digital identity and financial health. We see this shift clearly in our data. Across Gen, we block tens of millions of scam attempts every quarter, most tied to financial fraud. Last quarter alone, we blocked more than 45 million fake online shop attacks, up over 60% year over year. These scams mirror exactly how people shop today, and scammers are following consumers in those same channels. As a result, fake ads now represent more than 40% of all consumer cyber threats. They are visually indistinguishable from legitimate brands, and the fraud often is not revealed until credentials are stolen and payments are made. Speed is the second major shift. AI has compressed the life cycle of attacks from months to days, sometimes hours. It has lowered the cost and efforts required to launch personalized scams at scale. The implications are clear: more attacks, faster execution, and higher success rate. Gen is built for this reality. Because of our scale and the depth of our telemetry, Gen has a unique view into how threats emerge, spread, and intersect with real consumer behavior. We analyze real-time signals across security, identity, devices, platforms, and financial activities. This lets us go beyond blocking threats to understanding risk as it evolves and adapting protection dynamically. Cyber safety today is no longer about blocking malware or bad websites after the fact. It is about understanding behavior, intent, context, in the moment, across identity devices, platforms, money. And Gen's platform is built for exactly that. This approach is resonating. Cyber safety bookings grew 5% year over year with double-digit growth in our most comprehensive Norton 360 with LifeLock offerings. Customers are choosing broader protection because the risks they face are broader. Looking ahead, AI agents represent the next major shift and the next major consumer risk. Millions of people already use AI agents to browse, shop, manage accounts, and make decisions on their behalf. And adoption is accelerating. These systems act like humans online but at far greater speed and scale, creating new vulnerabilities. AI agents can be deceived the same way people can: through fake ads, impersonation sites, or misleading messages. But the speed and impact are amplified. We're already seeing agents click on fraudulent ads, enter credentials into impersonation sites, and authorize transactions based on manipulated information. Take OpenClue as an example. It runs locally and performs tasks on your behalf, like managing emails and automating daily activities. To work, these agents access your files, your messages, and credentials, and if something goes wrong, the consequences can be severe. A single malicious email could prompt an AI agent to scan a device, extract sensitive data, and send them out without exploiting any traditional software bug. The AI is doing exactly what it was designed to do, just without enough safeguards. Autonomous agents redefine what consumer cyber safety means. Protection is no longer just about protecting users. It's about protecting the autonomous systems people rely on. Security cannot be optional, but the providers of these innovations are not focused on making it foundational. That is the gap Gen is uniquely positioned to fill. Earlier this week, Gen Threat Labs introduced a beta version of the world's first agent trust hub. It allows users, both humans and AI bots, to scan skills for risk before execution, control what agents access, and verify safety before it's used. It also includes a curated marketplace of skills maintained by Gen's security researchers, effectively the world's first trusted app store for agent skills. Also in December, we launched Norton NEO, the world's first safe AI browser. Adoption has been strong in our install base, reinforcing demand for AI experiences that are secure by design. AI agents will go through hype cycles, of course, but the trend is permanent. As AI becomes embedded in daily life, people need a trusted partner to protect them. The AI economy cannot scale without safety and confidence, and that's where Gen comes in. Our competitive advantage is based on AI combined with and powered by the unmatched breadth of signals that we bring together across security, identity, and financial risks. At our scale, those signals allow us to retrain our defenses continuously, detect scams earlier, adapt faster, and stop attacks in real time. That allows us to deploy enhanced anti-scam protection across our portfolio, including on-device deep fake detection that can stop an attack during a video playback. These are practical defenses designed to protect consumers against real-world threats. We also recognize that identity threats and financial risks are no longer separate. They are deeply interconnected. That is where Gen delivers true peace of mind, and our customers recognize this shift, trusting us more every day. Across our portfolio, we're approaching 100 million active financial accounts monitored over 500 million protected endpoints. Each month, customers take millions of financial actions, allowing us to strengthen protection, personalization, and recommendations. Within LifeLock, we continue to expand beyond traditional identity protection. Financial accounts monitored grew double-digit year over year to nearly 50 million. We are redesigning the LifeLock experience to deliver clearer, and expanded alerts, personalized insights, and more actionable recommendations, reinforcing its position as the most trusted financial protection partner. MoneyLion also continues to perform strongly, with nearly 40% revenue growth in Q3. More importantly, it is evolving into an always-on financial hub. Beyond short-term liquidity solutions, we're helping consumers manage cash flow, build confidence, and protect financial progress they're working hard to achieve. Later this year, we will launch MoneyOne, a new subscription combining the best of MoneyLion with scam and identity protection, currently in closed beta and moving towards early access. This quarter, we introduced a new feature like found money, our savings optimization assistant. Early engagement has been strong. 60% of users engaging with found money interacted with an offer, and 30% linked at least one additional account, strengthening the data foundation that powers personalized guidance. Leveraging the strength of Gen, we also embedded scam security and risk detection directly into MoneyLion's transaction insights. And as adoption grows, this reinforces the flywheel between engagement and value. And as a result, we delivered record highs in Instacash usage, RoarMoney deposits, and card activity, proving that trust, safety, and growth scale together. Our marketplace engine continues to scale under the Gen brand. This quarter, engine processed a record number of inquiries as we expanded into new credit cards and mortgage categories and integrated ENGINE more deeply into our consumer brands, helping insights turn into action more often. Yesterday, we announced an expanded partnership with Equifax using Equifax differentiated data to enable enhanced alerts and insights for our customers across our entire portfolio. It also enables Equifax to offer more personalized financial offers on myequifax.com powered by Engine. Stepping back, our platform strategy is a real differentiator. Across Norton, Avast, LifeLock, and MoneyLion, we operate leading consumer brands that generate high-value signals on behavior, risk, and intent that are amplified by our marketplace. Engine alone now processes over 360 million inquiries annually with expanding financial product verticals and improving conversion. What sets Gen apart is how we connect these inputs to create value for our customers and the business. Unifying AI and our data-driven approach to bring together security telemetry, identity events, financial behavior, and marketplace interactions is at the core of our strategy. This shared foundation allows us to move beyond static protection and deliver personalized contextual guidance when it matters the most. After building our modular cyber safety tech stack, we now focus on expanding our unified data platform and automation trust layer, turning vast amounts of data into actionable intelligence that helps consumers make better digital and financial decisions. In an AI-driven world where outputs can be biased or manipulated, Gen's ability to anchor guidance in verified identity and trusted data is a durable competitive advantage. And our strategy is simple: turn proprietary signals into trusted recommendations and scale them across our products and partners. We are already seeing early benefits. Our AI lifecycle agent is orchestrating customer lifecycle communication, engagement, and personalization across the portfolio. A real-time data platform powers customer-facing features like protection score, giving consumers a clear, actionable view of their protection. And shared LLM frameworks are accelerating innovation across products with new agent capabilities deployed in MoneyLion and Norton Money app. So in closing, success for Gen is defined by trust. Earning it, scaling it, and delivering it in the moments that matter the most, helping people make safer, smarter digital financial decisions. Cyber safety remains foundational. And it's not just a category. It's a promise. And as awareness of Gen Portfolio grows, we are increasingly recognized not only as a cybersecurity leader but as a trusted partner across consumers' digital and financial lives. We are executing well in a rapidly changing environment. Our platform is scaling, our strategy is working, and we're focused on long-term value creation by earning our customers' trust every single day. And with that, I'll turn it over to Natalie. Natalie Derse: Thank you, Vincent, and hello, everyone. For today's call, I will walk through our Q3 results and also provide some additional color on our performance metrics. I'll then conclude by providing an outlook for Q4 and fiscal year 2026. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. I will also include commentary on our pro forma growth, which includes MoneyLion's results from the prior year for comparative purposes. Now on to our results. Q3 was another strong quarter for Gen, with results coming in at the high end of our guidance, driven by record revenue and bookings, double-digit EPS growth, and exceptional free cash flow generation. On a reported basis, Q3 bookings were $1.3 billion, up 27% year over year and up 10% on a pro forma basis, with revenue of $1.2 billion, up 26% year over year and up 8% on a pro forma basis. In our cyber safety segment, bookings grew 5% and revenue grew 3%. Our strong bookings reflect ongoing demand for our cyber safety subscriptions and is a leading indicator for future revenue. Operating margins remained strong at 61% as we drive increased leverage in this segment. Growth continues to be supported by secular tailwinds from rising scam activity, driving strong adoption of our Norton 360 memberships across both desktop and mobile. Our higher-tier memberships continue to grow double digits, where customers choose the most comprehensive security, privacy, and identity protection, and our newest capability, Genie Pro Scam Protection. Through our expanded features, we are strengthening our product relevancy and driving increased membership conversion, now nearing 45%. We will continue to strengthen lifecycle messaging and upsell pathways, improving the customer lifetime value across all cohorts. In our customer success organization, our product recommender continues to scale with select customer cohorts. This is an internally developed AI model that analyzes customer product ownership, feature usage, and behavioral signals to deliver more relevant and timely offers. This approach allows us to better match customers with the services that they are most likely to need, improving conversion rates, and increasing product penetration across our install base. Early results are encouraging, particularly across our privacy add-on products, with Norton cross-sell penetration now exceeding 26%, which reflects our continued progress towards the targets we set out at our last Analyst Day. Based on this performance, we plan to expand this capability to additional cohorts in Q4 and continue to drive more commercial benefits from our Gen platform. In our trust-based solutions segment, on a pro forma basis, bookings and revenue grew 23% and 22% respectively, and more than doubled on a reported basis. Operating margins remained stable at 30%, in line with expectations, as we make targeted investments in MoneyLion and other AI-related initiatives. Performance this quarter was led by nearly 40% revenue growth in MoneyLion, well-balanced across strong customer demand for personal products like Instacash, and further scaling of our engine marketplace, which enriches the Gen platform through tens of millions of inquiries taking place every quarter. Double-clicking a bit more, Instacash delivered record originations during the quarter, supported by targeted marketing to capture elevated demand during the holiday season. At the same time, engine continued to gain traction as we added new partners across leading financial brands and top online publishers. The strength of the Gen brand and our scaled audience increasingly elevating engine as a premium marketplace partner. Growing adoption of third-party financial products on engine reinforces our mission to help consumers make better financial decisions through embedded experiences across both financial and nonfinancial platforms. And we continue to deliver steady growth in our identity offering, which remains our highest value customer cohort with the highest retentions. We are also advancing our secure financial wellness strategy with the initial rollout of a LifeLock branded marketplace that now includes offers from leading credit card issuers and high-yield savings accounts. While still early, initial test results are encouraging, particularly in driving offer engagement with our LifeLock cohorts. And across the segments, our direct channels continue to reflect the strength of our first-party portfolio and innovation efforts, with revenue growing 18% as reported and 6% pro forma. Our partner business continues to scale impressively, growing revenue 88% as reported and 23% pro forma, supported by diversified growth across the portfolio led by engine market retail channels, particularly in Japan, and employee benefits, which delivered another strong double-digit quarter of growth driven by continued new logo acquisition during open enrollment season. We continue to drive broad-based growth in our paid customer base, now totaling over 78 million customers and up 1 million sequentially. Cyber safety direct customers were up half a million as we continue to expand across the regions and channels consistent with prior quarters. And we are acquiring new customers through MoneyLion and engine as we add new verticals, all with sustainable, healthy returns. Now turning to profitability. Q3 operating income was $629 million, translating to a 51% operating margin, in line with our expectations. Our margins remain robust across our segments as we scale and diversify. We remain committed to operating in a disciplined fashion. As our results demonstrate, scrutinizing our cost envelope proactively. We have and will continue to invest in our strategic AI opportunities. We will invest in our long-term strategic growth initiatives while remaining steadfast in driving efficiencies. Q3 net income was $394 million, and diluted EPS was 64¢, up 14% year over year as reported and at the high end of our guidance. This represents our ninth consecutive quarter of achieving or exceeding our 12-15% EPS growth target, reflecting consistent execution and capital allocation. During the quarter, we reduced our weighted average ending share count to 618 million, down 5 million shares year over year. Interest expense was $131 million in Q3, and our non-GAAP tax rate remained steady at 22%. Turning to our balance sheet and cash flow. Q3 ending cash balance was $619 million, representing over $2.1 billion of liquidity, including our $1.5 billion revolver. During the quarter, we generated $541 million in operating cash flow, and $535 million in free cash flow. This robust free cash flow enabled us to deploy nearly $700 million of capital for shareholders, including $300 million towards share repurchases, which is 11 million shares, as well as $300 million of debt repayment and $77 million of regular quarterly dividend. We exited the quarter with net leverage at 3.1 times EBITDA, which puts us ahead of schedule for our goal to drive net leverage below three times in fiscal year 2027, while maintaining flexibility to continue investing in growth and additional capital returns. Please note, we are currently exploring refinancing options for our TLA, our term loan A, which matures in September 2028. Early market discussions have been encouraging, and we expect to complete this before it becomes current. For Q4 fiscal 2026, the board of directors approved a regular quarterly cash dividend of 12.5¢ per common share to be paid on 03/11/2026, for all shareholders of record as of the close of business on 02/16/2026. These strong quarterly results underscore our commitment to driving profitable growth with disciplined execution, generating strong free cash flow, and returning capital to shareholders. That have become hallmarks for Gen. Now let me share our Q4 and fiscal year 2026 outlook. We are raising our revenue and EPS guidance again for fiscal 2026, based on our strong results and the momentum we're seeing. Our business remains resilient, bolstered by a highly recurring revenue base further supported by solid customer retention, and substantial free cash flow generation. For fiscal year 2026, we are raising our annual guidance and now expect full-year revenue in the range of $4.955 billion to $4.975 billion, up from our prior expectation of $4.92 billion to $4.97 billion. We expect non-GAAP EPS to be in the range of $2.54 to $2.56, representing our continued commitment to achieving a 12 to 15% annual EPS growth. This implies an expected Q4 non-GAAP revenue in the range of $1.24 billion to $1.26 billion and EPS in the range of $0.64 to $0.66. Our Q4 and full-year guidance assumes high single-digit pro forma growth and disciplined cost management while funding targeted longer-term growth initiatives and investments in the Gen platform and additional AI capabilities. This guidance range also assumes current FX rates to Q3. We're now well into our final quarter of a very strong fiscal year. We've successfully integrated MoneyLion and continue to accelerate our growth profile while maintaining the same operating discipline that has long defined our strategy. With many opportunities ahead, we are driving healthy growth across both our operating segments and focused on unlocking top-line synergies through our secure financial wellness strategy. Operating margins remain strong, and we're continuing to invest in scalable innovation without compromising returns. Our free cash flow generation is robust, creating capacity for growth investments, ongoing opportunistic share repurchases, and further deleveraging to drive strong returns for our shareholders. We continue to hit the mile markers we've laid out as we navigate towards our long-term growth initiatives. I want to thank the entire team for staying focused and delivering great value to our customers and to our shareholders. As always, thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator? Operator: Thank you. We will now begin the question and answer session. For any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star 1. The first question comes from Roger Boyd with UBS. You may proceed. Roger Boyd: Thanks for taking the questions. Hey, Vincent. Hey, Natalie. I wanted to come back to consumer AI and what we saw with OpenClue, MoltBot. I know you touched upon this a little bit, but I think we're becoming more aware of how much trust individuals are going to need to place in the hands of AI that's going to touch all aspects of their digital lives. And just curious how you're thinking about the role Gen can play there in helping consumers. I know you mentioned the agent trust hub and a lifecycle with the Neo browser, but do you feel like this could be a material kind of tailwind to demand for cyber safety moving forward? And are you seeing any sort of uptick in pipeline around that so far? Thanks. Vincent Pilette: Very good question, and I confirm, Roger, that the trend is happening. The revolution of AI is happening, and everybody saw it with the virality of OpenClue in the last two weeks or even last weekend. I would say I see it in a sequential way, suddenly exponential growth. We initially, as you know, were protecting in the initial days of the Internet, the device and protecting against weaknesses in the operating systems. Then later on protecting against the flurry of websites that existed in the early days of uncategorized search tools. All of that created opportunity, as you know, and that's the root of Avast and Norton brands. If you take today this revolution of AI, it is happening in front of us. We're agents, in the case of OpenClue, can do your task. As you know, you can send a WhatsApp or an email to your machine at home and ask them to go and book a restaurant or do other activities, and they will do it. And the agent, if they don't know how to do it or cannot do it via email, may go and download other agents or skills if you want and do it that way. And suddenly, you have an explosion of players around you that are going to try to complete the task you've asked them. Today, like any new innovations, is super fun as an early adopter. Security is not the mindset. It's really about how cool it is to be more efficient, to be delegating new tasks to those agents. And, similarly, that at the beginning, the operating systems were not fully secured and Norton created the antivirus. We feel there's a huge gap here to singularly focus on bringing that trust and security and verification inside this environment. As you mentioned, we launched the agent trust hub at Gen from our lab. It actually comes from the fact that over the last two weeks, we saw many of our Norton users starting to use some agents cascading those activities to other agents, and so exposed risk. There's, you know, over 18,000 skills that have exported to the Internet that can be pulled by your agent. Some of them could be malicious. Some of them could leak some of your information, like passwords or other things if you give them access to your machine. And people don't always know what they will do. This trust hub will enable, to really validate whether an agent or skills will have a set of risks. And decide whether it's an acceptable risk or not. And actually, very uniquely, we build it for both and agent. So websites normally designed for humans, and you can if you want to program it yourself. It's also for the agent to go and look at it, see what's verified or risky, and then where the marketplace is to see which other skills can be used. Similarly, that when the Internet and the different websites were not fully categorized and search organized, we can play that role of helping what is safe and secure to give confidence for you or your agents to go and delegate those tasks. So now it's not only anymore about protecting a machine, then we were moving to protecting a user with multiple surface exporters. Now it's about protecting a user plus an infinite amount of agents that can represent that user. And so we definitely see this as a renewed need for our mission to play right in the center of that revolution. Roger Boyd: Awesome. Thanks, Vincent. I appreciate all the color there. And then just a quick follow-up on the MoneyLion business. Again, very solid growth there, 40%. I just wanted to confirm, are you kind of in that shift over to kind of more subscriptions in that business? I think you noted that some of those are turning towards early access. But it seems like still very early days. But how at all is that impacting the growth in that business and then your outlook for trust-based services for the rest of the year? Thanks. Vincent Pilette: Yep. A 100%. And we set the mark for a very cautious pace. Doesn't mean a slow pace, but a cautious pace to make sure that we follow the consumer needs where they are and we do not compromise the customer experience. MoneyLion itself in the financial wellness sector is growing ahead of market, continuing to be very strong on both legs, the personal consumer offering led within Instacash, but also the membership, savings account, and then with engine that really outgrowing or outgrowing the rest. And today, the ratio is roughly 60% on the consumer side or the personal financial side and then 40% on the engine side. We continue to see steady growth. You mentioned 40%. We do have a good business responsible management where we set the long-term business growth at around 30% as we scale for a margin that is above 20%. And then, when we see pockets of acceleration, we, of course, capture them as we saw this quarter. As we continue to scale this business, the biggest opportunity for us is really to drive the revenue synergies across the portfolio. As we see our customer already when they come to cyber safety, the number one concern is to protect against the financial damage, to protect their financial health. And now with MoneyLion, as we embedded white label and created into our Norton and our Avast LifeLock applications, we enable the consumers to not only be protected but improve that position. We have a few activities put in. We started, created engine version into LifeLock. We're redesigning the experience here. We've seen an increase, a double-digit growth in LifeLock customers connecting their bank account into the LifeLock app to be able to detect anomalies and give advice on that. And that will continue as we said. We launched last quarter Norton Money both in the employee benefit channel, which will only, as you know, show up materially at the time of benefit inscription at the end of the calendar year. And then we also launched it into our own install base to really refine and connect between cyber safety and financial wellness. And we see early adoption of and convergence of the need between a cybersecurity and a financial health position. Those are really good fact patterns. We said it that we'll start sizing revenue synergies and then over long-term growth after this fiscal year. So probably in the May timeframe for the next fiscal year. Roger Boyd: Really clear. Thanks again. Operator: Thank you. The next question comes from Meta Marshall with Morgan Stanley. You may proceed. Meta Marshall: Great. Thanks. Maybe I just wanted to spend a second on could kinda go more into the Equifax partnership and just how that can help drive incremental MoneyLion product adoption? Adoption, if there's any kind of economics of the partnership that we should be mindful of. Vincent Pilette: Yeah. Very good. So you referred to a partnership we just announced two days ago with Equifax. Up to now and before we penetrated financial wellness, our relationship with the credit bureaus was essentially a vendor to customer relationship. We were consuming their data, some of their information to embed that into our proprietary algorithm and modules to give alerts to our customers, help them restore and serve them that peace of mind that their financial profile in the digital world was fully protected. With MoneyLion, especially the engine now, we're able to match financial institution offers with consumer traffic. And then we, as you know, we already embedded in that some of the LifeLock benefits, some of the identity protection, and we have very strong momentum. That enabled us to have a very strong strategic discussion with Equifax, a two-way discussion, and their strategy is essentially positioned on the financial institution, the SMB, the enterprise side, if you want. And as we are very strongly and uniquely focused on the consumer side, coming together, if you want, we can bring more value to the customer. So on one way, now have deep access to the differentiated dataset not just credit monitoring, but the credit block and some utilities and really expand the alerts and visibility for the consumers on their risk profile out there. And then they're going to use engine on myequifax.com to bring all of their traffic a more personalized, both safe and financial solutions offering, which will increase over time, obviously, monetization. And then that strategic partnership will also enable to enrich the offers on the engine as the financial partners that Equifax has relationships with will also then use that engine platform. So feel pretty excited about that. We obviously look to partner with many others in the industry to really provide this unique value proposition, this matchmaker, if you want, between a financial solutions safety at the core, and then consumer with their needs. Meta Marshall: Got it. And maybe just as a follow-up. I know you touched on it, but kind of expanding on that last answer of just any trends between first-party products and third-party products on the MoneyLion marketplace? Any material shifts in any direction? Thanks. Vincent Pilette: So the short answer is all of the trends you've seen for the last two, three quarters have continued and continued, that's what we embedded in our guidance. And January was no different either. We have grown, as I mentioned, our first-party product which essentially was not from the engine only, but some of from the engine, at the somewhat same gross rate that the engine. And we cite engine is pretty balanced on the first-party and third-party. Obviously, where we strong like, term lending on some of the credit builder, we lead in that subcategory. And in others, where we don't have a cause and offering, it could be a credit card or an insurance. We are, obviously, our old third-party. Meta Marshall: Great. Thanks. Vincent Pilette: Thank you. Operator: The following question comes from Matt Hedberg with RBC. You may proceed. Matt Hedberg: Hey, guys. Thanks for taking my questions. Congrats on the results. Really, really impressive. Natalie, you didn't talk about fiscal '27, and obviously, you're not guiding to it yet. But we think about anniversarying MoneyLion, you talked a lot on this call about cross-sell and AI, you know, additives. Are there any sort of high-level kind of early guardrails or kind of building blocks we should think of whether it's spread out their profitability? Natalie Derse: Yeah. In the overall business, I would point you to, you know, outside of MoneyLion, we had said we wanted to drive a sustainable mid-single-digit rate of growth over the long term. And we have now done that for several quarters in a row. And so as we go into fiscal year twenty-seven in that same type of period of long-term analyst day targets, I would point you to that. Now parts of our business are growing faster than others, especially as you see the MoneyLion results and some of the other areas of partner. But all of that's embedded in the guide. All of that is embedded in the mile markers that we put out there. Specific guardrails as it pertains to fiscal year '27, I would point you back to that overarching growth and profitability architecture. Don't forget that we had the extra week in this fiscal year, so you definitely want to keep that in mind. Don't forget that the special tax is now behind us, and so that'll give us a couple $100 million of additional capital allocation to go after and to deploy in a productive fashion. And then other than that, it's going to be balancing, you know, making sure that we're investing for the long term, while capturing the current demand and continuously driving a very efficient business. Matt Hedberg: That's great. That's super helpful. Thanks for that. And then, you know, Vincent, you know, I wanted to double-click back on MoneyLion synergy. It sounds like you're doing a lot right now. You talked about MoneyOne. And it sounds like synergies may be later in the year, fiscal year here. I guess when we start to think a little bit more broadly about some of these synergies, how do you think about kind of bridging the gap between kind of the historical MoneyLion cohort and kind of your premium base? You know, it feels like there could be a lot of synergies there, but, you know, could you see only, you know, off-selling synergies but also sort of benefiting your premium base? Vincent Pilette: Yeah. Actually, we see synergies across the entire cohort as we see the convergence between cyber safety and financial wellness needs from a customer perspective. I mentioned the customer come to our four key reasons, and the number one is always protecting against financial damage. That space, of course, has to run its course, and part of it is us educating. But, of course, they have to realize our offering and experiences, etcetera. That's why sometimes you may feel it slow, but we want to make sure we follow that customer experience. Obviously, LifeLock customers are a little bit more or further away in that convergence because they already had organically in our portfolio move from basic credit to monitoring your key assets, like your home for a home title, your bank account for anomalies, and we continue to expand that pool. And so that awareness, if you want, is stronger. And now we can bring other additional value. I think I had mentioned to you that one of the first realizations that financial wellness was coming closer and closer, we were monitoring those anomalies and we introduced our AI assistant into the environment. Most of the questions were not too much. Please spot the anomaly. It was, what can I do with it? Can I consolidate this? Can I save money here? And we didn't have at the time the value to deliver it. Today, with MoneyLion, which, of course, we're creating four-life customer journey experience, we'll be able to address all of that. So it's expanding that view. We're not approaching it as a cross-sell the same way that maybe a traditional cross-sell has been. And so it's much more customer-driven from a customer adoption using our assistance into the platform. Matt Hedberg: Got it. Thanks, guys. Operator: Thank you. The next question comes from Saket Kalia with Barclays. You may proceed. Saket Kalia: Okay, great. Guys. Thanks for taking my questions here, and great to see the consistency. Hey, Vincent. Yeah. Thank you. Vincent, maybe we'll start with you. You know, there's clearly a lot of success on driving the top of the funnel, right, with various offerings. Right? And, of course, MoneyLion is the newest one. I'm curious how the addition of all these businesses and the growing membership mix is contributing to retention. I know that's not maybe the perfect metric to look at right now, but I'm just curious how you think about that just as you kinda build this flywheel. Vincent Pilette: Yeah. Absolutely. So before I talk about retention, I would say the customer experience is the most important. That's why very early on in our strategy, we took a modular white label approach in our stack. The second view is it's good to have your modular white label so you can curate the user interface and experience to your brand. So it's part of your own journey as a special customer or a Norton customer or an Avast customer, which is different in adoption of innovations and other things. And then you really drive that now our second step is to drive that with intelligence. And so unifying our dataset across all of our applications to drive intelligence and leverage those intelligence pools of those LLMs across the different apps is adding more value, personalized, contextualized, finding that right moment of your needs. And that also is a big impact and a big driver in this multi-application or multi-brand portfolio. And then to answer your question, if you do really well in customer experience and you find the right moment in the right intelligence if you want to do it, you're going to have improved retention. Today, we have our cohorts by cohorts that continue to improve in retention, of course, MoneyLion doesn't have subscriptions, so we do not know about MoneyLion yet in terms of material retention pool as we'll grow subscription, we'll be able to tell you more at that time. And overall, Gen retention has been stable. Got it. Saket Kalia: Got it. Very helpful. Natalie, for my follow-up maybe for you, it was great to see the strong capital return. I think in $300 million in the quarter in both delevering and in buybacks. I was just wondering if there are any guardrails that you would have us think about for kind of how you'll deploy kind of going forward beyond Q3? Natalie Derse: Yeah. We were happy about this quarter. We generate such a substantial amount of free cash flow, and we really challenge ourselves to deploy that in a balanced fashion as fast and as efficiently as we can. And I think Q3 was reflective of that. And Q3 is going to continue in terms of as we look into Q4 and we look into the fiscal year. The tenants are the same. We'll continue the dividend. We'll have a balanced approach across accelerated debt pay down and opportunistic share buyback. We have lots of room left in our buyback program. And as we look to the future, it's going to be a balance across the two. Keep in mind, what I mentioned earlier, we will have a couple $100 million more than we even did in fiscal year 2026 because we're through the transition tax. So even though we already, that kind of hits us and has hit us for the last six years in Q2, on an annualized basis, generate enormous amount of free cash flow to deploy, we'll have even more in year to deploy. We'll do it in a balanced fashion. We stay very committed to, yeah. And we stay very committed to, like, we put that under three times net target out there for ourselves. We're really, really close. I mean, even if I look at, you know, in the next quarter or two, we're going to organically be there through mandatory debt pay down, and a little bit of accelerated debt. And so we'll continue the balanced approach. It's working for us. Saket Kalia: Very helpful. Thanks, guys. Operator: Thank you. One second. Thank you. The next question comes from Robert Coolbrith with Evercore. You may proceed. Robert Coolbrith: Hi. Good afternoon. Congratulations to the team on the strong results and outlook. Just wanted to ask on the investments you're making operationally in the business. Sales and marketing seems to accelerate a bit in the quarter. Was just wondering if that's something that's reflective of inflation in the immediate cost environment or if that's in response to anything you're seeing in the business, maybe faster payback periods, stronger LTVs, maybe on the Norton 360 mix shift which sounds quite positive. And then on R&D, looks like you're seeing even stronger efficiency and productivity growth there. Can you just wanted to ask if you have anything new you could add on the use of AI within the organization? If that's making strong contribution or just maybe better synergy realization, anything more you might be able to add on that. Thank you so much. Natalie Derse: Yeah. Thanks for the questions. We appreciate it. On sales and marketing, let me take that one. We haven't seen for sale and marketing. We continue to deploy in the market where we see the highest and the most efficient return. There's a few. We're definitely investing in capturing more on an acquisition front. The bigger higher ROAS on the membership adoption, so the 360 memberships to your point, we see that really taking off in the mobile, the customers that are being acquired through the App Store that's driven by a lot of the new functionality that our team has built and expanded into the mobile channels. But it doesn't stop there. We're seeing the demands of the 360 memberships across the board. That's fantastic. We continue to invest in MoneyLion. Both on the first and the third party. Those we see well-balanced growth even higher than we had indicated to you guys, higher than our expectations, higher than average industry growth. So we saw both first party and third party growing at approximately 40% in the quarter, and so continuously investing in healthy returns. To shore that up. And then just generally across the board, we're very, very diversified across the channels. We really just operate in a disciplined fashion to create the capacity to invest more and more in sales and marketing because we want those healthy returns. We want to make sure that we're acquiring the right cohorts at the right time so that we continue to sustainably grow at that mid-single-digit rate of growth. And so, yes, for Q3, I'm proud of the team. And then every quarter, we just get smarter and smarter through the analytic and the tools that we're using on those returns, on that CLV over CAC, and that continues to be a horse that will ride to drive our revenue growth. Vincent Pilette: Cool. And then maybe I'll take the R&D and then Roger, as you analyze it also, keep in mind that the MoneyLion business and you have the public data from prior acquisition versus a core security business have different profiles. Obviously, the MoneyLion is more a little bit more in customer, which are a bit more in S&M, a little bit less in R&D, and I would say our security business is exactly the reverse. So you do have a little bit of a mix impact. On R&D, though, we're doing pretty cool things. I mentioned I think, a few times that we have two big buckets of AI initiatives. One, it would call them AI native portfolio, and it's really about rebuilding many of our new applications or features with first an AI lens, as opposed to introducing AI feature into it, redesigning it from an AI-native view. Then the second one is changing our functions to be AI first. And there are three buckets that are making really progress. One is in our support area. The second one is in our marketing area. And the third is in R&D, and there's no order of priorities on those. We're making really good progress on redesigning how we approach software development and products from ideations to product launch. We have a set of seeds that we call that, we say we call our jelly corn. And it's basically a squad of three PM, an R&D developer, and a design person. And they have to drive everything from mediation to product. Using only AI tools. And we're running experiment. We're still in the learning phase, but super excited by how the capacity, if you want, to test, learn, and put to market new products at the speed of never equaled before. That will continue to lower your cost of overall R&D. We're trying to bring that approach into our more infrastructure, so into the licensing system, into the billing system, which take a bit more time versus the ideation. But I think the world is here to change, and we gotta be at the forefront of it and leverage the full benefit. Robert Coolbrith: Great. Thank you so much for the update. Vincent Pilette: Yep. Operator: Thank you. Thank you. Our final question comes from Joseph Gallo with Jefferies. You may proceed. Joseph Gallo: Hey, guys. Thanks for the call. I really appreciate it. Yeah. Earlier in the call you, earlier in the call, you talked about, you know, protecting the user and infinite amount of agents that, you know, represent that user. How should we think about, you know, the ASP uplift or monetization opportunity there? Just can you share a little bit more, details on that opportunity? Vincent Pilette: Yes. We are absolutely not yet at the level of discussing an ARPU, an ASP. This is really a fast-evolving I was gonna say evolution. I should say revolution happening. Even people who are not technically savvy like some of my dear board members, are calling and say, oh my god. I use Open and I connected my email and my calendars, and I don't know what's working. And can you please undo it? I'm worried. And so we see that real-time, real-life. We people adopting it. Right now, there is a gap to fill, which is providing that safety the same way that antivirus only provided safety into the operating system at the beginning of its life that was not focusing on security, more on all the features. We believe there's a similar need here into the AI economy, and we were going to move super fast on that. There is no doubt in our mind that as we continue to expand that and able to protect, not only the users, but now the exponential amount of agent they may use, they would be willing to pay for that pain point because we see it real life that it is a pain point and a worry for those who are using it. Joseph Gallo: That's really helpful. Maybe just as a follow-up, I mean, you guys have done a tremendous job of beating the expectations you've laid out. As we think about Q4 guidance, is there anything we should consider in terms of macro or as we're getting used to MoneyLion just anything to call out in terms of seasonality there? Thank you. Natalie Derse: I think just from a current consideration standpoint, everything is baked into, you know, either our actuals or, you know, we're just we're responding to what we know of right now. I don't really look at macro factors and try and fold in or weave in anything specific with the unknown. And I would include FX in that. So, the currencies that we assume are what we already know and what's already in the Q3 actuals. Anything else that you? Vincent Pilette: Well, if I can add, obviously, you've seen the consumer sentiment being at a multiyear low, but I would say the last months maybe the last few months have been stable at that level. And obviously, the need we address, whether it's security or frankly, financial health to be able to survive in that, are all super relevant in that environment. So notwithstanding a one-time special crazy environment could happen in the world, we do feel that even though it's slow, it's stable. Joseph Gallo: Great to see. Thank you. Vincent Pilette: Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect your line.
Operator: And thank you for joining Atlassian Corporation's earnings conference call for this 2026. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian Corporation's website following this call. I will now hand the call over to Martin Lam, Atlassian Corporation's Head of Investor Relations. Welcome to Atlassian Corporation's Second Quarter Fiscal Year 2026 Earnings Call. Martin Lam: Thank you for joining us today. On the call with me today, we have Atlassian Corporation's CEO and co-founder, Michael Cannon-Brookes, and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for 2026. The shareholder letter is available on the Investor Relations section of our website, where you will also find our other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. During the call today, we will have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled "Risk Factors" in our most recent filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, and investor data sheet on the Investor Relations section of our website. We would like to allow as many of you to participate in Q&A as possible, so out of respect for others on the call, please take one question at a time. With that, I will turn the call over to Michael Cannon-Brookes for opening remarks. Thank you all for joining us today. As you have already read in our shareholder letter, we closed out Q2 with very strong enterprise sales execution, Michael Cannon-Brookes: and incredible momentum across our business. We surpassed $6 billion in annual run rate revenue, delivered our first-ever $1 billion cloud revenue quarter, up 26% year over year, and grew our RPO 44% year over year to $3.8 billion. We have strong momentum across our enterprise, AI, and system of work transformations, and you can see this in our numbers. Customers are choosing us for their future, in bigger ways and bigger numbers than ever before. Enterprises like Cisco, Expedia, Reddit, and Synchrony Financial rely on Atlassian Corporation to power their most critical business processes and workflows. Robo surged past 5 million monthly active users of our AI capabilities. We are seeing firsthand every day how AI is transforming the way that work gets done, and we are directly benefiting as a business. When we look at the thousands of customers in our software team using AI code generation tools, we found that they create 5% more tasks in Jira, have 5% higher monthly active users, and expanded Jira seats 5% faster than those who do not use these AI coding tools. As I have said before, AI is the best thing to happen to Atlassian Corporation, and the results we are seeing today are no accident. As a long-term focused company, we are now benefiting from years of thoughtful investment across product, R&D, and GTM, which have positioned us to capture this moment. These investments are creating what we believe is a truly differentiated customer experience. First, the data and domain expertise living inside our Teamwork graph, which is now well more than 100 billion objects and connections across first and third-party tools, enables Robo to deliver real business value that is context-aware and actionable for customers across their search, chat, and agentic experiences. Second, our decade-long investments in enterprise-grade security, data governance, permissioning capabilities, and compliance enable every organization to securely move work forward at scale while deploying these fantastic new AI capabilities with the trust that they need. We provide a system of work built on deep integration into customer workflows, with that compliance, security, and support that enterprises trust built in. Lastly, our unique distribution engine enables us to seamlessly deliver incredible experiences to over 350,000 customers, including more than 80% of the Fortune 500 and 60% of the Forbes AI 50. Customers are realizing the value of our unified system of work and want to continue to partner more closely with us than ever before. And all of this is driving our results. We closed a record number of deals greater than $1 million ACV in Q2, nearly doubling year over year again, as enterprises are choosing to standardize on the Atlassian Corporation system of work. In less than three quarters, more than a thousand customers have upgraded to our main AI monetization driver, the Teamwork Collection, purchasing more than 1 million seats to get the best AI platform and many more AI credits for their agents. As I look across our business, two things are clear. We have never been more of a strategic partner to the biggest businesses in the world, empowering their AI and future work transformations. And our momentum is continuing to grow. This gives us confidence in our road ahead and our long-term opportunity. We are truly transforming how work gets done and solving the toughest human-AI collaboration challenges for our customers, and we are doing it every day. We are pushing ahead with strong conviction, and I could not be more bullish about the massive opportunities in front of us as we advance our mission to unleash the potential of every team. With that, I will pass over to the operator for Q&A. Operator: We will now begin the question and answer session. If you have a question, please press star, followed by the one on your phone. If you would like to withdraw from the queue, please press star followed by the two. First question comes from Rob Oliver from Baird. Please go ahead. Rob Oliver: Great. Thank you. Good afternoon. Thanks, Mike. Appreciate the clarity and conviction in the letter. Obviously, a ton of fear in the market right now on software, so I thought I would address it by asking you about some of the conversations you are having with your buyers right now. Clearly, the numbers show whether it be cloud NRR, you know, million-dollar deals, Robo adoption that existing customers are expanding with you. And in the letter, you called out some of those reasons, just Cisco around data, Michael Cannon-Brookes: Expedia around, you know, customer familiarity. But, you know, can you talk about how those conversations have changed, if at all? Recently with your customers, and what is driving this motion towards Atlassian Corporation right now, and if AI is all changing those conversations, thanks. Michael Cannon-Brookes: Thanks, Rob. Appreciate the kind words in there. The well, customer conversations have changed a lot over the last year. There is no doubt about that, Rob. And I would say all of those changes have been incredibly positive for us. The customer conversations we are having are at a higher level than we have ever been having them before. And those customers are looking for strategic partners to help them through AI. They continue to appreciate our delivery of that AI value to them, inside their processes and workflows. They will call this out directly. We get called out directly that AI capabilities are the reasons people move into the Teamwork Collection. They are the reasons that people are upgrading to the cloud. They are the reasons they see R&D investments. They use our chat capabilities, our agents, in millions of workflows now per month. They are able to deploy them, get them up and running, and get value from them quicker. We have so many customer quotes and examples where they see this. Right? We have long put software in our customers' hands for them to use and deliver on. That, in return, makes those customer conversations about longer-term commitments. Right? As you pointed out, you see that in our numbers. Right? Our RPO at 44% growing for accelerating for the third quarter in a row, is a really fantastic vote of confidence, I believe, from those customers. Right? Those are tens of thousands of seats signing multiyear deals, that are voting on not the platform for 2026 for them in but the platform in 2027, 2028, and 2029. And those customers are seeing what we are doing, seeing our progress, and voting with their feet. There is a lot, obviously, of noise out there in the market. Right? As I said in my shareholder, there is no doubt about that. But when I talk to customers, they believe that we are helping them through a lot of that noise. Delivering for their software teams, their business teams, and their business process, and they are able to get efficiencies and improvements today. And I would say they want all the same things they have wanted in the past. Sometimes, these types of times when there is a lot of noise, Right? We can forget the fundamentals. Right? Enterprise customers want a platform they can trust. They need it to be compliant and secure and all the things they have always needed. They want great ROI. They want efficiency in their business. AI enables us to do that better than we ever had before in our domain, helping their teams to collaborate and be better. I think we are seeing it in all of our numbers across the board. So, again, that is where you hear us feeling incredibly bullish, right, about what we are doing each quarter and seeing that real acceleration. Operator: Your next question comes from Keith Weiss from Morgan Stanley. Please go ahead. Sanjit Singh: Yeah. This is Sanjit Singh for Keith Weiss. Congrats on the $1 billion quarter cloud and the progress with Teamwork Collections, really nice to see. I wanted to follow-up on Rob's question. In terms of kind of the reality on the ground in terms of what the market is, you know, sort of asking and calling for versus customers want, and this is specifically around pricing. And like, I would love to hear your take on where does pricing go to and evolve over the next, one to three years? Market seems concerned on seat-based model, seat-based pricing. Customers probably like seat-based pricing. And so what do you think this all shakes out in terms of where we are headed in terms of the pricing monetization story for Atlassian Corporation? Michael Cannon-Brookes: Sure. Thanks, Sanjit. Look. A totally valid and important question. Let me start with the numbers that you can see it, and then I will talk to our philosophy. You can see in everything from the RPO to NRR number, again, 120% ticking up for the third quarter and are 120% plus, north of 120% and ticking up for the third quarter in a row. The pricing we currently have is delivering. Right, for the customers. They are opting for more of what we are doing. And price is not a huge part of any of these that we are having with our customers. It always is. They want to get good value. They want to understand, but we are a very good value option. We always have been, and we continue to be so. The conversations around consumption-based pricing and pricing models changing, again, our philosophy has always been to deliver the best value we can in the overall ROI sense to our customers. It is our job, I believe, as an application vendor, not an infrastructure vendor, but an application vendor a platform vendor, to manage the costs of everything that we have in the envelope of what the customers pay. We have done that in storage. Done that in network costs. We are now doing it in AI costs. And the customer's preferred method of payment is still an understandable predictable pricing pattern which tends to be a seat-based model in our category of software in terms of delivering collaboration tools for teams of people how many people are collaborating is a best proxy at the moment for value, and I believe continues to be so. You could worry about our AI costs. Again, you can see in our gross margin improvements, for a probably the third or fourth quarter, do not quote me on that, continue to improve our gross margin that we are able to deliver those 5 million Robo seats and continue to improve gross. That is a huge achievement on behalf of our engineering teams. But it shows that we can manage those AI costs inside for the vast majority of customers. Now, we do have consumption-based offerings, as you can see. Everything from Forge to extra AI credits, if you go over the limits, to Bitbucket pipelines. Like, there are consumption-based offerings. So we are very clearly in a hybrid model of that, but we do try to make our pricing philosophy what is best for those customers. Right? They want to buy their applications. Not on a consumption basis. But on a familiar predictable basis. Goes into the total cost of ownership that they look at for that equation. So we feel really good about where we are seeing it. And lastly, you would see the you know, the million seats we have passed in Teamwork Collection in under nine months is a huge achievement on behalf of a lot of teams at Atlassian Corporation. That has a predictable pricing pattern that is there. That has gone from zero to a million seats in under nine months. On this pricing pattern. And those are customers who are upgrading. Why? Because of the pricing philosophy, but also because of what the Teamwork Collection gives them as an AI platform. It gives them significantly more AI credits. Right? So when they look at that upgrade, AI's list is one of the reasons, but it is baked into the pricing plan that we have on 1 million seats, we would argue it is working really well. Still early in that business. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead, Gregg. Gregg Moskowitz: Thank you for taking the question. Well, we are in a software twilight zone of sorts. So when a company whose stock is down almost 40% and five weeks on no company-specific news just reports a strong quarter, raises guidance and makes a significant commitment to accelerate the buyback. And yet the shares are right now indicated down a lower or an 10%. So I really do sympathize with how frustrated you all must be. Now as to my question, it is for you, Mike. And what are your thoughts on the medium to longer-term prospects of Anthropic's CoWork as a competitive alternative to Jira? Also, I think it is important to get your perspective on CoWork's new plug-ins. And so you know, if we were to compare this to the most common Jira use cases, what could something like a CoWork plug-in automate for Jira, but also know, where would it fall short? Michael Cannon-Brookes: Thanks, Gregg again. Appreciate the sound the kind words you seem as frustrated as we are. So that is great. Look. Firstly, I would say Anthropic is a great partner of ours. Use a lot of their models. We use a lot of their coding tools and working tools. We have just both become partners of Atlassian Williams Racing. It is wonderful. We are both helping that team to get to the front of the grid. With a combination of all of our software and tools. And I think that is a great example. Right? There are going to be new tools that arrive with AI and those new tools are going to deliver new capabilities. We are seeing that every week. Every month. And that is great for our customers. Those tools continue to require data. They continue to require places to exchange. One of the greatest users of our MCP server as an example, is a way to get to Atlassian Corporation's offering and the Teamwork Graph and the context we have in those other tools is through things like, you know, CoWork's use of Atlassian Corporation's MCP server. That is really good for us. Right? Because it enables you to see how you can utilize and contribute back to the Teamwork graph from lots of different tools using lots of different contexts. There is no doubt some of these tools are going to exist in different places, with some overlaps. There is significant value, I think, between our offerings and those offerings. So we do not see that as being perhaps the challenge that others do out there. There is a great partnership opportunity there, and we continue to explore that. We continue to use their offerings really strongly internally. There are always going to be a lot of differentiations out there. Our Teamwork graph is very differentiated. The context we have across our applications and other applications is very useful for any of those agentic type tools. At the same time, you are still going to need human beings in the process in lots of different places. Approval workflows, business processes, they can be accelerated in lots of spots. That is exactly what we see customers doing with Robo agents and with all of the other agents that can now operate inside of Jira. Those agents are accelerating business processes in lots of different ways. They are not eliminating the human impact. Right? The human-AI collaboration is incredibly important, and I think it continues to be so. Lastly, I would just say that that is not new for us. Our philosophy of integration goes to listening to customers. The history of enterprise technology is about integrating with various different offerings. Right? Work with lots of different products. To make sure that our data and our workflows are integrated with what the customers are using. We will continue to do that. That is a very strong part of our philosophy, and I believe what customers really resonate with that we are integrated with deeply enmeshed in their processes and workflows, and we will continue to help those workflows get more efficient. Operator: Your next question comes from Karl Keirstead from UBS. Please go ahead. Karl Keirstead: Maybe I will direct this one to Joe. I noticed in the shareholder letter, you talked about next year, just, warning The Street that the DC segment, obviously, on the back of a tough comp would be down meaningfully. I guess the spirit of my question is if we go back to the medium-term guide that you offered a year and a half or so ago, I think we would get to sort of an implied total revenue growth, if my math is right, of 19, 20% next year, If DC is meaningfully down, I guess I just wanted to test your confidence that the cloud revenue can be up enough such that you still feel comfortable with hitting that previous guide. Through fiscal 2027. Thank you. Joe Binz: Yeah. Thanks, Karl. We do continue to have confidence in the long-term cloud guide. If you think about the short-term guidance, we have taken the same approach in Q3. FY 2026 that we followed last year. The growth drivers for the cloud business going forward continue to be very consistent. What we shared at the last Investor Day. We expect to tap into large market opportunities to drive healthy revenue growth. Through our strategies around enterprise AI and system of work. All of that drives a great number of users, a higher ARPU, and more opportunity for cross-sell and upsell to higher value additions. And with AI, we believe we have a unique and differentiated position at this critical pivot point in the market with our Teamwork graph around high-value mission-critical workloads combined with our cloud platform. And there is a lot of long-term opportunity in that space as well. So overall, those are the big drivers. And we continue to expect to drive healthy revenue growth over the next two years in cloud. Operator: Your next question comes from Aleksandr Zukin from Wolfe Research. Please go ahead. Aleksandr Zukin: I guess in the spirit of the first two questions, Mike, it feels like you guys are continuing to see really solid growth and really solid progress on all the initiatives you have laid out. I guess my question would be, given the fact that you are probably already both benefiting from within Teamwork's collection a number of AI consumptive drivers. You are seeing Robo, and you are starting presumably to see your customers use agentic interactions even from other systems to enhance the value that both Jira and Confluence provide to Teams. At what point do you would you expect to see monetization increase, improve, and that greater value proposition to result in acceleration, in stability, of the cloud numbers, specifically? And when do you think that will actually happen? Michael Cannon-Brookes: Hi, Alex. I can definitely talk to that. Look. I want to reiterate, firstly, what Joe just said in the last answer, we have our long-term guide. We firmly believe in reiterating our confidence in that guide. And, hopefully, you can see in things like our RPO numbers and our NRR numbers, so our retention and our remaining performance obligations. That there is a confidence in that long-term future that comes across. And both of those RPO and NRR numbers are across both cloud and DC. Combinatorial. So that is important. I think you are seeing it today. So we run into this tricky bond. You are seeing that acceleration today. Our RPO number has ticked up for the third quarter in a row and is growing significantly faster than our cloud revenue growth. And the cloud revenue growth also accelerated this quarter. So I believe you are actually seeing that today. And it will flow through. These customers are signing multi-year, you know, three-year large-scale deals. So in terms of at what point do we expect to see monetization? We are already seeing it and will continue to see it. Right? It is one of the number one reasons to move to the cloud and to upgrade to our cloud platform. AI is one of the number one reasons to choose the Teamwork Collection as a higher offering, and that is a great economic equation for our customers and for us. You are seeing more than 5 million AI now, as you pointed out, and millions of agentic workflows now running every single month. All of that is leading to our customers continuing to expand their commitment to the Atlassian Corporation platform. AI is a huge part of that platform. Like, we should not mistake that. It is one of our three big transformations. We are heavily invested in delivering that AI to our customers. That monetization is coming through in the Teamwork Collection numbers we are seeing. In those long-term customer treatments. They understand what we are building today. They see the road map of what we are building tomorrow. Customers have faith in our delivery. Again, the things we announce at our conferences we ship. We ship those very, very quickly now, increasingly quickly after those conferences. That does is build this long-term customer trust. Operator: Your next question comes from Ryan McWilliams from Wells Fargo. Please go ahead. Ryan McWilliams: Hey. Thanks. Second question. For Mike, as new models get released, we are hearing examples of developers switching between different models and different coding agents. As they see better model improvements. How do you view your position outside of the large AI labs working to Atlassian Corporation's advantage as customers can use Jira across their organization for the long term and then while still enabling their developers to use their favorite coding tool. Michael Cannon-Brookes: Cool. Thanks, Ryan. Look. There is a lot of answers to that question. Firstly, we are big fans of model delivery. Every time new models come out, we take those capabilities. We have long set our strength is in adapting and delivering those models to our customers through the value. Again, our customers do not use models. They use applications. Right? We do not sell chips. We sell apps. And those apps have to deliver value, and those models let us deliver better value. We have a very good AI team world-class in adopting new models, working out where they are stronger, where they are cheaper, where they are faster, where they deliver better quality results, and getting those into our products really quickly. That is our job to do. The customers may not even notice that. They probably do not. They may notice the check got a little better today than yesterday. We continue to do that. We have continued to improve check quality, agentic answer quality, etcetera. And we are able to use all the models again. We use models from multiple foundation labs within the customer's preferences. And choices our ability to do that, if we can pick the best model for the best purpose across multiple labs, that is a good thing. And that is a good thing for our customers, like, fundamentally, right, in terms of their ability. We take the same position when it comes to agents. Again, we are shipping a whole set of capabilities for Jira directly. That includes Jira Service Manager, Jira Product Discovery, and Jira itself. To assign work to agents inside of any existing workflow or business process. Now you can assign work to a Robo agent out of the box. You can build your own agents. But you are also able to assign work to agents from all of the other big agentic platforms. And I think that is a real strength of ours, because you can model your business process in Jira, You can model your workflow in Jira, and you can involve other agents from your agent platform of choice or as most enterprises will probably end up with, multiple agent platforms, and we have an out-of-the-box offering that works for you for simple quick cases. This is a real strength for our customers because it means that they have one workflow, and they can take the best of the best that makes sense. Maybe that one set of agents in finance and a different set in sales. Fine. We are able to help them across the board again to our view of helping integrate with the tools they have. Now lastly, you mentioned some of the software capabilities of those agents. Just wanted to stress as we have said for twenty years, we solve human problems. We do not solve technology problems. We have never solved technology problems. And when we solve human problems, Jira is about the human reference to work. It is a piece of work that is going through a workflow, a set of changes, We use our own Robo dev tool. Sure. We use old school coding where you just type the characters in, and we use many of the new AI code generation tools. In our engineering team, which is very large and very world-class. We use all of these things. We still use a lot of Jira. Again, the statistics we are showing is that the more people use those tools, they create more issues. They have more workflows. They actually have more MAU in Jira. 55% more MAU, at least. And they expand their seats at a faster rate. Because those are the most cutting-edge companies. Those are growing the fastest. Right? And I think that shows that the world of collaboration and human challenge of teams getting together to decide what to do is still really important even among all of those technologies. So I think we have a unique position to take all those models into our customer as they need the value from them. Operator: Your next question comes from Jason Celino from KeyBanc Capital Markets. Please go ahead. Jason Celino: Great. Thank you. Maybe switching topics a little bit more of a simpleton kind of question, but curious to hear how the migration activity is going, you know, DC to cloud, if you are able to quantify how much that benefit was for the quarter. Joe Binz: Thank you. Yeah. Thanks for the question. We saw very healthy cloud migrations in Q2. It contributed a mid- to high single-digit impact to cloud revenue growth rates. So given this, we continue to expect migrations to drive a mid- to high single-digit contribution to cloud revenue growth for the full year. So happy with the progress, and it continues to go very well. Operator: Your next question comes from Ittai Kidron from Oppenheimer. Please go ahead. Ittai Kidron: Thanks, and thanks Joe, for resetting their own 2027 data center. I wanted to dig into the seat expansion. It clearly was an upside driver. It came exceeded your expectations in the order. But, Joe, I was wondering if you could break down the seat expansion, if there is a way, that internally you look at this in context of new customer additions, expansion with existing customers, whether it is developers or other corporate functions. I mean, every day, we are hearing about companies laying off more and more and more people, yet you are getting more and more seats. I would love to get any insights as to the flavors. Where is it that you are gaining seats? Where are you still seeing kind of good momentum over there in your confidence level about your ability to sustain the seat growth? Joe Binz: Yeah. Thanks for the question, Ittai. In terms of where we see the expansion, I would say it is broad-based. It is across both tech and non-tech users. We are making a lot of progress on what we call non-tech or business users, particularly with the Teamwork Collection product. Those seat expansion rates both across the enterprise and SMB remain stable. That has been the case for, you know, four to six quarters now, so we feel really good about the continued progress on that. And that is the way I would describe from a prepaid seat expansion perspective. Sort of the color in terms of what we are seeing on that front. Michael Cannon-Brookes: Hi. Sorry. If I can just chime in at a sort of a non-financial high level. Look. We are very clear that the system of work is about a continued growth of Atlassian Corporation into the knowledge worker population. Right? When we talk about unleashing the potential of every team, our mission for over two decades, I would stress the every team part. We have got the software collection, which does very, very well. The DX and a lot of other things encompass in a Bitbucket pipelines. Like, there is a lot of great areas of that software collection. We have also got the service collection. So we are seeing great growth in service collection across HR teams, finance teams, other areas outside of its traditional market in IT and operations teams. But that is certainly an area of growth for us. So there is HR and finance teams seeing a lot in the service collections, for example, and you have seen us ship a lot of features. Also launched customer service this quarter. As an application within that, to go after a new set of teams. We have not been able to get to as well, you would say. In the core Teamwork Collection, look, as we said in our letter, we were seeing double-digit seat expansion. More than double-digit seat expansion compared to people who buy the standalone applications. And that is baked into the Teamwork Collection packaging, but it is also because of the AI offering and how it works. Right, in terms of getting you get you equate your Loom confluence and Jira seats along with your additions which often gains expansion. But given the nature of our applications, and our continued growth in business teams across an enterprise, sales, marketing, HR, finance, etcetera, what that licensing structure allows those teams to do is to collaborate more. And collaboration is a very sticky and kind of viral activity that is where you are seeing that expansion coming through in our MAU and in our AI MAU. And also ultimately ending up in our you know, NRR and RPO numbers in terms of long-term commitments from customers. That is and where they are seeing expansion across business teams of all fronts. Operator: Your next question comes from Koji Ikeda from Bank of America. Please go ahead. Koji Ikeda: Yes. Hey, guys. Thanks so much for taking the question. I wanted to follow-up on the point about customers that are using AI cogen tools are increasing Jira uses by 5%. You know, 5% on the tasks, on the MAU, and expanding faster. And so what I am trying to get at is understanding how the squares with the productivity gains that we are hearing from the cogen tools. Like, 30% more developer efficiency, driven by cogen. Does that equate to 5% more Jira usage? Maybe I have that completely wrong, but what I am trying to understand is how one helps catalyze use of the other. And how we can maybe use that plus 5% increase of that Atlassian Corporation usage when Gen I AI is being used as a good read for other parts of the Atlassian Corporation growth opportunity. Thank you. Michael Cannon-Brookes: Koji, great question. Into some specifics here. Firstly, that is obviously within sort of the software team and software collection. So the first thing I would say is, to if I spoke to him previously, that is a subset of our user base, right, in terms of software teams. And those are generally broad technology teams as well. Right? So not just developers, but you know, security folk and network analysts and operations teams and product managers and designers. There is a lot of different roles involved in a software team well beyond just the coding itself. But it is a subset of our total audience. And, again, service collection had an amazing quarter. In a totally non-software sense. I think what we are saying there is it is 5% higher or at least 5% higher than non-AI code generation based companies. It does not mean it is a 5% expansion rate. It means they are expanding 5% higher than the rate of expansion of the other groups. So that is where you see that it is not necessarily a 5% total expand rate. You can see in that NRR and other stats, it is higher than that. Right? Secondly, there is a lot of reasons for that, I believe. Firstly, these are the cutting-edge companies. These are the companies that are pushing the boundaries the most. They tend to be growth-oriented companies, so they tend to be companies that are growing, which is great. But guess who those largest companies are going to be? The future is those ones that are pushing the boundaries and driving forward in a generalized economic sense. So that is really good. Those are the leading companies for us. Secondly, yes, they are getting more efficiency. If you look at the actual delivery efficiency, loading speed is, again, 20 to 30% of the developer's job. And so you may be getting 10, 15, 20% improvement in the overall productivity of your organization if you have thousand people in R&D, something like that. But that innovation moving quicker does not mean you are finishing your road map. You are coming up with more things to do. So you are adding more tasks, you are also creating a lot more technology, a lot more software and services which makes your architecture more complicated, it gives you more things to manage with something like Compass in terms of the different software code bases and models and pipelines and all the different data structures that you have to deliver your technology products and services as an organization as a customer of ours. And lastly, you create more complexity. Right? The security and compliance of a bank. The governance functions that have to happen, the structuring and the downtime, the operating of that software. All of these things create Jira issues at large volumes. Right? So if you create more software, you are going to have more management, more overhead, more collaboration, some version of that is what we believe is happening underneath. Right? You have more collaboration to do because you end up with more technology, and that is a good thing. More software in the world is a good thing for Atlassian Corporation. If we have said that for a couple of years now, that is a belief that we are on AI is unlocking sort of human creativity at the highest level. Right? It is allowing them to create more. That means those humans have to interact and collaborate more, and those created objects need to be managed, operated, maintained, and that is generalized, a good thing for Atlassian Corporation across software and non-software teams. Operator: Your next question comes from Keith Bachman from BMO. Please go ahead. Keith Bachman: Hi. Thank you very much. Mike, I wanted to direct this to you if I could. And I wanted to get your perspective and update on JSM specifically. And I will break that into a few parts. If any kind of metrics you could give us on growth, and what the trajectory is. There is a lot of consternation about workflow, broadly speaking, mentioned your stock going on. It is not the only one. ServiceNow goes down almost every day given concerns around the underlying fundamentals of JSM. The second part is, just anything on the competitive dynamics. And then the third is really I wanted to focus on seats for a second within the context of JSM. And is there any update you can give us on like for like? What I mean by that is you have a JSM workload a customer has, is there seat degradation within the confines of a given workload understand you are still grabbing customers, so seats are probably going. But, really, on a like for like basis, just want to understand some context on seats. Many thanks. Michael Cannon-Brookes: Sure. Thanks, Keith. Great question. Love questions about the service collections. Doing fantastically. Look. We gave some stats in our shareholder letter. Right? We passed 65,000 customers, which is a big milestone. 50% of the Fortune 500 as a business in and of itself, and the enterprise side of that world growing over 60% year on year. So hopefully, from those sort of high-level statistics, service collection is doing very, very well. It is definitely our fastest-growing product at significant scale. And that is a really important milestone for that business. As I said earlier, yes, that growth is happening on a like for like customer base. I like your sort same store sale analogy. I get what you are asking there. You are certainly seeing efficiencies coming in some of those customers. At the same time, as a challenger brand, we are seeing great growth in HR. We shipped twelve months ago, a whole series of HR service management, blueprints, and other areas. We are going really well in that sort of part of helping operate a business. Same in finance, same in other areas of operations, often, like, management, these types of things. Service collection is doing very, very well in and we feel very confident that we have a lot more growth to go get there. Secondly, on the asset management side, you have seen us take assets out of the service collection and put them into the core platform. That continues to be a big growth driver for us as we have a far more modern CMDB like system as a graph compared to a lot of the legacy competitors. And as we connect the assets graph that you have of physical objects often to the Teamwork graph, but we are seeing our agents and our AI capabilities get significantly more powerful, and we are seeing great growth there. As such, you know, in the last six months, more than 40% of the agentic workflows that have been built are actually in service collection customers and service workflows. It is a very natural area to deploy agents AI agents into your service workflows to help improve the human agentic experience or the human agent experience of delivering value to the customer, or customer just getting the value directly themselves. So that is going very, very well. More than two-thirds of our service question customers are using it for non-IT use cases at the moment, which is a great sign that that is happening. Two other things, maybe one, you see we are a leader in our enterprise service management wave. The analyst community continues to recognize us as a leader and a visionary, but also a significant challenger and growth brand. And we continue to see a lot of migration from legacy service management platforms onto service collection for much higher ROI much better cost equation with a much more modern stack and user experience, and that is really great for us. Lastly, and it should not be last. It is definitely not the most minor. We only GA'd our customer service management app inside the last quarter. So that is delivering great efficiency results for us in running parts of our customer service, as we have said. And very early in that journey, but really excited about how that can continue to grow the service collection as it continues to power a large part of the license growth. Operator: Your next question comes from Raimo Lenschow from Barclays. Please go ahead. Perfect. Thank you. Thanks for squeezing me in. Raimo Lenschow: I have a question on the DC price increases and the gap we have to Jira cloud now. Like, how do you think about that in terms of as an incentive to move? Do you think there is further action in the this can help you there to kind of accelerate that journey? And then I had one quick follow-up. Joe Binz: Yeah. Thanks, Raimo. You know, from a pricing perspective, on the cloud, you know, we invest quite a bit in R&D. And we are consistently delivering a lot of innovation and value to our customers. And that fundamentally allows us the opportunity to increase prices over time, commensurate with that value delivery. We may do that through pricing packaging of premium SKUs or through list prices. In either case, our prices today remain significantly below many of our software peers and competitors across our portfolio. And because of that and the pace of innovation and value delivery, on mission-critical workflows, we still feel we have plenty of headroom for further pricing. In terms of data center, we will ensure that any price changes on data center going forward fit into the deliberate and planful approach we are taking in providing the right incentives at the right time to help customers upgrade to the cloud. Overall, however, we believe we remain competitively priced just relative to the value we deliver and competitive alternatives in that space as well. So that is how we think about the pricing perspectives, in terms of the interplay between cloud and data center. Raimo Lenschow: Yes. Okay. Perfect. Thank you. And then I have one question. I might have missed it, but did you talk to the 20% revenue growth CAGR? Or did you could you clarify that? Because I had a couple of questions from the from the other audience if you kind of reiterated it or not. Joe Binz: Yeah. Sure, Raimo. There is no change to our midterm outlook calling for 20% plus compounded annual revenue growth through FY 2027. I would say the same thing for our 25% plus non-GAAP operating margin commitment in FY 2027. We remain confident in our ability to deliver healthy and accelerating cloud revenue growth. As we expand operating margin over time. And I would also highlight that with respect to our short-term guidance for FY 2026, we do continue to take a conservative and risk-adjusted approach. So that is the way to think about that. Raimo Lenschow: Thank you. Operator: That is all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Michael Cannon-Brookes: Thank you, everyone, for joining our call today. Thanks to all of the Atlassian Corporation teams for delivering a truly fantastic quarter. And as always, we appreciate all your thoughtful questions and continued support. From the investor and shareholder community. Have a kick-ass weekend, everybody.
Keri A. August: Good afternoon, ladies and gentlemen, and welcome to Good Times Restaurants Inc. Fiscal 2025 Fourth Quarter and Year End Earnings Call. I am Keri A. August, the company's Senior Vice President of Finance and Accounting. By now, everyone should have access to the company's earnings release, which is available in the Investors section of the company's website. As a reminder, a part of today's discussion will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements involve known and unknown risks, which may cause the company's actual results to differ materially from results expressed or implied by the forward-looking statements. Such risks and uncertainties include, among other things, the market price of the company's stock prevailing from time to time, the nature of other investment opportunities presented to the company, the disruption to our business from pandemics and other public health emergencies, the impact of staffing constraints at our restaurants, the impact of supply chain constraints and inflation, the uncertain nature of current restaurant development plans, and the ability to implement those plans and integrate new restaurants, delays in developing and opening new restaurants because of weather, local permitting, or other reasons, increased competition, cost increases or ingredient shortages, general economic or operating conditions, risks associated with our share repurchase program, risks associated with the acquisition of additional restaurants, adequacy of cash flows, and the cost and availability of capital or credit facility borrowings to provide liquidity, changes in federal, state, or local laws and regulations affecting our restaurants, including wage and tip credit regulations, and other matters discussed under the risk factor section of Good Times annual report on Form 10-K for the fiscal year ended 09/24/2024, and other reports filed with the SEC, including Form 10-K for the fiscal year ended 09/30/2025. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation to comparable GAAP measures is available in our earnings release. And now I would like to turn the call over to our Chief Executive Officer, Ryan Zink. Ryan M. Zink: Thank you, Keri, and thank you all for joining us today. As has been reported by other company-operated quick-service burger companies, the fourth fiscal quarter was a challenging one for us, in particular, at our Good Times concept. The combination of soft sales and higher costs, most specifically the significantly elevated cost of ground beef, put a dent in profitability for the quarter. Keri will go into details surrounding the financial performance during the quarter, but it goes without saying that we are disappointed in the results and committed to immediate improvement. Of note, although the same-store sales at Good Times remained negative in the fourth quarter, the 6.6% decline represented a 240 basis point sequential improvement from the fiscal third quarter, and through the first eleven weeks of the first fiscal quarter, Good Times same-store sales are down approximately 3.6% compared to the same time period in the prior year. Craig So to, our director of operations for Good Times, continues to demonstrate strong leadership and has been holding a higher level of accountability among above-store leaders, which has cascaded down to our restaurant-level general managers. Craig has focused on realigning general manager schedules to better align the time GMs are in the restaurant with peak revenue periods, which is creating greater GM-level awareness and interaction with team members throughout the day, enabling them to address product and service opportunities that exist primarily in the dinner and late-night dayparts. Craig, along with our learning and development team, have made significant strides in improving restaurant-level training, paving the way for us to roll out true cook-to-order among all of our burger products with minimal impact on speed of service. We have several different price tiers within our system and remain sensitive to menu price increases, as the quick-service burger segment has earned a poor reputation recently for value as a result of the significant price increases major players have taken in the years since the pandemic. Our core menu pricing at Good Times remains near its lowest premium to our large competitors in fast food, as we have only taken approximately 1% of menu price since January 2024. With our upcoming cook-to-order process and continued improvements in ops execution, we believe we can re-earn a premium to those competitors over time. We continue to be averse to large-scale discounting due to its impacts on profitability. However, we will be addressing value concerns with highly targeted value promotions starting this spring and expect expanded offerings through our GT rewards loyalty program, a recently refreshed mobile app meant to simplify the mobile ordering experience. For Bad Daddy's, although our same-store sales weakened during the fourth quarter, they have improved sequentially to date in the first quarter, and we are down approximately 1.6% through the first eleven weeks of the quarter compared to the same time period in the prior year. Same-store sales improvement has been most evident in our Colorado restaurants, marking a change in trend from 2025 when our Colorado restaurants have been a drag on same-store sales for the Bad Daddy's system. Similar to Good Times, we've made some targeted pricing adjustments and have made some upward adjustments to our Badass Margarita pricing in the fall. We currently have a blended year-over-year price increase covering food and beverage of less than 1%, and expect an average year-over-year price increase for the first quarter of approximately 1.7%. Our fall product promotion, which among other items featured a giant shareable Bavarian pretzel served with a house-made sauce trio of jalapeno cheddar Sam Adams beer cheese, whole grain dijonnaise, was a hit with our guests. And we see an opportunity for the pretzel to be included in our core menu at some point in the future. Our holiday promotion includes a chocolate cookie cheesecake that is made in-house and has satisfied a long-term guest request for a chocolate dessert. Similar to the pretzel, we see the cheesecake as a potential future core menu addition. Following a winter promotion anchored by a Mediterranean Power Bowl and two regional burger features, we expect to move to a burger of the month platform, which will simplify messaging around the product feature, enable a sharper focus on product execution and salesmanship, but more importantly, will feature approachable and familiar items to our guests but still with Bad Daddy's quality and scratch-made ingredients. I'll now turn the call over to Keri for a review of our performance during the quarter. Keri A. August: Thank you, Ryan. Let's review this quarter's results. Total revenues decreased approximately 5.1% for the quarter to $34 million and decreased approximately 0.5% compared to our all-time record fiscal year 2024 sales to $141.6 million. We'll start by going through Bad Daddy's results. Total restaurant sales decreased $1.7 million to $24 million for the quarter and decreased $2.2 million to $101.4 million for the full year. The sales decrease for the quarter was primarily driven by reduced customer traffic as well as the closure of the Longmont, Colorado restaurant in 2024, partially offset by menu price increases. Our average menu price during the quarter was 0.4% higher than Q4 2024. Same-store sales decreased 4.6% for the quarter with 38 Bad Daddy's in the comp base at quarter-end. As Ryan mentioned, same-store sales have improved into the first quarter of the New Year, with the most significant improvement in our Colorado restaurants. We expect an average price increase of approximately 1.7% for the quarter 2026. With the exception of certain targeted adjustments due to menu engineering, we do not expect any significant price increases over the next six months. Food and beverage costs were 31.6%, a 40 basis point increase from last year's quarter. The increase is primarily attributable to record high ground beef prices in the fourth quarter of 2025, as well as significantly higher prices for other proteins over the prior year quarter, partially offset by the impact of the 0.4% average increase in menu pricing. Thus far into the first quarter of 2026, we have experienced lower input costs. And despite the large number of complimentary burgers for our military guests on Veterans Day, we expect food and beverage costs as a percent of sales to improve quarter over quarter. Labor costs increased by 140 basis points compared to the prior year quarter to 35.7% for the quarter. This increase as a percentage of sales is primarily attributable to lower team member productivity resulting from sales deleverage. Although we expect improvement in this metric in the current year, in January, Colorado's minimum wage increases to $15.16, a 2.4% increase, and the tipped minimum wage increases to $12.14, a 3% increase. Occupancy costs were 6.7%, an increase of 50 basis points from the prior year quarter. The increase is primarily due to a decrease in benefit from the GAAP-required noncash rent adjustments between the quarterly periods. Other operating costs were 16% for the quarter, an increase of 80 basis points, primarily due to increased repair and maintenance and utility expenses. Overall, restaurant-level operating profit, a non-GAAP for Bad Daddy's, was approximately $2.4 million for the quarter or 9.9% of sales, compared to $3.4 million or 13.2% last year, primarily due to increases in labor and food and beverage costs as well as the deleveraging impact of lower sales on various fixed costs. Moving over to Good Times. Total restaurant sales for company-owned restaurants decreased approximately $300,000 to $9.7 million for the quarter compared to the prior year fourth quarter, and increased $1.2 million to $39.2 million for the year compared to the 2024 fiscal year. Same-store sales decreased 6.6% for the quarter with 27 Good Times restaurants in the comp base at quarter-end. The average menu price for the quarter was approximately the same as the prior year quarter. We have taken a small menu price increase for 2026 and currently expect to take only modest price increases as we have assessed our relative pricing position in the market. We expect to monitor competitive pricing in January and continue to make very targeted adjustments to the pricing of specific menu items but believe it is unlikely we will take any significant across-the-board price increases. Food and packaging costs were 32.1% for the quarter, an increase of 120 basis points compared to last year's quarter. As with Bad Daddy's, we experienced record high beef prices during the quarter. We also saw significantly higher costs for bacon and eggs. As is the case with Bad Daddy's, input costs have decreased into the first quarter, and we expect food and beverage costs as a percent of sales to improve quarter over quarter. Total labor cost increased to 35.9%, a 200 basis point increase from the 33.9% we ran during last year's quarter, due to higher average wage rates resulting from market forces and the CPI index minimum wage in Denver and the state of Colorado, as well as decreased productivity due to sales deleverage. Occupancy costs were 9.1%, an increase of 10 basis points from the prior year quarter. Other operating costs were 15% for the quarter, an increase of 110 basis points primarily due to increased customer delivery, technology, and utility expenses. Good Times restaurant-level operating profit decreased by $400,000 for the quarter to $800,000. As a percent of sales, restaurant-level operating profit decreased by 420 basis points versus last year to 8% due to elevated costs throughout the P&L. Combined general and administrative expenses were $2.4 million during the quarter or 7% of total revenues, a decrease of 70 basis points from the prior year quarter, primarily related to decreased multiunit supervision costs, legal and professional services, and outsourced accounting fees, as well as health insurance underwriting costs, partially offset by an increase in recruiting and training-related costs. We anticipate 6% to 7% general and administrative costs in fiscal 2026. Our net loss to common shareholders for the quarter was $3,000 or $0 per share, versus net income of $200,000 or $0.02 per share in the fourth quarter last year. There was approximately $500,000 income tax benefit recorded during the current quarter versus $400,000 in the prior year quarter. Adjusted EBITDA for the quarter was negative $74,000 compared to $1.3 million for 2024. We finished the quarter with $2.6 million in cash and $2.3 million of long-term debt. And now I will turn the call back to Ryan. Ryan M. Zink: Thank you, Keri. Abby, we can open the call for questions at this time. Operator: Thank you. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 if you would like to join the queue. Again, it is 1 if you'd like to join the queue. And we have no questions at this time. I will turn the conference back over to Mr. Ryan Zink. Ryan M. Zink: Thank you, Abby. Although the fourth quarter was a difficult one for our concepts, 2026 is shaping up to mark improvement in same-store sales and in adjusted EBITDA. Our product and promotional roadmap at both concepts is robust and targeted towards broad guest appeal, and we continue to drive operating improvements translating into great guest experiences. I am proud of our leaders and team members in our restaurants who each day deliver memorable experiences for our guests and who are ultimately the ones who create value for our shareholders. Thank you all for joining us today. And in conclusion, I wish all of you, as well as all of the members of the Good Times and Bad Daddy's teams, happy holidays. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Fourth Quarter 2025 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. Today's call is being recorded. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Thank you, sir. Please go ahead. Dave Fildes: Hello, and welcome to our Q4 2025 financial results conference call. Joining us today to answer your questions is Andrew Jassy, our CEO, and Brian T. Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2024. Our comments and responses to your questions reflect management's views as of today, February 5, 2026, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we have seen today and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates and energy prices, changes in global economic and geopolitical conditions, tariff and trade policies, resource and supply volatility, including for memory chips, and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we do not conclude any additional business acquisitions, restructurings, or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance. And now I'll turn the call over to Andrew Jassy. Andrew Jassy: Thanks, Dave. We are reporting $213.4 billion in revenue, up 12% year over year excluding the impact from foreign exchange rates. Operating income was $25 billion, and trailing twelve-month free cash flow was $11.2 billion. We are seeing strong growth, and with the incremental opportunities available to us in areas like AI, chips, low earth orbit satellites, quick commerce, and serving more consumers' everyday essentials needs, we have a chance to build an even more meaningful business in Amazon.com, Inc. in the coming years. With strong return on invested capital, and we are investing to do so. We are already seeing strong demand in these areas even in these early innings. I'll start with AWS. AWS growth continued to accelerate to 24%, the fastest we've seen in thirteen quarters. Up $2.6 billion quarter over quarter and nearly $7 billion year over year. AWS is now a $142 billion annualized run rate business. And our chips business, inclusive of Graviton and Tranium, is now over $10 billion in annual revenue run rate growing triple-digit percentages year over year. As a reminder, it's very different having 24% year-over-year growth on a $142 billion annualized run rate than to have a higher percentage growth on a meaningfully smaller base which is the case with our competitors. We continue to add more incremental revenue and capacity than others, and extend our leadership position. We are continuing to see strong growth in core non-AI workloads as enterprises return to focusing on moving infrastructure from on-premises to the cloud, along with AWS having the broadest functionality, strongest security and operations performance, and most vibrant partner ecosystem. AWS continues to earn most of the big enterprise and government transitions to cloud. Since our last call, we announced new agreements with OpenAI, Visa, MBA, BlackRock, Perplexity, Lyft, United Airlines, DoorDash, Salesforce, US Air Force, Adobe, Thomson Reuters, AT&T, S&P Global, National Bank of Canada, the London Stock Exchange, Choice Hotels, Accenture, Indeed, HSBC, CrowdStrike, and many more. More of the top 500 US startups use AWS as their primary cloud provider than the next two providers combined. We are adding significant EC2 core computing capacity each day, the majority of that new compute is using our custom CPU silicon Graviton. Graviton is up to 40% more price per than leading x86 processors and is used expansively by over 90% of AWS's top thousand customers. Graviton itself is a multibillion-dollar annualized run rate business growing more than 50% year over year. We consistently see customers wanting to run their AI workloads where the rest of their applications and data are. We are also seeing that as customers run large AI workloads on AWS, they are adding to their core AWS footprint as well. But the biggest reason that AWS continues to gain AI share is our uniquely broad top-to-bottom AI stack functionality. In AI, we are doing what we've always done in AWS, solving customer challenges. Let me give you some examples. The first challenge is having a strong foundation model to generate inferences or predictions. Customers are realizing as they get further into AI that they need choice. As different models are better on different dimensions. In fact, most sophisticated AI applications leverage multiple models. Whether customers want frontier models like Anthropix Cloud, or open models like Miesztrall or Lama, Frontier Intelligence will lower cost and latency like Amazon Nova. Or video and audio models like twelve Labs or NovaSonic. Amazon Bedrock makes it easy to use these models to run inference scalably, and performantly. Bedrock is now a multibillion-dollar annualized run rate business, and customer spend grew 60% quarter over quarter. The second challenge is how to hone the model for your application. Customers sometimes think if they have a good model, they will have a good AI application. It's not really true. It takes a lot of work to post-train and fine-tune a model for your application. Our SageMaker AI service along with fine-tuning tools in Bedrock make this much easier for customers. A third challenge is how to have a custom version of a foundation that best leverages the company's secret sauce, their own data. To date, companies have tried to shape models with their own data late in the process, usually with fine-tuning or post-training. There's debate in the industry about this, but we believe that enterprises will want models trained on their own data at an early stage, at pre-training if possible, so their models have the best possible foundation for what matters most to each enterprise on which to learn and evolve. It's a little like teaching a child a foreign language early in their life. That becomes part of their learning foundation moving forward and it makes it easier to pick up other languages later in their life. To solve for this need, we just launched NovaForge. Which gives customers early checkpoints on our Amazon Nova models allows them to securely mix their own proprietary data with the model's data in the pre-training stage, and enables their own uniquely customized versions of Novo. What we call novellas, trained with their data early in the process. This will be very useful for companies as they build their own agents on top of the model. There is nothing else out there like this today and a potential game changer for companies. Another challenge is cost. I've said this many times, but if we want AI to be used as expansively as companies want, we have to make the cost of inference lower. A significant impediment today is the cost of AI chips. Customers are starving for better price performance and typically and understandably, the dominant early leaders aren't in a hurry to make that happen. They have other priorities. It's why we built our own custom silicon in training. And it's really taken off. We've landed over 1.4 million Tranium two chips our fastest ramping chip launch ever. Tranium two is 30 to 40% more price performance than comparable GPUs. It is a multibillion-dollar annualized revenue run rate business with a 100,000 plus companies using it is trading as the majority underpinning of Bedrock usage today. We recently launched Tranium three, which is up to 40% more price performance than Trainium two. We are seeing very strong demand for Tranium three and expect nearly all of our Tranium three supply of chips to be committed by mid-2026. And though we are still building Tranium four, we are seeing very strong interest already. Looking ahead, the primary way companies will get value from AI is with agents. Some their own, some from others, and there are several customer challenges that we are well positioned to solve. It's harder to build agents than it should be. For that, we've built strands of service enabling agents to be created from any model. Once agents are built, enterprises are apprehensive about deploying to production because these agents need to securely and scalably connect to compute, data tools, memory, identity, policy governance, performance monitoring, and other elements. This is a new and hard problem where a solution has not existed until we launched Bedrock Agent Corp. Customers are quite excited about Agent Core, and it's unlocking deployments. Customers also want to leverage others' useful agents, and we've built several. Including Curo for coding, Amazon Quick for knowledge workers to leverage their own data and analytics, AWS Transform for software migration, and Amazon Connect for call center operations. We continue adding new capabilities, and usage continues to grow quickly. For example, the number of developers using Curo grew more than 150% quarter over quarter. In addition to agents that customers direct, customers are also becoming excited about agents that require less human interaction. They can be fully autonomous, run persistently for hours or days, scale out quickly, and remember context. At this past AWS re:Invent, we launched Frontier Agents to do that. Kiro autonomous agents for coding tasks, AWS DevOps agents for detecting and resolving operational issues, and AWS security agents for proactively securing applications throughout the development life cycle, and they're already making a big difference for customers. We expect to invest about $200 billion in capital expenditures across Amazon.com, Inc., but predominantly in AWS, because we have very high demand. Customers really want AWS for core and AI workloads. And we are monetizing capacity as fast as we can install it. We have deep experience understanding demand signals in the AWS business and then turning that capacity into strong return on invested capital. We are confident this will be the case here as well. I'll now turn to stores. We continue to expand selection, including more 400 new beauty brands in The US in 2025, like Bobbi Brown Cosmetics, Charlotte Tilbury, and Laura Mercier, and new fashion brands like Away Luggage, Converse, Diesel, Michael Kors, Nike, and The North Face. Our ultra-low priced offering, Amazon Hall, grew selection to over a million items under $10 in expanded to serve customers in more than 25 countries and regions. We continue to see strong customer response to everyday essentials and grocery. In 2025, everyday essentials grew nearly twice as fast as all other categories in The US, representing one out of three units sold in our store. And we've become a go-to grocery destination for over 150 million Americans. Mostly through online shopping and Whole Foods. With over $150 billion in gross sales, Amazon.com, Inc. is clearly a large grocer at this point. Customers in thousands of US cities and towns can now get perishables delivered same day alongside millions of other items. And customers who use that service shop more than twice as often as customers who don't. We plan to expand in many more communities in 2026, and we also plan to open more than 100 new Whole Foods Market stores over the next few years as we work to make grocery shopping easier, and more affordable for customers. We remain committed to staying sharp on price. And continue to meet or beat other retailers' prices. A recent study from Profitero showed that Amazon.com, Inc. is America's lowest priced retailer for the ninth straight year. 14% lower on average than other major online retailers. We again achieved our fastest ever delivery speeds for Prime members around the world in 2025. In The US, we delivered nearly 70% more items same day than the year before. We also continue increasing speed for rural customers with nearly two times more average monthly customers in rural areas receiving same day delivery year over year. Same day is our fastest growing delivery offering and nearly 100 million customers used it last year in The US. And the team is continuing to innovate, We've launched Amazon now in India, Mexico, and The UAE. Ultrafast delivery on thousands of items in about thirty minutes or less. And we are testing it in several communities in The US and UK. It's early, but customers are loving it. For example, in India, customer response exceeded our most optimistic expectations, and we are seeing Prime members triple their shopping frequency once they start using it. Expanding our same day delivery coverage also leads to meaningfully later cutoff times for orders. Which is a big deal for customers. For example, on Christmas Eve, customers in about 4,000 US cities could order items up until midday and get them that same day. Another example is our recently launched feature add to delivery. Which enables Prime members in The US to add items to their upcoming Amazon.com, Inc. deliveries with just one tap without going through checkout again or paying additional shipping fees. Just six months after launch, add to delivery already makes up about 10% of all Prime volume fulfilled through the Amazon.com, Inc. network each week. While this seems simple on the surface, this feature is supported by a lot of invention where we need to figure out in real time with incredibly low latency what items among Amazon.com, Inc.'s hundreds of millions of products are available to add to a customer's upcoming deliveries? Surface them, find a way to include in their packages, and deliver within the same customer promise. The stores team is also continuing to innovate and deliver for customers with AI. Our AgenTik AI shopping assistant, Rufus, is rapidly expanded. Rufus can research products, track prices, and auto buy. Purchasing a product in our store when it reaches your set price. It can also now shop tens of millions of items in other online stores and make purchases for customers using our agentic buy for me feature. Last year, more than 300 million customers used Rufus. In addition, customers used Lens our AI powered visual search tool to find products with a phone's camera, a screenshot, or a barcode. And they did it 45% more year over year. Moving on to Amazon Ads. We are pleased with the continued strong growth across our full funnel offerings generating $21.3 billion of revenue in the quarter and growing 22% year over year. Sponsored products advertising in our store continues to be our largest ads offering, and the combination of trillions of shopping, browsing, and streaming signals with advanced AI and machine learning led us deliver highly relevant useful ads for customers. We saw continued growth in Prime Video ads. Which is now available in 16 countries and is contributing meaningfully to our revenue growth. Prime Video has an average ad supported audience of 315 million viewers globally, up from 200 million in early 2024. Our ads team is also innovating with AI. We recently announced our ads agent, which lets brands use AI to create non optimize campaigns at scale. Implement effective campaign targeting, and quickly create actionable insights. And our creative agent lets advertisers research brainstorm, and generate full funnel ad campaigns from concept to completion using conversational guidance in Amazon.com, Inc.'s retail data transforming what was a weeks long process into just hours. We are also continuing to invent and see momentum several other areas, and I'll mention just a few. Starting with live sports on Prime. The fourth season of Thursday night football broke more records. It was our most watched season ever, averaging more than 15 million viewers, a 16% year over year increase, and a third consecutive year of double digit growth. And the packers versus bears wild card game was the most streamed NFL game in history with 31.6 million viewers clearing the prior mark by more than 4 million. We just made Alexa Plus available to all customers in The US, free for prime members and $19.99 a month for non prime members. Alexa Plus continues to get even better and more capable and we've added new ways to interact with Alexa, including a new chat experience at alexa.com, a redesigned mobile app, and new integrations with third party devices like Samsung TVs and BMW cars. We've also added new features like the ability to answer a ring doorbell on a customer's behalf, and more ways to shop or manage a home. And finally, the team is making rapid progress on Amazon LEO. Which will bring connectivity to consumers, enterprises, and governments in places where they don't have broadband connectivity. Our enterprise grade customer terminal, LEO Ultra, is the fastest satellite Internet antenna ever built. Delivering simultaneous download speeds of up to one gigabit per second upload speeds of up to 400 megabits per second. LEO will offer enterprise grade performance and advanced encryption with secure private networking that bypasses public Internet. Connecting directly to AWS. We've launched 180 satellites have more than 20 launches planned in 2026, more than 30 in 2027, and expect to launch commercially in 2026. We have dozens of commercial agreements already signed, including with AT&T, DIRECTV Latin America, JetBlue, and Australia's national broadband network. I have many more on the way. It's been an action-packed year of innovation and progress and we've hit the ground running in 2026. With that, I'll turn it over to Brian for a financial update. Brian T. Olsavsky: Thanks, Andy. Starting with our top line financial results. Worldwide revenue was $213.4 billion, a 12% increase year over year excluding the 150 basis points favorable impact of foreign exchange. In Q4, we reported worldwide operating income of $25 billion. This operating income includes three special charges, which reduced operating income by $2.4 billion. The first charge of $1.1 billion is for the resolution of tax disputes associated with our stores business in Italy, and the settlement of a lawsuit. This charge primarily impacts our international segment and is largely recorded in the fulfillment and other operating expense line items. The second charge is $730 million for the estimated severance costs. This charge impacts all three of our segments and is recorded primarily in the fulfillment sales and marketing and technology and infrastructure expense line items. The third charge of $610 million is for asset impairments primarily related to physical stores. This charge primarily impacts the North America segment as reported in other operating expense line. Moving on to our segment results. In the North America segment, fourth quarter revenue was $127.1 billion, an increase of 10% year over year. International segment revenue was $50.7 billion, an increase of 11% year over year excluding the impact of foreign exchange. Worldwide paid units grew 12% year over year, because our highest quarterly growth rate in 2025. The fourth quarter marked a strong finish to the year as we delivered for customers during the peak holiday season. Our sharp pricing, vast selection, and record vast delivery speeds resonated with customers. They appreciate the convenience of receiving their items quickly. Bring gifts for family and friends, to everyday essentials and perishable groceries. Our millions of global third-party sellers continue to be an important contributor to our broad selection. In Q4, worldwide third-party seller unit next was 61%. We continue to invest in tools and services including a comprehensive suite of AI tools that help our selling partners manage and grow their businesses. Shifting to profitability, North America segment operating income was $11.5 billion with an operating margin of 9%. Up from an 8% margin in 2024. International segment operating income was $1 billion with an operating margin of 2.1%. Excluding the impact of special charges mentioned earlier, International segment operating margins also expanded year over year. We are pleased with the fulfillment network performance throughout the peak season. We made strong progress improving the cost structure of our network over the past few years. In The US, a regionalized network is operating at scale and we continue to make refinements. This regionalization has improved local inventory placement, leading to faster delivery and lower costs. Last year, US Prime members received over 8 billion items the same or next day. Up more than 30% year over year. With groceries and everyday essentials making up half of the total items. For the third year in a row, globally in 2025, we achieved both our fastest ever delivery speeds for Prime members while also reducing our cost to serve. By leveraging our existing US network, we can now deliver perishable groceries to customers in more than 2,300 cities and towns, all with same day delivery. We saw significant adoption of this service throughout the year. When customers engage with our perishable offering, they demonstrate notably higher monthly spend compared to those who did not shop the category. We also see the customer shopping perishable gross add three times more items to their same day delivery orders. Looking ahead, we see further opportunity to enhance productivity our global fulfillment network while delivering at faster speeds for customers. We'll continue optimizing inventory placement to drive down distance traveled, reduce touches per package, and improve package consolidation. As well as launch robotics and automation to increase efficiency and elevate the customer experience. Shifting to advertising. Advertising revenue grew 22% in the fourth quarter and we added over $12 billion of incremental revenue in 2025 alone. As our full funnel advertising approach of connecting brands with customers is resonating. Simplifying the advertiser experience to enable brands to better reach customers wherever they are. Moving next to our AWS segment. Revenue was $35.6 billion, and growth accelerated to 24% year over year. We added $2.6 billion in quarter over quarter revenue and AWS now has an annualized revenue run rate of $142 billion. This acceleration was driven by both core and AI services as customers continue to modernize their infrastructure and migrate workloads to the cloud. Our AI offerings continue to resonate with customers. Including our argenic capabilities. This growth was helped in part by the more than one gigawatt of capacity we added in Q4. In 2025, AWS added more data center capacity than any other company in the world. AWS operating income was $12.5 billion. We are seeing strong top line growth while remaining focused on driving efficiencies across the business. This includes investing in software and process improvements to optimize server capacity. Developing a more efficient network using our lower cost custom networking gear, advancing custom silicon. At the same time, we continue to rapidly develop products and services on behalf of customers. As we've long said, we expect AWS operating margins to fluctuate over time, driven in part by the level of investments we are making at any point in time. Turning to cash flows. Our full year operating cash flow increased to $139.5 billion in 2025. Up 20% year over year due primarily to improved operating income and changes in working capital. Now turning to our Q1 financial guidance. Q1 net sales are expected to be between $173.5 billion and $178.5 billion. This guidance anticipates a favorable impact of approximately 180 basis points from foreign exchange rates. As a reminder, currencies can fluctuate during the quarter. Q1 operating income is expected to be between $616.5 billion and $21.5 billion. A few things to mention on the operating income guidance. Within the North America segment, we do expect a year over year cost increase of approximately $1 billion related to Amazon LEO. We have more than 20 launches planned in 2026, and more than 30 in 2027 which means we are spending more on launching satellites each year. Select enterprise customers are testing Amazon LEO services now. And we expect a wider commercial rollout later this year. As a reminder, today, we do expense most of these LEO costs as incurred. We expect that later in the year, many of these costs, such as satellite manufacturing and launch services, will be capitalized. Within the international segment, we are continuing to invest more in our stores business to enhance the customer experience and to encourage retail demand to move online more quickly. This includes bringing faster delivery options including Amazon Now or service which delivers to customers in thirty minutes or less. We are also working hard to stay sharp on pricing and seller fees. In our countries where we've had to be more aggressive to meet or beat competitors' prices. We like these investments because they will delay customers, grow our business, and we believe they will generate long-term positive return on invested capital. As we enter 2026, I'm energized by our team's strong execution. I want to thank everyone across the company for their hard work on behalf of our customers. We remain focused on driving an even better customer experience which is the only reliable way to create lasting value for our shareholders. With that, let's move on to your questions. Operator: At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question. If you would like to ask a question, please press star 1 on your telephone keypad. We ask that when you pose your question, you pick up your handset to provide optimum sound quality. Once again, to initiate a question, please press star then 1 on your touch tone telephone at this time. Please hold while we poll for questions. Andrew Jassy: Thank you. Operator: Our first question comes from the line of Mark Mahaney with Evercore ISI. Please proceed with your question. Mark Mahaney: Okay. Thanks. I think, Brian, let me throw this to you or maybe to Andy. On the strong long-term return on invested capital, I think that's the debate in the market today. So could you give us a little bit more insight into how you think investors will be able to see that? Either, talk about the duration of the CapEx cycle that you're going through now or, what we should see in terms of profitability levels? And maybe also talk about, like, other de minimis or minimum free cash flow generation levels that you don't want to go below as you go through this CapEx cycle? Just help us get to that get to your level of confidence in having a strong long-term return on that invested capital. Thank you. Brian T. Olsavsky: Yeah. Sure, Mark. Thank you. I'll start from a financial side. So on the investments we are making, as Andy said earlier, you know, we are putting into service with customers all capacity that we are getting, and it's immediately useful. And we are also seeing a long arc of additional revenue that we see from other customers and backlog and commitments of people are anxious to make with us, especially for AI services. So you can see that it's working out its way into our P&L both through CapEx and also through our operating margin in AWS. AWS is 35% operating margin through Q4, up 40 basis points year over year. Just talked about before that is going to fluctuate over time. It certainly has a headwind from the investments in AI and the depreciation on that CapEx. But we also work very hard to offset that with efficiencies. And cost reduction. So we will see how that develops over time. So but, yeah, we see long strong return on invested capital. We see strong demand for these services, and we continue to like the investments in this area. I would add to that. You know what? If you look at the capital, we are spending and intend to spend this year, it's predominantly in AWS. And some of it is for our core workloads which are our non-AI workloads because they are growing at a faster rate than we anticipated. But most of it is in AI and we just have a lot of growth and a lot of demand. When you are growing 24% year over year with an annualized revenue run rate of $142 billion, you are growing a lot. And what we are continuing to see is as fast as we install this capacity, this AI capacity, we are monetizing it. So it's just a very unusual opportunity. You know, as I've shared a lot of times I passionately believe that every customer experience that we know of today is going to be reinvented. With AI, there are gonna be a whole bunch of customer experience none of us ever imagined that are gonna become the norms of how we all operate every day and what we use. I think the other thing is that if you really want to use AI, in an expansive way, you need your data in the cloud and you need your application in the cloud. Those are all big tailwinds pushing people towards the cloud. So we are gonna invest aggressively here, and we are gonna invest to be the leader in this space as we have been for the last number of years. We have, I think, a fair bit of experience over the years in AWS of forecasting demand signals and doing it in such a way that we don't have a lot of wasted capacity and that we also have enough capacity to serve the demand that's there. And I think we've also proven with AWS over the years how we build data centers, how we run them, and how we invent in there. If you think about our chips and our hardware and networking gear and how we've invented and power that this isn't some sort of quixotic top line grab. You know, we have confidence that these investments will yield strong strong returns on invested capital. We've done that with our core AWS business. I think that will very much be true here as well and I think some of the things that you will see over time in the AI space is you're gonna keep seeing all the inference services, which is gonna be the majority of the long-term AI workloads is gonna be inference. You're gonna see the inference keep getting optimized. You're going to see higher utilization on those services. You'll see prices normalize over a period of time. And then I think the companies that have not just the excellence and infrastructure but also the component that give them it'll give customers better price performance and give those companies themselves better economics are going to have advantaged financials. And I think if you look we're already off to a really good start having Traneum underneath some majority of our bedrock service and that's not just giving customers better prices but it also gives us better economics. So we see that following the same sorts of patterns we saw in the early days of our core AWS investment. I'm very confident we're gonna have strong return on invested capital here. Operator: And the next question comes from the line of Douglas Anmuth with JPMorgan. Please proceed with your question. Douglas Anmuth: Thanks so much for taking the questions. Can you just talk about how Project Ranir is running with Anthropic after first full quarter? And I think in the release, it talks about 500,000 ships, but a few months ago, you talked about getting to 1,000,000 as well. So if you could clarify that. And then maybe just a follow-up on Mark's question, are there any financial guardrails or governors in place that we should think about around the spend just in terms of operating income growth? Or positive free cash flow? Thanks. Andrew Jassy: Yeah. I'll start with the training piece. We are very excited about the growth that we see in Traneum the future that we have there. I think if you look at what's happened in the early innings of AI over the first few years, you see a lot of usage but customers are really thirsty for better price performance. And Tranium has 30% to 40% better price performance than comparable GPUs, so it's very compelling to customers. You mentioned Project Rainier Anthropic is building their next they're training the next Claude model on top of Tranium two. And that's what Project Rainier is. We talked about 500,000 chips there. You will see that continuing to increase. They're also using a fair bit of Tranium-two for other workloads and their own APIs beyond just Project Rainier but Trainium is a multibillion-dollar annualized run rate business at this point and it's fully subscribed. And what you're also seeing is Trainium three, which is the next version of Tranium, which we just started shipping. That's 40% more price performance than Tranium two. And we have there is very substantial amount of interest there. We expect that nearly all of that supply will be committed by somewhere around the middle of this year. And we're just in the process of building training four. There's very substantial interest in training four which is coming in 2027 and we're already having conversations about training five so there is a lot of interest in training at this point and I think when you you know, I think people know about our chips capability, our chips business, but I'm not sure folks realize how strong a chips company we've become over the last ten years. You know, if you look at what we've done with Tranium, if you look at what we've done with Graviton which is our CPU chip, which is about 40% better price performance than comparable x86 processors, 90% of the top 1,000 AWS customers are using Graviton very expansively. If you combine Traneum and Graviton, it's well over a $10 billion annualized run rate business it's still very early there so I'm very optimistic about what we're seeing, know, the Project Rainier has gone very well. I think Anthropic is quite pleased with it. We've learned a lot in the process as well but it's early days with what's possible here. This is big business that's getting bigger and has a lot of potential. And I just briefly comment on your second question that you know, we are as I mentioned, this is what know, I think this is an extraordinarily unusual opportunity to forever change the size of AWS and Amazon.com, Inc. as a whole. I think it also is an extraordinary opportunity for companies to change all their customer experiences and for startups to be able to build brand new experiences of businesses that would have taken much longer try to accomplish before that they can do right now. And so we see this as an unusual opportunity we are going to invest aggressively here to be the leaders because like we've been the last number of years and like I think we will be moving forward. Operator: Thank you. The next question comes from the line of Ross Sandler with Barclays. Please proceed with your question. Ross Sandler: Great. Andy, you mentioned if you called back how the AI market was currently a bit top heavy with a lot of the spend kinda clustering around a few of the AI native labs. So how is that changing as you look out into '26? And, specifically, how do you think you might extend your relationship with a company like OpenAI to maybe help Amazon.com's AI efforts both on the retail side and the AWS side. Thanks a lot. Andrew Jassy: Yeah. The way I would describe what we see right now in the AI space is it's really kind of a barbelled market demand where on one end you have the AI labs who are spending gobs and gobs of compute right now along with and what I was consider a couple runaway applications. And then at the other side of the barbell, you've got a lot of enterprise who are getting value out of AI in doing productivity and cost avoidance types of workloads. These are things like customer service or business process automation or some of the fraud pieces. And then in that middle of the barbell are all the enterprise production workloads. And I would say that the enterprises are in various stages at this point of evaluating how to move those, working on moving those, putting them into production. But I think that middle part of the barbell very well may end up being the largest and the most durable and I would put in the middle of that barbell too by the way I would put just the altogether brand new businesses and applications that companies build that right from the get go run-in production on top of AI. And so I think that to me when I look at this and what's happening it's kind of unbelievable if you look at the demand of what you're seeing already with AI but the lion's share of that demand is still yet to come in the middle of that barbell and that will come over time, it will come as you have more and more companies with AI talent, as more and more people get educated with that AI background, as inference continues to get less expensive and that's a big piece what we're trying to do with Tranium and hardware strategy and as companies start to have success in moving those workloads to further and further success in moving those workloads run on top of AI. So I think there's it's just a huge opportunity. It's still in the relative early stages even though it's growing at very unprecedented clip as we've talked about. You know, and then I think how do we see our relationships extending with other companies like OpenAI. You know, would tell you that this movement and what's happening in AI is it's very broad. It's gonna be a lot of companies. It is a lot of companies already. There's a number of AI labs but almost every company you talk to, almost every conversation we have on the AWS side starts with AI. And so we have very significant with a lot of different companies. You know, I think we announced an agreement with OpenAI in November. We're excited about that agreement. It's a big one and we have a lot of respect for the company and we hope to continue to extend our partnership over time but this AI movement is not going to be a couple of companies. It's gonna be thousands of companies over time. Operator: Thank you. The next question comes from the line of Michael Morton with MoffettNathanson. Please proceed with your question. Michael Morton: Hi, good evening. Thank you for the question. This one's on the retail business. Andy, you've talked about how you're passionate. This is going to change experiences across the board. And you've shared some encouraging data points on Rufus. And we're seeing all the other Internet platforms roll out. Agentic protocols. I would love to see how you think this plays out for the retail business. And the on-site ads portion of the retail businesses. What seems like it could be a compression in the funnel as consumers get better answers over time. Anything there would be great. Thank you. Andrew Jassy: I'm very optimistic about the customer experience that will ultimately be what customers use for agented shopping. And I think it's good for customers. I think it's going to make it easier for them. It's a big piece of why we've invested as significantly as we have in our own shopping assistant in Rufus. And if you haven't checked out Rufus recently, I really encourage you to do so. It's gotten much, much better and keeps getting better every month. And, you know, we have about three we have 300 million customers who use Rufus in 2025. Customers who used Rufus are about 60% more likely to complete a purchase and so you just you know, you're seeing a lot of usage of it and a lot of growth and I think it's very useful. And, you know, I think at the same time, we will have relationships with third-party horizontal agents that can enable shopping as well. We have to collectively figure out a better customer experience. You know, it's still, you know, these horizontal agents don't have any of your shopping history, they get a lot of the product details wrong. They get a lot of the pricing wrong. And so yeah, we have to try to find a customer experience together that better and, you know, a value exchange that makes sense for both parties. But I'm very hopeful that we'll get there over time. We continue to have a number of conversations then I think you're gonna have to look at as time goes on you know, which types of you know, which shopping agents are consumers gonna use and it kinda reminds me in some ways of the early days of of kinda all the search engines that were that that were referring traffic to retailers and, you know, it's still a relatively small portion of the overall traffic and sales but of that fraction you have to ask how many consumers are going to prefer using a horizontal agent where it's kind of a middle person between the retailer and the consumer versus wanting to use a great agent from that retailer that has all its shopping history history and that has all the data right there and makes it easy if you're just you know, spearfishing for something to shop for it right there or if you wanna do discovery, you can do it there and it's got the best data on shopping. I think a lot of customers are ultimately gonna choose to use a great shopping agent from that retailer because if you think about what consumers really want in retail and retailer they want really broad selection, They want low prices. They want really fast delivery. And then they want they want a retailer that they can trust and that takes care of them. And I think horizontal agents are pretty good at aggregating selection but retailers are much better at doing all four of those items. And so I'm very optimistic that people will use our shopping agent it's off to a great start I also expect that we'll work with other third-party agents over time as we work on the issues I mentioned earlier. Operator: Thank you. The next question comes from the line of Brian Thomas Nowak with Morgan Stanley. Please proceed with your question. Brian Thomas Nowak: Thanks for taking my question. Andy, I want to ask you one about the global retail business. This year. I know there's a lot of areas of investment in it that you're talking about. To sort of make improve the service, make it more durable over the long term, etcetera. But I'm assuming there are also sources of efficiency you expect to see this year. So can you sort of help us understand both sides of the ledger on retail this year? Where are some of the areas where you see the potential for sources of efficiency and cost to serve savings? And then where should we be thinking about the areas of investment to drive more durable growth, robotics, etcetera? How does that sort of break down? Andrew Jassy: Yeah. So I would say on the side of continuing to invest, to keep growing the retail business, you know, the kind of core drivers of demand continue to be the same. You know, we are gonna work really hard to expand selection and you you've seen what we've done over the last several years, you know, the expansion of selection has been broad. And you'll see it on both ends of the spectrum. You know, we have a lot more of those luxury brands that have built presences in Amazon.com, Inc. had success found that we could we could manage their brand presentation the right way and they've been very happy. Mean you only have to look at L'Oreal as an example too of just how fast that business is growing and how happy our partners have been and at the same time we are working really hard to continue to expand the amount of everyday essentials that we offer our customers. And the growth in everyday essentials in our business is really remarkable as I mentioned in my opening comments. And one out of three units now that we that we move are everyday essentials and what we find there is that the more the customers can rely on us for everyday essentials and the lower ASP items, they just choose to do more their downstream shopping with us in every way. We're just more front of mind. And so, yeah, I think a big piece of why we have captured more and more of those everyday essentials and you see it also in our grocery business with perishables too. It's just our speed of delivery improvements over the last three years has been really market mean, it's customers it's the one thing I get stopped on the street most often about which is I just can't believe how quickly from when I order something I get it my door and how reliable you are. I think along that speed of delivery piece it's also quite interesting what's happening with QuickCommerce, you know, and we have this offering called Amazon that we've largely started outside The US and India and The UAE and that gets thousands of items to customers within thirty minutes and it really is it's quite interesting how quickly that is growing. And I think that it's just another one of those things like everyday essentials that when you're when you're able to order more and more from Amazon.com, Inc., you just think of Amazon.com, Inc. first if it's a great experience that we're offering for whatever you're looking for. But in our if you look in India, which is the place we've rolled out QuickCommerce the fastest, customers who try QuickCommerce are shopping with triple the frequency than they did before they tried us in Quick. So those are all areas I think are pretty exciting that we're expanding. You'll see us continue to expand what we're doing in the perishable side too which we're quite excited about and we are able to deliver perishables same day in thousands of cities around the world now. In the cities in which we have those perishables available, nine out of 10 top items that are ordered in that geography are perishables. So we're just having a lot of success with that too and people buy perishables from us. After they buy perishables, they're shopping with us twice as frequently. So lot of good things to like there. And then, you know, on the efficiencies, we are I mean, we always have a very long list of these. That we're working on, Brian. And, you know, it's true today as well. If you look even you know, I mentioned I talked a lot about regionalization. In our fulfillment network, particularly in The US. You know, over the last couple of years. And I said we weren't done honing that and that's true. It's just we, you know, we don't talk about it every time but if you look at what we've done there we've extended the number of regions. You know, it was eight. It's now 10. We've extended regionalization to what we do with our inbound delivery to be much more efficient, being able to get more items closer to customers more quickly. We have made a lot of we're doing a lot of work and we've made a huge amount of progress in being able to get more units into each box. And as we're able to get more units into each box it obviously saves shipments and we drive better operating income when we do that and we've made very significant progress there but have a lot more planned. It's part of by the way that improvement is part of what helps us do things like I was talking about earlier in adding to a delivery in near real time. And then, you know, robotics, as you mentioned, is another big one for us. You know, we have over a million robots today in our fulfillment network. They take care of all sorts of functions, but still a fraction of what I think we are going to be able to enable over time which will allow our you know, we'll always have a lot of people that we employ in our fulfillment network, but they'll you know, they'll leave to the robotics things that, you know, that are more repetitive so it's better productivity for the business, more safe for teammates and there's real cost efficiencies in that as well. So, a lot on both sides of the ledger as always. Operator: Thank you. And our final question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Eric Sheridan: Thanks so much for taking the question. Maybe a few parts just on AWS. Can you speak to the current state of your revenue backlog as of Q4? And also discuss a little bit about what you see both for internal use cases and external client needs with respect to any imbalance between supply and demand around AI efforts? And how you think about closing the gap on those as more capacity comes online through 2026? Thank you. Andrew Jassy: Yeah. That's a lot of parts. I'll start with the first one. Which is on backlog, our backlog is $244 billion. That's up 40% year over year. I think it's up 22% quarter over quarter. You know, we have and we have a lot of deals that are in the pipeline. There's just a as I mentioned earlier, there is a lot of demand for AWS right now. In the AI space and also in the core AWS space. Your second question was internal and external use cases. I would and then the impact around supply and demand. You know, the vast majority of our the capital that we spend and the capacity that we have consumed by external customers. We have all Amazon.com, Inc. has always been a very large AWS customer, very helpful AWS customer because they're very demanding and they use the services very expansively and stretch the limits as we launch things. So they've always been a very important big customer but always a very small fraction of the total and that's true today in AI as well as the overall AWS business. You know, on internally, we have all sorts of ways that we are using AI. We have over a thousand AI applications that we've either deployed or in the process of building, and they range from our shopping assistant in Rufus that we were just talking about to Alexa Plus, which is a really large scale generative AI application. To applications in our fulfillment network that allow us to have more forecasting predictions to how we do customer in our customer service chatbot to how we are making it much easier for brands to create advertisements and to optimize all their campaigns or across the full funnel of advertising options we have. To, you know, in live sports, you watch Thursday night football, can see you know, defense of alerts which predict which player is gonna blitz or, you know, pocket health. I mean, we in every one of our businesses, you see a very broad use of AI to improve the customer experience. And in many cases, just to completely reinvent was possible before. I mean, it's pretty neat to use something like Lens where you may see something you want to buy, you can just take a picture of it in the app and it finds the item on the detail page and buy it one click. Kinda magic. You know, externally, I would say it's kind of what I said earlier. You have AI labs, you know, consuming lots and lots of capacity. Both for training as well as for the inference and the research across what they're doing with their different applications and models. We see enterprises, all sorts of workloads, you know, customer service automation, business process automation, fraud, completely reinventing their application you know, agentic coding applications, legal applications, Suno is a really cool example. An AWS customer that's kind of reinvented how you can write music and build music. So really across the board and, you know, and I just think on the supply and demand, what I would tell you is you know, we're growing 24% year over year a $142 billion annualized run rate business. So we're growing at really an unprecedented rate. Yeah. I think every provider would tell you, including us, that we could actually grow faster if we had all the supply that we could take. And so we are being incredibly scrappy around that. If you look know, in the last twelve months, we added 3.99 gigawatts of power. Just for perspective, that's twice what we had in 2022 when we were in $80 billion annual run rate business. We expect to double it again by the '27. We added 1.2 gigawatts of power in Q4 just quarter over quarter. So it's so we are our team is being aggressive scrappy and inventive and adding capacity as fast as we can. I you know, we'll add a lot more in '26 and '27 and in '28 for that matter. And we're very optimistic we can continue to grow in the ballpark of what we have. Dave Fildes: Thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon.com, Inc., and we look forward to talking with you again next quarter.
Operator: Good day, and thank you for standing by. Welcome to Paylocity Holding Corporation's Second Quarter 2026 Financial Fiscal Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead. Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal 2026, which ended on December 31, 2025. I'm Ryan Glenn, Chief Financial Officer. Joining me on the call today are Steve Beauchamp, Executive Chairman, and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next forty-five days on our website under the Investor Relations tab. During the call today, we will use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. We do not undertake any duty to update any forward-looking statements. In regard to our upcoming conference schedule, we will be attending the Raymond James Annual Institutional Investors Conference and the Citizens Technology Conference. Let me know if you'd like to schedule time with us at either of these events. With that, let me turn the call over to Steve. Steven Beauchamp: Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal 2026 earnings call. Our strong results continued in Q2, with recurring and other revenue growth of 11% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Total revenue was $416.1 million, or 10% growth over Q2 of last year. Our multiyear investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM, finance, and IT in one single platform, all underpinned by our core employee record data, represents the broadest and deepest comprehensive offering in the marketplace. This dynamic continues to be highlighted by the growing adoption and utilization of products across our suite, including new HCM offerings such as reward and recognition. As the only provider with a native reward system that automates the taxation of rewards payments and allows for the cash redemption of rewards, reward and recognition continues to serve as a point of competitive differentiation in the market and a driver of improved employee engagement and efficiency for our clients. For example, during the calendar year-end, which is a popular time for companies to recognize employees, an existing client fully transitioned and automated their manual holiday reward program within our platform, successfully distributing gift cards to more than 750 employees located across multiple locations. Our expanded AI capabilities, which we have continued to embed across the platform, also contributed to our strong financial results and increased guidance, including the recent release of our policy and procedures agent, which enables clients to leverage their own internal documentation, such as employee handbooks and standard operating procedures, to provide employees with instant and accurate answers to questions around topics such as travel expense and sick leave policies. Additionally, we recently extended our AI assistant into HR rules and regulations, tapping into more than 200 IRS and Department of Labor knowledge sources to provide administrators with guidance on tax and labor regulations. Collectively, these new capabilities will help our clients simplify and automate employee support while also reducing risk and improving compliance outcomes. And we continue to see growing utilization of our AI capabilities, with the average monthly usage of our AI assistant increasing over 100% quarter over quarter. Our ongoing commitment to product innovation continues to be recognized by third parties as Paylocity was recently awarded the 2026 Buyer's Choice Award from Trust Radius, named a leader in 19 categories within the winter 2026 G2 Grid reports, and listed on Capterra's payroll shortlist. I would now like to pass the call to Toby to provide further color on the quarter. Toby Williams: Thanks, Steve. As Steve mentioned, the momentum seen in Q1 continued into the second quarter, contributing to a strong selling season performance and increased revenue and profitability guidance for fiscal 2026. Our results continue to be driven by the combination of strong sales, operational execution, and product differentiation, including the addition of new functionality to core products such as video candidate screening, self-service scheduling, and prescreening forms within our recruiting module. As a result of these new capabilities, we are helping our clients improve their hiring process, drive a higher degree of automation and efficiency within their business, and better stand out in an otherwise competitive hiring environment, as evidenced by an existing client with over 1,200 employees who has seen a roughly 50% reduction in their time to hire since adopting our new recruiting functionality. We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q2. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration, and API capabilities, and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel, with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients through enhanced capabilities such as our benefits guided setup. Through self-service and intuitive tooling, benefits guided setup allows brokers to directly build plans and rate structures and update rates on behalf of their clients directly within the Paylocity platform, enabling our partners to deliver a higher level of service to our mutual clients. We also saw another strong quarter of client retention, which helped contribute to our strong financial performance through fiscal 2026. As highlighted last quarter, in addition to embedding AI capabilities within our product suite, we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business. Specifically within the operations team, we continue to leverage AI to drive down client case volumes, automate client interactions and case routings, and perform sentiment analysis to flag urgent cases for faster response, and we remain committed to continuing to evaluate new opportunities to help deliver world-class service and partnership. Overall, we are pleased with our Q2 results and believe we are well-positioned heading into the back half of the year, as reflected in our increased guidance for fiscal 2026. Finally, this time of year is a very busy time for all of our teams as they work closely with clients on year-end processing of payrolls, W-2s, 1095s, and annual tax form filings to federal, state, and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy time of year. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently recognized by Newsweek on America's Greatest Workplaces for Culture, Belonging, and Community 2026. I would now like to pass the call to Ryan to review the financial results in detail and provide our increased fiscal 2026 guidance. Ryan Glenn: Thanks, Toby. Q2 recurring and other revenue was $387 million, an increase of 11%, with total revenue of $416.1 million, up 10% from the same period last year. Our strong Q2 results were primarily driven by another solid quarter for our sales and operations team, allowing us to come in $8.1 million above the midpoint of our revenue guidance and allowing us to again raise our fiscal year guidance by more than our quarterly beat. Our adjusted gross profit was 74.4% for Q2, versus 73.8% in Q2 of last fiscal year, representing 60 basis points of leverage. Over the first six months of fiscal 2026, adjusted gross profit is up 80 basis points over the same period last year as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development, and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 10% compared to 2025, and we remain focused on making investments in R&D throughout fiscal 2026 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.1% of revenue in the second quarter, and we remain focused on making investments in this area of the business in fiscal 2026 to drive continued growth. On a non-GAAP basis, G&A costs were 9% of revenue in the second quarter versus 9.8% in the same period last year, representing 80 basis points of leverage. Briefly covering our GAAP results for Q2, gross profit was $282.1 million, operating income was $70.4 million, and net income was $50.2 million. Our adjusted EBITDA for the second quarter was $142.7 million, or a 34.3% margin, and exceeded the top end of our guidance by $7.2 million, resulting in increased margin guidance for fiscal 2026. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q2 was up 140 basis points over Q2 of last year, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability. We remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our team and providing the ability to focus on more strategic work. We're also pleased by our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes, including a 40% increase in cash provided by operating activities in the first six months of fiscal 2026, 26% growth in free cash flow over the last twelve months versus the comparative period, and a free cash flow margin of nearly 24% over the last twelve months as we execute against our recently increased financial targets. Additionally, given the confidence we have in our business and our strong cash flows, in Q2, we repurchased roughly 690,000 shares of our common stock at an average price of $144.86 per share, approximately $100 million in aggregate repurchases in the quarter. Fiscal year to date, we have repurchased over 1.8 million shares of common stock at an average price of $162.66 per share, approximately $300 million in aggregate repurchases, helping to drive our diluted shares outstanding down more than 2% as of the end of Q2. As a reminder, we have approximately $400 million remaining under our share repurchase program, which we anticipate continuing to opportunistically execute against going forward. In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis. Looking at the balance sheet, we ended the quarter with cash and cash equivalents of $162.5 million and $81.3 million in debt outstanding related to the funding of the Airbase acquisition. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $3.2 billion in Q2. We're estimating the average daily balance will be approximately $3.7 billion in Q3, with an average annual yield of approximately 320 basis points, representing approximately $29.5 million of interest income in Q3. On a full-year basis, we are estimating the average daily balance will be approximately $3.3 billion with an average yield of approximately 340 basis points, representing approximately $112 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date, with an additional 25 basis point rate cut assumed in each of March and April of this fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal 2026. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal 2026 recurring and other revenue guidance by $12.5 million and total revenue guidance by $14.5 million, which includes the full impact of our guidance being Q2 and a further increase in back half fiscal 2026 revenue guidance. Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance for fiscal 2026. With that said, for the third quarter of 2026, recurring and other revenue is expected to be in the range of $457.5 million to $462.5 million, or approximately 9% to 10% growth over Q3 2025 recurring and other revenue. Total revenue is expected to be in the range of $487 million to $492 million, or approximately 7% to 8% growth over third quarter fiscal 2025 total revenue. Adjusted EBITDA is expected to be in the range of $200 million to $204 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $170.5 million to $174.5 million. For fiscal 2026, we are increasing all aspects of our guidance as follows: Recurring and other revenue guidance is now expected to be in the range of $1.62 billion to $1.63 billion, or approximately 10% to 11% growth over fiscal 2025 recurring and other revenue. Total revenue guidance is now expected to be in the range of $1.732 billion to $1.742 billion, or approximately 9% growth over fiscal 2025. Adjusted EBITDA is expected to be in the range of $622.5 million to $630.5 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $510.5 million to $518.5 million. In conclusion, we are pleased with our Q2 results and the momentum we have across our sales and operations teams as we execute the busiest time of the year. The strong results we are seeing across HCM, finance, and IT solutions, combined with continuing to drive competitive differentiation and our AI strategy, give us confidence in our ability to drive sustainable, durable revenue growth and improve leverage across the business to achieve our updated long-term financial targets over the coming years. Operator, we're now ready for questions. Operator: If your question has been answered and you wish to remove yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Daniel Jester with BMO Capital Markets. Your line is open. Daniel Jester: I guess we'll start with the selling environment. I think the commentary was that it was pretty strong. I guess maybe double-click on that if you could, please. Maybe compare and contrast how you exited this year compared to last. And any pockets of strength or weaknesses you'd call out? Thanks. Toby Williams: Hey, Dan. Yeah. I'll start off. I mean, I think overall, I would characterize the selling season as strong this year. I think the go-to-market team performed really well, excuse me, across sales and marketing in our channel teams. And I think we saw a very stable demand environment. So I think similar commentary on the demand environment from last quarter carried through to this quarter. And I think our performance from a sales perspective through selling season was strong, and I think that's a good part of what allowed us to turn in the really strong results we did from a revenue growth and profitability perspective. And I think that's a lot of what carried into the raise of guidance for the rest of the year. I think on a relative basis to last year, to the other part of your question, I would characterize it as consistent and stable. And I think the performance of the team was really strong. So I think we were overall pretty happy with it. Daniel Jester: Great. Thanks. And then maybe just a follow-up on maybe sort of a bit of an obligatory AI question. You know, I think you've commented a lot about how Paylocity is building tools and integrating AI into the platform. I guess, how are you seeing your customers engage with AI, and are you seeing any trends about maybe building some of this functionality business themselves? Appreciate the context, guys. Thank you much. Steven Beauchamp: Yeah. I think I'll grab that one, Steve, here. What I would say is we have really been focused on embedding AI across the suite. You know, our value proposition is being the most modern platform. As we embed AI, the two use cases that we called out in the script, you know, policies and procedures, and allowing clients to be able to upload their own docs and answer employees' questions is certainly one of the big use cases that we've seen. We've seen a lot of interactions with our AI assistant with how do I do something? How do I accomplish this? Asking for data in the application. And so I think from our perspective, we will continue to build templated agents for our customers to be able to use. We'll give them some flexibility so that they can customize those for their use cases. And what we're seeing is really improved ease of use from our customer feedback. We're seeing more engagement in the platform, some more utilization. And then finally, it's really saving our customers time. Daniel Jester: Great. Thank you so much. Operator: One moment for our next question. Our next question comes from Brad Reback with Stifel. Your line is open. Brad Reback: Great. Steve, so on that last point, saving your customers' time, that's great. Can you talk about how you're translating that into revenue for Paylocity? Steven Beauchamp: Yeah. So I think, as you know, Brad, one of the things about being in payroll and HR is we have the data in terms of being the system of record. So we know in real time when anything happens, whether somebody's getting a new job, new supervisor, new hires, terms, and many times, our customers then want to use those triggering events via our APIs and marketplace to be able to connect to other systems. I think as the client experience becomes more developed, we will see more, and we've already started seeing significantly more usage of our APIs tying our data to other really key workflows within an organization. That's number one. Number two is we're seeing people put more data and drive more utilization of our platform. So from a monetization perspective, it has an opportunity for us to sell more of our modules back to our clients. We're seeing more value. And they're able to customize more of that experience so that it's purpose-built to really deliver on their individual use cases. So I think from a client perspective, it's less about us driving them away from the personal interaction that we have. As you also know, our clients call us very frequently. They're looking for advice. You know, that relationship is really part of our strong retention, so we don't want to walk away from that. But we really want to be able to drive an easier-to-use experience and drive more utilization. When we do that, we get larger upsell. On top of the opportunity in marketplace and APIs. That's really where we see the near-term opportunity. Brad Reback: And on that upsell and the retention, is it still too early to have good metrics around new customers with high AI engagement spending 10 or 15% more than peers or retaining two or three points better? Steven Beauchamp: I think it's a little early. I think you gotta go back to our average-sized customer, which is about 150 employees. And so this does happen on a gradual basis. And we have, though, seen in the past as we've really increased the number of modules that the customers who are using more of our modules typically have a stronger retention, typically are more satisfied, and we see AI as another tool to be able to drive that same outcome. Brad Reback: Awesome. Thank you very much. Operator: One moment for our next question. Our next question comes from Terry Tillman with Truist Securities. Your line is open. Terry Tillman: Yes. Hey, good afternoon. Nice job on the quarter. I've decided to abstain from asking an AI question. I was gonna ask two questions on kind of evolving products, which I'm very intrigued by. First, just an update on Airbase and just your play in the office of CFO and finance. And then secondly, I also wanted to ask what's developing and what you can share around your ability to help in the area of IT operations? Thank you. Toby Williams: Hey, Terry. It's Toby. I'll start and then, Steve, obviously, jump in. I mean, I think first on the Airbase update and all things in Paylocity for Finance, I think we continue to be pleased with the momentum we have there. We closed that acquisition last October, so we're just over a year or so into it. And I think we're really pleased with what we've seen so far. We delivered version one of the integrated product set in July, and I think that was an important factor from a differentiation standpoint as we came through selling season. So all across the spend management suite now is Paylocity for Finance. I think we are continuing to see lift there. We're continuing to get positive feedback from a client and prospect standpoint, and we're seeing, I think, a positive path as it relates to the attach and penetration and adoption and usage of those solutions. And then I would say we're in early days as it relates to all things IT-oriented, but I think we continue to see positive progress there from an attach standpoint and from a use case perspective there. And that's another one where, you know, I think you see Steve's comment in relation to the last question was very focused on our ability as the system of record to leverage the data that we have in our system to create automation against some really common use cases, whether that's onboarding or offboarding or system access or device management. I mean, I think all those things are triggered off of changes in the data that we see from a status perspective with respect to employees. And, you know, we continue to see a significant opportunity there to help create value for our clients from that product area. Terry Tillman: That's great. Maybe just a quick follow-up on the cash flow, which was well above what we were looking for. Was there, and this maybe this is for Ryan, but anything timing there that may not reoccur in the second half of the year? Just anything more you can share on just the strong outperformance and comparing it to the second half? Ryan Glenn: Yeah. Hey, Terry. This is Ryan. No. I think, yeah, obviously, you can see cash flow movement quarter to quarter. But when we look at it on an LTM basis, we're at nearly 24% free cash flow margin, up 26%. So we continue to execute against the same playbook that we've had for a number of years, which is driving leverage both in gross margin and G&A. And then continue to invest both in R&D and in sales and marketing to drive future growth. So nothing that I would call out timing-wise. Obviously, there is some benefit from the recent tax legislation changes, but we are seeing a strong majority of that leverage and free cash flow coming from natural scale across the business. Terry Tillman: Okay. Thanks. Operator: One moment for our next question. Our next question comes from Mark Marcon with Robert W. Baird. Your line is open. Mark Marcon: Good afternoon and thanks for taking my question. Wondering if you could talk just a little bit more about the selling environment. Obviously, the stocks have all gotten hit based on concerns around the impact of AI. Can you just talk a little bit about, like, from your client's perspective, the average client size is 150. I imagine they're not thinking anything close to about using, you know, any sort of new tools. But are you seeing any sort of hesitation in terms of slowing down either at the core part of the market or even at the enterprise side? And how would you judge your Salesforce productivity, you know, given some of the noise that's out there? Toby Williams: Yeah. So I think there's a few questions in that, Mark. I guess I would summarize it closer to where I started, which was selling season was strong. I think the team performed really well. I think we continue to be on a fairly consistent pace from a client growth perspective as we sit here halfway through the year, pretty consistent with last year. You know, and I think our ability to perform with the level of revenue growth that we showed in Q2 and our ability to raise the remainder of the year comes from the strong performance that we saw from new sales in the first half of the year. And I think the confidence that we have in our ability to perform across all segments throughout quarters three and four. And so I think, you know, you're right with an average client size around 150 employees, and Steve mentioned this a minute ago, I mean, I think we've seen just a relative level of stability in our client base, in the demand environment, in our team's ability to sell and bring on new units, and, you know, I think absent all of the concern around AI or any of that conversation, particularly in the last forty-eight hours. I mean, I think what we see is the continued really strong execution from both a sales and ops perspective as we've come through selling season performing really well. Driving, you know, 11 plus percent recurring revenue growth in the quarter. And I think performing really well from a retention perspective as well. I mean, our ops team performed very well in the context of getting through year-end and getting through January. So, I mean, overall, absent any other noise in the market, I think we sit here halfway through the year having put in a really strong performance in Q1 and Q2 with a lot of confidence around our ability to be successful in Q3 and Q4. Steven Beauchamp: I would just add one thing, Mark, just add one thing to that is, and I know you've been in this industry a long time, there's a lot more conversation from prospects around our service levels, our ability to meet those customer needs, and not necessarily replace all the interaction from an AI perspective. Certainly, when we automate things for them, they love that. When we make it easier for them, that's great. And they want to make sure that, you know, we're really pursuing the right modern technology. But our service organization, as Toby called out, is a big reason why it was a driver. So unlike other software spaces, we've got a pretty big moat around the service component of what we do, whether that's implementation or ongoing service or taxes. And that is actually a much bigger conversation still today with prospects than AI, which is a conversation and is a growing conversation, but still a smaller part of the overall value proposition. Mark Marcon: That's great. And then I was wondering if we could flip the AI in terms of advantages. And wondering if you can just talk a little bit about, like, how much more efficient I know it's early days, you know, Claude just came out a little while ago. But if we think about, like, when we think about your R&D efforts, are there any early thoughts there? And then in addition to that, with all the fears around AI, you know, are from a capital allocation perspective, are there some opportunities for M&A in terms of valuations becoming more reasonable that you're starting to explore to a greater degree? Thank you. Toby Williams: Yeah. On the first part, Mark, I mean, I guess I hear that from you as a question just around the efficiencies that we're able to drive in the business from the use of automation or AI. In areas like engineering. And we've talked about this a little bit before, but I guess I would start by saying, you know, going back to Ryan's comments with free cash flow up 26%, I mean, what you're seeing across the business is our ability to drive a level of continued productivity and efficiency increases across the business, and you see it show up in the free cash flow. And that comes from, you know, all kinds of different places. One of them is driving automation across the business, and part of that is utilizing AI in areas like engineering. But we're also using that from a broader operations perspective to help create a better, faster, more engaged client experience that is still driven by our service team. And so I think you know, that's part of the story that you're seeing play out. As it relates to our profitability increases in both adjusted EBITDA and free cash flow. So I think that's a significant part of the story. Mark Marcon: And M&A? Toby Williams: Yeah. From a capital allocation standpoint, I mean, I think we have always been focused on looking for areas in M&A that would be able to drive our product roadmap faster, further, speed time to market with critical solutions that we think are really strategic. And I think that, you know, that opportunity continues to exist. We continue to focus on it. But I think our threshold for what makes sense for us has not changed. I mean, I think you see valuations sort of ebb and flow in any given quarter from a target perspective. But I think our threshold for being able to find solutions that make sense for our platform that will add value to clients and that we tightly integrate, those are still the things that we're focused on. And if we can find things that will add value and that will speed our time to market, then those are the things that we'll continue to be interested in. Mark Marcon: Great. Thank you. Operator: One moment for our next question. Our next question comes from Sitikantha Panigrahi with Mizuho. Your line is open. Sitikantha Panigrahi: Great. Thanks for taking my question. I just wanted to ask about employment levels. First, what did you see this quarter, I mean, in the December quarter? Employment levels, and what's baked into your guidance? Ryan Glenn: Hey, Citi. It's Ryan. Good to hear from you. A lot of stability in employment levels, very similar to what we called out in the overall demand environment. So we continue to see year-over-year workforce levels up modestly in Q2. Spot on to what we saw in the first quarter. So continue to watch and see those numbers on a weekly basis, but have seen a lot of stability and no real change. And that extends into January as well. We continue to have an assumption in the back half of the year of flat employment levels year over year, which would be a slight degradation from what we've seen in the first half of the year. Sitikantha Panigrahi: Okay. That's great. And then, at a broader high-level question on employment, we keep hearing from, you know, people around saying that how AI is going to disrupt in terms of employment. More layoffs coming. How do you what what's your view on that? How exposed or not exposed is Paylocity? Toby Williams: Well, I think just to give you a couple of thoughts. I mean, I think, you know, we don't have any specific vertical concentration. And I don't think we have any particular exposure given any concern that anybody might have about a particular vertical being disrupted. And I then go back to, you know, Ryan's commentary that he just shared around us seeing things be relatively stable, you know, despite any of the commentary that's out in the market. I mean, we've seen stability, and I think if you go back to the commentary most recently from any of the large providers, you'll hear the same thing. So, I mean, I think what we see in real-time is stability across the employees in the platform in our business, and I think that's what you hear from others as well. Sitikantha Panigrahi: Great. Thanks for the color. Operator: One moment for our next question. Our next question comes from Scott Berg with Needham and Company. Your line is open. Scott Berg: Hi, everyone. Nice quarter, and thanks for taking my questions. I have two non-AI questions. I hope you're ready for them. The first one, I guess, is any commentary on win rates since you've had Paylocity for finance and asset management, IT asset management out in the market? I heard someone in the ecosystem tell me, you know, that they're seeing some at least chatter around it, that people have some interest in it and just don't know. And early, obviously, but didn't know if you're seeing any, you know, changes to your win rates based on having the availability of those modules. Toby Williams: Well, I think we've been going back to my prior comments. I mean, I think throughout the first half of the fiscal year, we've been really happy with how we performed overall from a go-to-market standpoint. I think we've seen a relative level of consistency in win rates. I do think, though, that there's a few things in the market, Scott, that are helping. It's just sometimes difficult to have perfect attribution as to, you know, what exactly those things are contributing and how much, but I think they're all positive. So, you know, I think the differentiation that we're able to create through things like Paylocity for finance, I think that is in the helpful column. And I also think it from an incremental ARPU standpoint. I would say the same thing with respect to our IT solutions. I think it's helpful from a differentiation perspective. Also helpful for ARPU. In pretty early days for each of those. And then I think the other thing that we've seen momentum on is our relationship with brokers, which has always been strong, but I think we continue to see momentum with the broker channel. And so I think all of those things are positive in addition to just the overall value prop of the platform. And the execution from our teams, I think, was really strong in the quarter. So there's a lot of positive there against a fairly stable demand environment. It's tough sometimes to create perfect attribution on those things. But I think that's the overall picture. Scott Berg: Fair enough. Thanks, Toby. I guess from a follow-up perspective, now that we've kind of seen what the impact of the tax law changes were on the business in the last quarter, which I assume had some maybe catch-up for the year a little bit, was there any debate or any conversation around maybe taking some of those cash flows and trying to invest that in other aspects of the business versus just, you know, harvesting them? I know it's accounting treatment and timing and etcetera, but you guys already generate plenty of cash, so my guess is, you know, probably there wasn't a lot of thought there. But I didn't know if there's anything that you thought of that you could maybe, you know, spend on that would be worthwhile in the short term. Toby Williams: Yeah. I mean, I think, you know, just echoing Ryan's commentary with free cash flow being up 26%. I mean, I think we're really happy with how we've been performing in driving that type of free cash flow leverage. I don't think, though, that that is coming at the expense of the things that we think we can and should invest in across the business to create better client experiences and to drive future growth. So, you know, I think we're really happy with what we've been able to both drive down into free cash flow, but while also investing in the things that we need to and want to and think that there's great opportunity around the course of the full year. And I think that includes, you know, a lot of things we talk about, new product development focus in our product and tech teams, a lot of things within the existing core of the solution. So I think overall, you know, pretty excited about the investments that we're making across the business not coming at the expense of also driving free cash flow. Scott Berg: Excellent. Thanks for taking my questions. Toby Williams: Yep. Operator: One moment for our next question. Our next question comes from Samad Samana with Jefferies. Your line is open. Samad Samana: Hi, good evening, and thanks for taking my questions. I guess one that I wanted to ask about is if you think about customers in a more muted hiring environment, presumably, they're hiring less and or there's less people to hire. What are they focused on? Like, where are they either redirecting within the HR tech budget and or are they redirecting that HR tech budget somewhere else? And then I have a follow-up question. Toby Williams: Yeah. I mean, I think we've seen going back to Ryan's commentary. I think we've seen a relative level of stability across the market from an employees on the platform perspective. And I think the clients that we're serving today and that we're talking to from a prospect perspective are focused on, again, going back to the fact that we have an average client size around 150 employees, they find significant value in a single vendor providing a broad swath of solutions on the platform. And echoing some of Steve's comments earlier, they derive a lot of value by the actual service that we're offering, particularly as we come through this time of year. So December is certainly a high point from a client service interaction perspective. And you have a huge amount of volume coming through the system in January with new business coming out of the platform. So I think I don't think there's a significant shift in terms of the value prop that clients in the core of our market are looking for. They're looking for a partner they can trust. They're looking for breadth of solution and a platform that will serve their needs and is purpose-built for their use cases. And I think we're continuing to deliver all of those things and focused on driving a level of automation and productivity and efficiency and usability to them that I think they value more and more by the day. So I think that's probably how I would characterize the overall state of engagement with clients. Samad Samana: Understood. And maybe just for follow-up in a different direction. Just as I think about the pricing environment, we've seen, you know, with different software vendors either raising prices, especially over the last couple of years. I know price increases are just a normal course of business, but how are you seeing customer reaction on renewal to either increases and or reduction of discounts? Any change in behavior versus prior renewal cycles, and anything that we can extrapolate from that? Toby Williams: No. I don't think we've seen any change there whatsoever. I mean, it's been very, very stable from that perspective. Although, we typically look at price in the springtime as we did last spring and as we will again this spring, and from the time that we would have looked at it last spring, I don't think we've seen any meaningful change. Samad Samana: Great. Appreciate the time as always. Toby Williams: Thank you. Operator: One moment for our next question. Our next question comes from Brian Peterson with Raymond James. Your line is open. John Messina: Hi. Thanks for taking the question. This is John Messina on for Brian. Maybe a follow-up to Terry Tillman's question earlier. As you look to deepen the penetration of finance and IT over time, what are the key execution milestones we should look for over the next eighteen to twenty-four months to measure success there? And how are sales cycles for those products either landing or expanding versus the traditional HCM modules? And then I have a quick follow-up. Toby Williams: Yeah. I think so taking that apart, I mean, I think when we're talking about the addition of those solutions to new clients that are coming out of the platform, the sales cycles are right in line with what we would have typically seen from our average client size. I mean, that could be in the, you know, thirty to forty-five day window for the heart of our market, and go-live times in the, you know, four to six-week time frame or something in that ZIP code. So there's no meaningful deviation from those products when they're included in new deals coming onto the platform. And then from a backspace perspective, it depends on what the specific product or company is. But those are usually fairly quick time to value in terms of the client buying those within the client base and being able to get them live on them. And there's, you know, depending on what it is, I mean, a lot of times, there's fairly limited implementation. So, man, I think that's what we've seen so far. Remind me if there's other parts of your question that you want me to hit. John Messina: It was just on measuring success from the outside there on the penetration rate of those products across the base. Toby Williams: Yeah. I mean, I think from a what we've always described as targets for new clients or new products being launched is if you can get into that 10 to 20% penetration rate over a, you know, three, four, five-year period of time, and I don't think it's any different from those. I think we're on track to get to those milestones with each one of those products or product areas. And so I think we're really pleased with the traction that we're seeing in the path that we're on. And I think what you see play out overall over time is our ability to continue to win new deals and continue to grow our client base in a fairly consistent fashion year to year while also continuing to drive ARPU. So I think those are overall the results that we've been really targeted on. John Messina: Okay. Thanks. That really helpful color there. And then with the announced consolidation in the industry, just can you share any impact the consolidation is having on pipeline, win rates, or go-to-market efficiency? The execution seems really good. Just trying to get at what extent you're maybe benefiting as competitors are navigating that M&A activity. Thanks. Toby Williams: Yeah. I mean, again, some of the attribution is challenging probably, but I think overall, the execution, you know, I appreciate your comment. Yeah. I think the execution has been very good across both our sales and ops teams in particular. And I think, you know, we see momentum in the business coming through selling season. And, you know, I think January, the same thing. I mean, we saw momentum with new deals coming out of the platform. So, you know, overall, I think the business has executed well. I think our go-to-market and ops teams have executed well. And, you know, I think overall, that's what we're really focused on to the extent that there's disruption in the market because of, you know, one company or another going through an M&A transaction. And yeah, I think we stand ready to perform for our clients and perform for the prospects that we're bringing on the platform. And I think if we can maintain that focus, if the case that others lose theirs, we'll be well-positioned to take advantage of that. So, you know, overall, just happy with the level of focus and the execution that we had in the quarter and year to date. John Messina: Thank you. Operator: One moment for our next question. Our next question comes from Jared Levine with TD Cowen. Your line is open. Jared Levine: Hello. Thanks. To start here, can you talk about Airbase upsell progress year to date versus expectations and your expectations for the second half of the year here? Toby Williams: Yeah. I think they're right on pace with our expectations. Both through the first half of the fiscal year and from what we can see for the back half. So, I mean, just commented on that a few minutes ago. I think overall, pretty happy with the progress that we've made. Yep. The one of the integrated solution was launched in July, so not all that long ago, but I think we're pretty pleased with what we've seen. And believe that overall, I mean, it's a story that helps with differentiation, believe that that's a meaningful area of differentiation for prospects that we're pitching. And I think it's been part of the reason that we've had such a successful first half of the fiscal year. Jared Levine: Got it. And then, Ryan, for follow-up here, in terms of the adjusted EBITDA guide, you didn't pass through all the 2Q beat here. Anything to call out in terms of timing? Because I think there was a similar dynamic with 1Q. There was some timing call out in terms of not passing through all the beat with the prior print, but just with this print, what would you call out here? Ryan Glenn: Yeah. I mean, I think, you know, as we set up the year on the August earnings call, I think the context we provided is if you look back to the last twenty-four months specific to adjusted EBITDA, we have driven several hundred basis points of leverage. Definitely ahead of where we would have expected to be and have been really happy with those results. And as we guided in August and have now updated in November, and here in February, we have increased margin each quarter. But the bias, I think, is to continue to drive some reinvestment back into the business. So you're seeing us reinvest some of those dollars back into R&D, back into sales and marketing because as you've heard on the call, we feel really good about the progress in each of those teams, and we want to reinvest in upside that will drive continued growth in the back half of this year and on to '27. So I think that's the context and that is how we're operating this year. Obviously, you are seeing outsized performance from a free cash flow standpoint as we've talked about. So that is not something that we have historically guided to, but when you think about free cash flow specifically in the updated target of 25% to 30% free cash flow margin against a TTM number of 24%. We are quickly moving to the high end of the prior range and not too far away from the updated range. So continue to believe, like, we have the ability to balance reinvestment but also continue to take margins up on a multiyear basis. Jared Levine: Great. Thank you. Operator: One moment for our next question. Our next question comes from Raimo Lenschow with Barclays. Your line is open. Sheldon McMeans: Hi. This is Sheldon McMeans on for Raimo. Thanks for taking the question, and I just have one here. The perceived AI risk in the market has been brought up times on the call, and as you mentioned, things are relatively stable for you. However, we're seeing announcements from AI companies that are moving software stock significantly. And to that point, can you speak a little bit more to some of the specific ideas on why AI advancements are not as big of a risk for your company compared to what, you know, maybe some of the recent price action may suggest? And you talked about the moat on your service org and, you know, are there a couple of other areas you could point out to? For example, the banking relationships and payment rails are not you can't vibe code something like that. Payroll companies need a certain scale on the from a balance sheet perspective on the float side or that simply, you know, just throwing a bunch of expensive GPUs at a payroll run just isn't efficient and doesn't make sense. And, yeah, as I mentioned, you touched upon this already, but I think we need some more handholding here. Thank you. Steven Beauchamp: Sure. So I think you hit some of the points. I think let me start with I think AI can certainly improve our client experience in a number of ways, make the software easier to navigate, make the data more accessible, provide additional use cases, where we have an opportunity to be able to expand our footprint and drive ARPU. All those things, I think, are opportunities in front of us. I think on the concept that some company is going to quickly kind of build a replacement product, there's challenges to that. And so you mentioned one. Is a lot of interaction with the customer. And so they call us. We email interaction. There's projects that we do on their behalf. Implementation is largely a handheld process where we lose money on implementation, right, to be able to bring the customer on board, which is well worth it when we think of how long we retain them for. So the service is absolutely an element. The other thing is there we interface with thousands of agencies on the back end. From a tax filing perspective. So local agencies, state, federal agencies, those formats change. The rules change. You're constantly changing your engine. Those are all deterministic calculations. They're not something that you can do and be probably right, and they require a fair amount of investment in testing. And so another example of where AI, at least today, is really not necessarily suited to be able to solve that problem most efficiently. And then you even got into a little bit of the capital structure behind it. To do that, you know, with an AI model and to be able to make the capital investments, it's much easier to be able to have deterministic algorithms to get you to that answer. And so as we think of this in a layered approach, the service capability that we have, the fact that, you know, we've got the data from a system of record perspective that allows us to continually expand our use cases, AI making those even better. And then the fact that we're moving, you know, billions of dollars through banks and to thousands of tax agencies across the country. We believe all are natural moats that, you know, we have and certainly many of our competitors have. And, again, I'll just end with, we see AI as a big opportunity. We certainly see an opportunity to be able to drive utilization, make our products easier to use, even integrate broader use cases into other applications. And so we're excited about that opportunity. And we certainly understand the nature of the question, but I think there's more complexity behind the scenes than in our business. Sheldon McMeans: Very clear. Thank you. Operator: One moment for our next question. Our next question comes from Patrick Walravens with Citizens. Your line is open. Austin Cole: This is Austin Cole on for Pat. A lot of questions here have been asked. I want to ask two on the new offerings in HCM, maybe, rewards and recognitions, and some of the other offerings there. What was kind of the upsell motion, how has that performed recently? And what's the opportunity around some of those new offerings? Steven Beauchamp: Yeah. I think Toby summarized it, I think, best. If you look at our historical formula and average revenue per customer growth versus unit growth, you know, those have moved a little bit year by year. But we've been fairly consistent on a year-over-year basis where unit growth is. And so you can see we're getting broader product adoption across the board that's really driving that incremental difference in terms of, you know, our unit growth versus our overall revenue growth. And I would not call out a singular product. I think to be able to move the needle at our size and scale, you know, our goal, you know, we want to get to 10 or 20% penetration for early products, things like reward and recognition. Then we want to move that to 30-40%. And then you've got products in our portfolio where we're seeing 70-80% adoption. And for those products, we think about what's the opportunity to be able to potentially add, you know, plus offerings or get more value from product enhancements that allow us to be able to continue to increase that average revenue per customer from those modules. So we see a ton of opportunity within the HCM category. Those continue to be probably because they're generally bigger and been around longer, the bigger driver today. And then you've got earlier in that product portfolio, things like IT and finance. Still being relatively small, but off to a really good start. And so I think we're really happy with seeing our product strategy resonate in the market and see the adoption across our client base. Austin Cole: Great. And then just as a quick follow-up, there was a comment made about the AI assistant monthly usage increasing 100% quarter over quarter. How should we think about that metric and maybe how it compares to your guys' expectations and that going forward and as a catalyst for some of that upsell as well? Steven Beauchamp: Yeah. So, you know, our strategy is to continue to embed AI across the suite, really adding additional use cases, increasing flexibility, and making the assistant, you know, more powerful over time. So, certainly, part of that utilization is the features that we've added. We talked about, you know, the policies and procedures. We talked about third-party content with the best department of labor, IRS, or state websites. And really helping our clients not only answer their questions but in many cases, save them time by answering a bunch of their employee questions. And so that's been really positive. We see an opportunity to continue investing in AI, adding additional use cases, and really driving agents' experiences that are going to really embed multistep processes into single clicks that's going to be able to drive insights and anticipate what their next steps are going to be. All of which is part of our goal, which is to be able to save our customers time so that they can, you know, really spend time with people, versus spend time on administrative tasks. And so, we're really, really happy with where we are, how that's really resonated with our customers, and we would anticipate that, you know, that single kind of text box interaction that you see in AI assistant is going to allow customers to do an increasing number of things over time. Austin Cole: Great. Thank you. Operator: One moment for our next question. Our next question comes from Jason Celino with KeyBanc Capital Markets. Your line is open. Zane Meehan: Great. Thanks for taking my questions. This is Zane Meehan on for Jason Celino. Just two quick ones for me. One of your peers noted that they had been seeing, you know, slightly smaller lands for just the initial lands for new customers, maybe due to, you know, macro or increased budget scrutiny. Is that anything you saw in the quarter? Anything new there? Toby Williams: No. We haven't seen that at all. I think we've seen a huge amount of consistency from a go-to-market standpoint. And new business being brought in during selling season and really happy with the performance that we've seen there. And I wouldn't call out any difference that we've seen from that standpoint. Zane Meehan: Okay. Great. Good to hear. And secondly, I believe last year, second quarter, you noted seeing a little bit of pull forward. Did that dynamic reoccur this quarter? Is there anything that might have pushed or pulled out of the quarter? Toby Williams: No. I don't think we saw anything this quarter. And what we mentioned last year was extraordinarily small, which we noted at the time. Zane Meehan: Great. Appreciate it. Thank you. Operator: One moment for our next question. Our next question comes from Steve Enders with Citi. Your line is open. Steve Enders: Alright. Great. Thanks for taking the questions here. I guess just to start, sounds like you had a good strong selling season. I guess, are you seeing kind of in the forward pipeline? And maybe how are kind of the new appointment requests or kind of the other forward-leading indicators kind of looking for pipeline development? Toby Williams: Yeah. I think they've been really stable. So, I mean, I think, you know, going back to prior comments, I mean, really, really happy with the team's execution from a go-to-market sales perspective in Q1, and through selling season. I think we've seen the demand environment maintain as stable. And, you know, there's nothing that I would really call out in terms of changes there. And I think that's also so I think that that is a big part of what allowed us to overperform relative to expectations for both Q2 and the first half. And I think that's also what gives us the confidence to carry that through from a raise perspective on the year. And, you know, I think to your question on activity and pipelining, I mean, I think that's that that is all our confidence in that carrying forward from selling season is also what gives us the ability to take the year up. So I think we feel pretty good in that respect. Steve Enders: Okay. Great. And then, just on the broker channel side of it, I guess, have you seen kind of any changes in terms of the, you know, the number of opportunities or maybe the share of opportunities that you've been able to capture within that channel? And then how do the new solutions and capabilities that you're releasing here to the broker side impact how you're thinking about that kind of go-forward opportunity and, I guess, how it could change the number of opportunities coming from the brokers? Toby Williams: Yeah. I mean, I think we've always had a great relationship from a broker standpoint with that channel. It's consistently been more than 25% of our new business referred from that channel, and that continued through the course of I think we've had the first half of the year and through selling season in Q2. Just, you know, directionally, I think we've had great momentum over the last year with the brokers in particular, and I think there's been some disruption from a market perspective with certain other competitors that have played in that space before. But I think we've taken we've gotten the benefit of some of that. I think we have great momentum. And, you know, I think part of that is our execution and focus and value-added delivery to that channel, and part of that is also focused there from a product perspective. So benefit guided setup is a product that we've launched, and I think that that is certainly one that accrues to the benefit of brokers being able to give more help and service to their clients. So I think we continue to focus on that channel in every respect, whether it's from a go-to-market standpoint, from a service standpoint, being able to partner with them and service their clients, and from a product perspective, launching new products that are not just useful to clients, but also helpful to the brokers. Steve Enders: Okay. Awesome. Thanks for taking the questions here. Toby Williams: Yep. Operator: One moment for our next question. Our next question comes from Matt Van Vliet with Cantor. Your line is open. Matt Van Vliet: Yes, good afternoon. Thanks for taking the question. Just looking towards the rest of the year and even into fiscal 2027, curious where you feel you are from a sales capacity and overall market coverage, especially with the addition of Paylocity for finance and IT there and kind of how you think you can continue to meet the demand in the market? Toby Williams: Yeah. I think overall, we feel pretty good about our coverage. I mean, I think as we've said for probably the last eighteen months or so, we've been really focused on making sure that we have that we have adequate coverage across the opportunity set, but also that we're continuing to focus on driving productivity across those teams. And I think we're really happy with what we've seen so far this fiscal year from a sales productivity standpoint. And I think that's, you know, also a big part of what helped us perform well in Q2 and through selling season, and that's also a big part of, I think, what gives us confidence to take the year up for, you know, quarters three and four as we're looking ahead. I feel pretty good with where we sit today in terms of go-to-market investment and the productivity that we're seeing from those teams. Matt Van Vliet: And then a quick follow-up on the broker channel. You've obviously seen better momentum there and you highlighted some disruption from competitors. But in terms of resource allocation, you know, is there still more to be done in terms of total broker coverage, or is it now just, you know, kind of leaning into those that have greater, I guess, success of selling through Paylocity and how you do that, you know, kind of how you leverage that relationship there. And within that, have win rates gone up at all given some of that disruption in the market? Toby Williams: Well, I think from an execution standpoint, it's all of the above. I mean, it's always been an important part of our selling motion. It's and it's an important part of the selling motion in the field with our reps. And building those relationships at the ground level, also managing them from a corporate perspective. But a lot of that work is in a lot of the partnership and a lot of that success is driven in the field with and through our reps. And I think it is just it is continuing to drive that focus from an execution standpoint. It's continuing to invest in the things that the brokers find the most value in. That's in part the relationship in the field. That is in part the service that we provide to our mutual clients, and the clients they refer to us. And it's in part being a good partner to them as clients go through implementation and service. And it's continuing to also drive the delivery of a platform and a solution set, including new product launches like benefit guided setup that add value to them and give them the ability to add more value to their clients. So it is it's all of the above. Matt Van Vliet: Alright. Great. Thank you. Operator: One moment for our next question. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is open. Jacob Smith: Hey, thanks for taking my question. Retention has been consistently around 92% over the past couple of years. As you look at the elements from cross-selling Paylocity for finance, expanding IT offerings, getting greater AI adoption across the platform, how do you see that retention rate evolving over the next two years? Is there a structural reason it should move higher as customers become more embedded across HCM finance and IT, or are there any offsetting factors we should be mindful of? And maybe related to that too, are you seeing any early evidence that customers who adopt multiple modules have different churn characteristics than single product customers? Thanks. Toby Williams: Yeah. Our retention rate has been north of 92% for over a decade. And I think, you know, we are very, very happy with being able to maintain that level of client retention. You know, huge shout out to our operations and service teams that work really hard to maintain those relationships with our clients and partner with them. And particularly coming through this time of year when December, January is the biggest two months that we have for client engagement and client interaction. So I think overall, our belief has been and has played out that the more value that you can add to clients, whether that's through the adoption of a broader part of the platform, and coupled with our service model and our service teams, you know, that's the recipe for success. And I think that's a large part of the reason we've been able to maintain those retention rates for such a long period of time. And I think that's, you know, that is a reflection of the value that's added from an overall platform and service perspective. So, you know, really pleased with our ability to maintain those levels over a long period of time. Jacob Smith: Great. Thanks. Operator: And I'm not showing any further questions at this time. I turn the call back to management for any further remarks. Toby Williams: Well, thank you very much. I really appreciate everybody joining the call and your interest in Paylocity. And I want to send a special shout out to all of our teams and all of our employees helping our clients through year-end and onboarding in January. Great job. Very much appreciate all the effort, and I hope everybody has a great night. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Desiree: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bloom Energy Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the conference over to Michael Tierney, Vice President of Investor Relations. You may begin. Thank you, and good afternoon, everybody. Michael Tierney: Thank you for joining us for Bloom Energy's fourth quarter and full year 2025 earnings call. To supplement this conference call, we furnished our fourth quarter and full year 2025 earnings press release with the SEC on Form 8-Ks and have posted along with supplemental financial information that we will reference throughout this call to our investor relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events, and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity, and full year outlook for 2026. These statements are predictions based upon our expectations, estimates, and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties. As discussed in detail in our documents filed with the SEC, including our most recently filed forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our fourth quarter and full year 2025 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with US generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our fourth quarter and full year 2025 earnings press release available on our Investor Relations website. Joining me on the call today are KR Sridhar, founder, chairman, and chief executive officer and Maciej Kurzymski, our acting principal financial officer and also our principal accounting officer. KR will begin with an overview of our progress, and then Maciej will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I now turn the call over to KR. Good afternoon, and thank you for joining us today. Bloom is rapidly becoming the standard for on-site power. As evidenced by our excellent fourth quarter capping our best year yet. KR Sridhar: We delivered record revenue, gross margin, and operating margin for the year. Our product backlog increased 140% year over year to about $6 billion. Our service business has been profitable for eight quarters in a row, and in the fourth quarter, we achieved 20% gross margin in service. With around $14 billion of service backlog and a growing product backlog that is 100% attached to service, Bloom is well positioned for durable growth in service revenue and profits in the years ahead. Our growth has been fueled by seismic changes in customer attitude towards power. Bring your own power has become the mantra for data centers and power-hungry factories. On-site power has moved from being a decision of last resort to a vital business necessity. This shift has led large power users to seek Bloom to fulfill their needs. Our demand from data center and commercial and industrial or C&I customers, is secular and growing. In 2026 we will further invest in our commercial team to capitalize on growing sales opportunity. AI is a huge tailwind for the power industry and a big catalyst for Bloom's growth. The backlog we reported today includes half a dozen hyperscale and neo cloud end customers, compared to just one a year ago. Bloom has a master contract structure to enable these customers to keep returning to us for repeat orders, much as we have expanded with our C&I customers. And we're also experiencing surging demand in our C&I business. C&I backlog grew over 135% year over year. And it consists of several verticals: telecom, manufacturing, logistics, retail, healthcare, and education. Digitization, automation, electrification, and reshoring are driving C&I customers to seek on-site power. And our C&I sales pipeline is stronger than ever. The geographic mix of our US backlog is noteworthy. Two years ago, over 80% of our US backlog was composed of installations in California and the Northeast, traditionally the high cost of power states. But this year, over 80% of our backlog comes from other states with lower power costs. This geographic shift highlights two important dynamics at play. First, companies are locating factories and data centers in states where they can quickly secure reliable and affordable power, either from the grid or on-site. The states where we are growing fastest have robust natural gas infrastructure and favorable regulatory and policy frameworks for on-site power generation. Second, in these states with lower power costs, Bloom is cost competitive. Our value proposition—fast time to power, high reliability, and lower emissions—strongly resonates for our customers. In short, our customer base is diversified with numerous customers in every key sector including AI. We are rapidly becoming the standard for on-site power. Given our healthy backlog, and our robust funnel, I'm sure your questions will now shift from why we are expanding manufacturing capacity to when we will expand even more. Let me address that with some background. At the core, Bloom is a technology innovator that rapidly delivers cost-competitive platform products at meaningful scale to satisfy customers' current and future needs. We are building solid-state digital power for the digital age. We are not an industrial era energy company. Bloom's manufacturing IP and supply chain diversity enable us to scale without facing the multiyear delivery backlogs plaguing traditional suppliers. Our ability to scale also comes with a high ROI and low-risk profile. Capacity expansion requires a significantly lower upfront investment—a fraction of what legacy players need. Our return on invested capital for capacity expansion is a few months, not years. This gives us the freedom to expand without predicting market size many years into the future to justify our deployment of capital. The simplicity of our manufacturing process is anything but simple. It represents years of innovation, thought, and intellectual property. We have created a differentiated asset-light approach to manufacturing with the control and execution afforded only by in-house production and complemented with a diversified and global supply chain that flexes to meet market demand much like a tech supplier. So my answer to questions on capacity expansion is simple. The Bloom Energy team reiterates its clear and simple promise to potential customers that have large time-to-power needs. Bloom will not be the bottleneck to your growth. And you can count on us to deliver timely power. We will deliver our power platform faster than you can build your greenfield facilities, be it an AI factory or a C&I facility. We demonstrated this recently by delivering a hyperscale AI factory order in fifty-five days against a ninety-day commitment. And power for a large factory before they could complete construction and commence operation. That is quick time to power. The Bloom Way. In short, we will continue to expand deliberately and with discipline. At a fraction of the cost and time it'll take traditional legacy vendors. And we will offer our customers quickly deployable power that's reliable, clean, and price competitive to meet their present and future needs. Speaking of future needs, let me address 800 volt DC. First, what is 800 volts DC? And why does it matter? The electric grid turbines, and engines were designed for the electricity loads of the twentieth-century factories and process industries. Large amounts of alternating current or AC power delivered at high voltage, 35,000 to 69,000 volts. Contrast that to the needs of the digital age. Computer chips, devices, and other semiconductor equipment. Everything digital in our modern world runs on low voltage, direct current, or DC power. The upcoming AI computer racks will consume almost 100 times more power than traditional CPU computer racks of yesteryears. To reduce copper use, increase efficiency, and enhance compute density, AI racks will be architected to receive 800 volts DC. This switch to 800 volts DC is a necessity and not a choice. And will happen at the compute rack level irrespective of whether power is being supplied from an electric grid or on-site power. 800 volts DC will soon be the data center standard because physics requires it. Any AI data center using grid turbines, or engines will need to install numerous transformers, rectifiers, and power conditioning tools to convert high voltage AC to 800 volts DC. This adds significant cost, reduces reliability, and increases emissions. Bloom, and only Bloom, natively produces 800 volts DC today. No Band-Aids, or adapters needed. Starting now, every Bloom server we ship will be 800 volts DC ready. With a removable adapter that allows customers to deploy in legacy AC environments and migrate to DC on their own timeline. This is a compelling future-proofed offering. We also offer to convert any servers we have shipped in the past to 800 volts DC with simple modifications. Highlighting backward compatibility of this new future. 800 volts DC is one of our many innovative apps that integrates seamlessly on our energy platform much like an app installed to a smartphone. We'll continue to make healthy investments in technology advancements this year. And further strengthen our position as the innovative leader in the power sector. While we invest in the future, we'll continue to reduce costs of our core platform, keeping us on a path of anticipated margin accretion, and further increasing our advantage over traditional solutions. We look forward to a strong 2026 as we continue our journey to become the standard for on-site power. A benchmark for speed, reliability, and customer value in the digital age. Over to Maciej now for a financial overview. I'll join you in a few minutes to answer questions. Maciej Kurzymski: Thank you, KR, and good afternoon, everyone. On today's call, I will discuss results of both the fourth quarter and the full year and also provide our full year 2026 guidance. Let me start by recognizing all of our employees at Bloom. Incredible execution in 2025. By calling out three highlights that the team drove this year. First, we achieved record financial results with several key metrics. I would like to highlight $271.6 million in adjusted EBITDA proving just how much operating leverage there is in the business as we start to scale. Second, we were free cash flow positive for the second consecutive year. And third, our service business achieved approximately 20% non-GAAP gross margin for the first time. None of that would be possible without the fantastic performance and dedication of the entire Bloom team. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter $777.7 million up 35.9% year over year. On-site power continues to accelerate relative to the grid. And Bloom's ability to deploy our energy servers and power upsides in record time continue to highlight Bloom's value proposition and drive revenue growth. Gross margin was 31.9%, lower than the 39.3% gross margin in 2024. Gross margin will continue to fluctuate given the mix of individual projects, in the quarter, but we will continue to manage this movement through product cost reduction efforts and operating expense efficiencies leading to a stronger EBITDA. Our operating income $133 million versus $133.4 million in Q4 last year. Adjusted EBITDA was $146.1 million versus $147.3 million in Q4 2024. Well, EPS was 45¢ versus 43¢ a year ago. Again, these are all non-GAAP results. Our product margins were 37% while our service margins were approximately 20%. This is the first straight quarter of double-digit margins in the service business, and while we will see some volatility in these results on a quarterly basis. We expect to continue to see annual improvement. Our balance sheet is much stronger than a year ago. As we added significant cash for convertible bonds. We ended the quarter with $2.5 billion in total cash on the balance sheet. Our inventory ended the year at $643 million slightly higher than what we expected at the 2025. As we prepare for a strong 2026. Our cash flow from operating activities was an inflow of $113.9 million while CapEx was $57 million. Turning to the full year, revenue was a record $2 billion. Up 37.3% from 2024. Non-GAAP gross margin of 30.3%, was up from 28.7% in 2024. Non-GAAP operating profit of $221 million up $113.4 million from the previous year, on a revenue increase of $550.1 million. Over 20.6% drop through to operating income. Non-GAAP gross profit in our service business was $29.7 million a significant improvement from 2024, as I mentioned earlier. Service was profitable on a non-GAAP basis during every quarter of 2025. For the second consecutive year. Looking forward, we continue to expect to drive improvements in service profitability as we expand our installed base and scale. Before we get to guidance, I wanna talk a bit about our backlog. We see tremendous momentum in commercial engagement across both the data center market as well as C&I. Our product backlog has more than doubled from a year ago, We also have approximately $14 billion in service backlog. We have grown our backlog while maintaining healthy customer mix and do not have oversized concentration to any one customer. This brings us to guidance for 2026. While 2025 was a great year for Bloom, we expect 2026 to accelerate. We expect 2026 revenue to be $3.1 billion to $3.3 billion. Non-GAAP gross margin of approximately 32% and non-GAAP operating income of approximately $125 million to $475 million. We expect capital spending to be $150 million to $200 million. And cash flow from operations to be close to $200 million. We do expect to invest in our R&D roadmap and commercial efforts. As you can see from our operating income projections, we expect to capitalize on the significant operating leverage of the business to drive profit expansion. To conclude, Bloom's disciplined execution is delivering accelerated growth while maintaining sustainable profitability as we scale. We believe that we are rapidly becoming the standard for the on-site power generation market. And I could not be more excited about the opportunity in front of us. Operator, we are now happy to take questions. Thank you. Desiree: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. If you are called upon to ask your question and are listening via speakerphone in your device, pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session, but you please limit to one and one follow-up question only. Thank you. And our first question comes from the line of David Arcaro with Morgan Stanley. Your line is open. David Arcaro: Oh, hi. Thanks so much for taking my questions. I was wondering, could you speak to the follow-on opportunities at existing customers? I was curious how have the initial projects gone, and how seriously are some of those customers now considering follow-on orders with you? KR Sridhar: Hi, David. Nice to hear from you. Yes. Look. That's a very important question you're asking. You build a strong company on the basis of happy customers. We have seen that from the day we started. We can tell you even in our commercial and industrial business, that has been our traditional bread and butter. Over two-thirds of our business year over year comes from repeat customers bringing in multiple repeat orders to us. This is how it operates. Once people get used to Bloom, they love Bloom. Because we keep our promise and we deliver to them. So this is no different right now that the newer sectors and the customers that have lately engaged with us, be it our utility partners, be it a hyperscale end customer, is seeking us out once they've tried us out. And that's strong traction. Oracle would be a very good example. That is, you know, you know, that's happening on a daily basis. We have great conversations with them on so many projects, and we are working with them on many projects. Many prospective projects in the future. David Arcaro: Okay. Excellent. I appreciate that color. And also, some of your thoughts on further manufacturing capacity expansion. I was wondering as you consider the potential for the next one, the next capacity expansion, just curious, what are the milestones or triggers that you'd be watching for and when do you think a decision could potentially be made about that next tranche of additional production capacity? KR Sridhar: Look. For us, making a decision on expanding is like everyday business for us. It's not a major issue for a very simple reason. We are extremely capital light in order for us to expand. We have standing orders with our suppliers of equipment, with our supply chain, with everybody else to ramp up as quickly as we need to. And the return on investment for us is a few months. So, you know, when do we make a decision? It's fairly simple. If we see a large opportunity, on a time to power, and we need to be able to expand our capacity to be able to provide that additional power to a customer. We can ramp up and provide that additional power to that customer before they are ready. Typically, it takes more than a year to stand up a greenfield data center. It takes more than a year to stand up a factory. From permits all the way to full implementation. We can be ready for them before then. So this is a continuous decision we will make going forward. Quarter after quarter. The reason we signaled to you last year that we're going from one to two gigawatts was there was concern in the market. About do we have a pipeline? Do we have an order? We just wanted you to show how much confidence we had. So we signaled that, and now you all understand why we are expanding. But going forward, we'll just continuously keep expanding our capacity, and that's just normal business for us. David Arcaro: Thank you. KR Sridhar: Absolutely. David Arcaro: Okay. Great. Thanks so much. Desiree: Our next question comes from the line of Christopher Dendrinos with RBC Capital Markets. Your line is open. Christopher Dendrinos: Yes. Good evening, and congratulations on the strong quarter and year outlook. I guess to start here, wanted to follow-up on the HVDC architecture and know, I guess, when do you think we could start seeing that solution set deployed and you know, how are those conversations going with customers? It seems like you all will have quite a bit of an advantage here from a cost perspective about needing to deploy all that extra electrical equipment. So I'm just curious how that's shaping up in the pipeline and how you're thinking about that opportunity. Thanks. KR Sridhar: Look. I think thank you for that question. And, you know, thank you, Chris, for your sentiments about the quarter and the year over year. Super excited about the accelerating momentum that we are seeing in our business as we sit here today. And, we just, I think, add even more of a competitive advantage by bringing in the 800 DC. And I think you're all beginning to understand why that's important from whether it's a CapEx perspective, a reliability perspective, use of copper, and lack of availability of copper in transformers. With the alternative option. As well as the operating cost because of efficiency losses you get from switching from extremely high voltage DC or medium voltage DC to the 800 volt DC. All those reasons, you understand. Now we are betting like we bet twenty-five years ago, DC architecture is the right way to go. And you can see where we are today. And we are betting that very quickly this solution is gonna be sought after. And anybody who's not implementing that on day one their data centers now because they don't have the supply chain on their sites ready for implementing that architecture. We'll want to switch our equipment to that DC as soon as they are ready. That's the reason we're gonna ship everything going forward as 800 volt DC. Your question on when will the data centers be ready for it, that's better left to ask them as opposed to us. We are always going to future proof them and be a step ahead. The key to being a great supplier in the digital economy is you're anticipating what their needs are, and you're there ahead of when they need it. And that brings everyone forward with greater speed. We are moving at AI speed on this one. Thank you. Christopher Dendrinos: Thank you. And I guess maybe as a follow-up, just sticking on that point of anticipating customer needs. You know, I guess on the R&D side of things and the technology roadmap, you know, what are what's the next kind of step for Bloom here, and how are you thinking about the evolution of the product? Thanks. KR Sridhar: Look. We are working on a lot of apps right now. But I you know, I'll tell you one that I think we have talked about a little bit here and there in the past. And what I'm super excited about and makes our customers and potential customers who come out to take a look at our operating systems in the lab. Is this rapid load following of the AI load being handled by our systems without requiring batteries. That is huge. And the ability to, you know, islanded mode, operate our systems without needing any backup in terms of backup generators because of our high reliability. But add to that, not needing batteries. To keep up with the wild swings. That the AI load have in terms of power. Is a super important application and every day, we are making that better and more robust. And anytime a potential customer throws an AI load profile at us, our team is able to just seamlessly integrate that into our product and show them why it'll work really well. That's a huge advantage not just in terms of cost savings, in terms of safety of avoiding all those batteries inside a data center and, you know, you know, a complex and the, you know, like, five assets that may know, like, that may create the maintenance issues that may create. On top of that, think about this. As the AI data centers grow, that battery supply chain also becomes a constraint and we are completely eliminating that constraint, not even mitigating it. So super excited about applications like that. There'll be many more to come as time goes by. Stay tuned, and all that I can tell you is we have a lot more ideas of a lot more apps that are gonna reside on the smart platform. Christopher Dendrinos: Okay. Thank you. Desiree: Next question comes from the line of Manav Gupta with UBS. Your line is open. Manav Gupta: Congrats on a very strong quarter. KR, I wanted to ask you about the progress you are making on combined heat and power solutions. Most data centers are using vapor compression chillers powered by electricity. I think your absorption chillers would be using thermal process that is powered from waste heat. At this point, vapor compression chillers are the primary source of cooling, and then absorption chillers are being deployed for some supplemental cooling. I'm trying to understand in a world where electricity is very expensive, and grid power is not available, can absorption chillers actually go at a faster pace than vapor chillers? And if it does, happen, then how does the benefit? Your product already has an 800 volt advantage. Do absorption chillers make it even more competitive? KR Sridhar: Manav, I wouldn't have expected anything other than a strong technical question from you. You know, like, kudos to you on your very good research report on the 800 volts DC. I think it's a must-read for people to understand that. Well done on that. On the absorption chillers, here's the answer. Right? Thus far, vapor compression was being used simply because the energy coming into a data center came in the form of electricity from a wire. The generation facility that made that electricity was made hundreds of miles away somewhere, and therefore, you couldn't fight the heat. The excess heat all the way from that faraway generation capacity to where the data center is. Now with on-site power generation being the go-to option, in a necessity option for data center customers. If we are generating power for them, on-site, in addition to our extremely high electrical efficiency, we have high-quality heat and that heat is allowed to drive a very well-established technology called absorption chilling. To provide cooling. We think we can reduce electricity usage in the data center by at least 20%. Two zero. That's a big number for this huge power-hungry gigawatt class data centers. And what do we do with that? It's chilled water. At somewhere around five degrees Celsius or 40 degrees Fahrenheit. Coming in. We have systems now that we are operating in this mode chilling and cooling our factory. Just to demonstrate to customers. Customers are super interested in this solution right now. A, because it is more efficient, less expensive, and there's an additional environmental benefit coming out of those absorption chillers in that they don't use hydrofluorocarbons. And that is a big issue for global warming. And lastly, by using absorption chillers, where they do on-site power generation, they are not competing with the same supply chain constraints that they have to on the vapor for all those reasons, this is extremely important. So think of this as another app on our platform. And you know, you asked the question of, does it make us more competitive? A smartphone that has more apps and can solve more problems for a customer, is always a more competitive solution. That is what we are quickly becoming out here as you can see. Manav Gupta: Thank you for a very detailed response, and congrats on all the positive developments that are happening in your company, sir. Congratulations. I'll turn it over. KR Sridhar: Thank you. Desiree: Next question comes from the line of David Sandler with Baird. Your line is open. David Sandler: Guys. Thank you very much for the time, and please let me echo the ones me and say congratulations on a great quarter and a great year. I wanted to ask, your guys' technology is increasingly being comped to legacy incumbents such as combined cycle gas turbines. Could you maybe talk about if you guys are seeing project wins against these or other types of technologies? KR Sridhar: So our answer to you I want I won't discuss about the competitive landscape. That is something you should ask the end user in terms of what did they compare before they choose us. But you can clearly see from the stamp sizes, of the projects we operate. We are operating in that class. Very clearly. And you know, we are no longer the ten and twenty megawatt systems. We have hundreds of megawatts going into the gigawatts. Very soon. Kind of you know, single site location that is the that is the stem size you're looking at. So very clearly, it's in the same category, of a combined cycle gas server. Right? If you consider the entire value proposition, not just in any one narrow aspect. From a customer's point of view. If it is on-site power that is islanded, can a combined cycle gas turbine operate and provide power at partial loads? Can it swing up and down with the needs of the load? Can it what happens to that system in high altitude? What happens to their efficiency? Can you modularly grow pay as you grow and operate that system? Or is it monolithic? Okay? None of the features of a very large stamp size, anything, really matches with how a digital world of a data center operates. Okay? When you when you've taken the cost associated with all that stuff. And then very large mechanical equipment with its inertia cannot swing up and down in milliseconds and seconds like our solid-state digital platform does. So it cannot follow a load that way. So you need Band-Aids for that. And then a huge combined cycle gas turbine because of the large amount of power it puts out monolithically can only do that with reasonable amount of copper at very high voltage. And you you need bandage to now be able to bring that to 800 volts. You put all that together. Can we compete? Yes. Yes. We can. And the fact that we are winning these kind of stamp sizes should show you that we are able to do that not just in high cost value places, but in states where cost of electricity is traditionally low. So even in a place where irrespective of gas prices, irrespective of utility prices, we are able to compete. We're soon becoming the standard. And, you know, the customers who evaluate the entire value proposition will choose us. Customers would just look at first cost. Surely, you know, if you can find it, and if you can install it in a short amount of time, you'll be able to use a combined cycle customer. David Sandler: Thank you, KR. And as a follow-up, could you talk just a bit about how the life of fuel cell stacks has improved maybe how it relates to service margins and how you guys think about risk in the services business? Thank you very much. KR Sridhar: Yeah. So, you know, thank you for asking me to highlight that. That should no longer be a question on any one of your minds. We fully understand when we were losing money every single quarter on service. And we told you that we have a roadmap to get to gross margin neutral and then gross margin positive and keep accreting. You had a reason to wonder about Telus' specifics. Show us that you're making progress. What you're looking from the last eight quarters is eight continuous quarters, contiguous and continuous quarters of profits in the service business. And on top of that, Q4 of 2025, we had a 20% gross margin. And as our fleet sizes increase, as our technology keeps getting better, and if you look at our $14 billion backlog in service, and then you understand that every order that we are booking has a 100% attach rate to service and will add to that backlog. You'll clearly see that service is going to be a growing profit-generating revenue-generating business for Bloom. For years to come. Which is gonna be a huge advantage. This is the reason why we have worked so hard on it, and we'll continue to work on it. Hard on it. Improving life, lots reducing cost, operating the system with AI-driven digital platform. Let me highlight that for a second. Here is what you need to know. We have a few trillion cell hours of field operation. Is what Bloom has. Few trillion cell hours. More than 6 billion data points come from our field. To us every single day. We are using AI. We are not only benefiting from AI on our revenue side. We are using AI to our benefit. For all this. To improve our performance every single day. Because we have a digital twin associated to every single fuel cell stack and data from the real field is coming and feeding the digital twin and making our models better and better. So this is how we're gonna build that business. It's a strong business for us. You shouldn't have to worry going forward about what are we gonna do with service business. The more important question is, are you placing enough enterprise value to this service business? Thank you. Desiree: Next question comes from the line of Michael Blum with Wells Fargo. Your line is open. Michael Blum: Thank you. Congrats on the quarter and good evening, everyone. So I'm wondering if you can speak to one of your suppliers, MTAR Technologies, had extremely bullish comments on their earnings call. Projecting 30% growth CAGR to 2030 for Bloom Energy. So I'm wondering if you could just speak to that and maybe help us square that with the updated backlog number. KR Sridhar: You know, we are appreciative of the enthusiasm that our strong supply chain partners have and how bullish they are about what we do. But, Michael, either to all of you or to our board or to our vendors, we have not provided any long-term guidance. And, you know, you can't attribute any of that to us. You would have to ask them where their confidence is coming from and square that with your own models. But we don't you know, we have not provided any guidance that far out. And, there's not a flipping comment. Let me tell you what's just happening. Right? Just take the last three days last two days, of what you're all seeing in the market. Amazon came out today along with us after the market. And said, they're upping their capital expense almost 100% to $200 billion for the year. 2026. Right? Google did the same thing yesterday. Or yeah. Yeah. Yesterday after the bell. And, upping their CapEx heavily to a 175 to a 185 billion. This is all for the digital infrastructure. You know what? What you're seeing happening is the horizon at best is six months. Long-term horizon. Nobody has visibility past that because this entire field is accelerating at that pace. For us to sit here and talk about 2030, you know, that's the old industrial age resource planning that the utility companies used to do. That's not where the digital age is going. We don't have any predictions for 2030s right now other than to say we're extremely bullish and it's gonna accelerate. Michael Blum: Thank you. Thanks, sir. Appreciate the clarity there, so thank you. Other question I had was on the backlog. I wonder if you could tell us what the mix is, US, international, and really, the broader question is, if you could speak to your conversations you're having with prospective customers should we expect most of your business is gonna be in the US going forward, or is there a meaningful international market opportunity also that we should be thinking about? Thanks. KR Sridhar: Thank you. That's a good question. You know, we don't break down the mixes between US and international. But look, to answer your broader question, Bloom's gonna be a global company. We are going to expand and really play a major role in other countries. That is going to actually, if you think about what is the kind of infrastructure we need to be able to play in those areas. It's gonna lag behind the US. Simply because LNG terminals, the amount of LNG available for new projects given what's happened in the world. With, like, Russian gas being cut off to Europe, things like that. Is necessarily going to take a few more years to take off in a big way. If that is good, if there is gas going to these countries now, it is to support existing infrastructure. It's barely available to support new growing infrastructure, and you're not seeing very large projects in Europe for that reason. You know, you're not hearing about the half a gigawatt and gigawatt data centers being built out there. Right? Other than their power is already available. So it's gonna lag behind a little bit. But we are gonna stay on top of it. The predominance of the opportunities right now for everybody in the world is here in the US. The growth rate is unbelievable. So do we see at least for the foreseeable future this being the key area US being the key area of focus? The answer is yes. In terms of the diversity of the mix, I wanna remind you all, as much as we talk about AI, commercial and industrial business is very strong for us. We have had a 135% growth year over year in our commercial and industrial backlog. Companies, factories, campuses, retail businesses, they're all digitizing. They're all automating. They're, you know, they're all using robots. They're all seeking AI. Their power needs, their power draw is going up. So that electricity demand is very high. And when a factory is getting built, they can't wait for the power company to give them the power at their own pace. So we see them coming more and more to us. And it's all happening in the middle of the country. Where there is gas availability, and where there's proper policy for you know, on-site power being encouraged. Michael Blum: Thank you. Desiree: Next question comes from the line of Colin Rusch with Oppenheimer. Your line is open. Colin Rusch: Thanks so much. You know, guys, as you look at the depth of the market and the breadth of customers that you're dealing with and the value-added elements that you have to your system, and with the future proofing and cooling dynamics, can you just talk about your pricing strategy? You get a little bit deeper into this, how much pricing leverage do you have, and how much do you wanna take you know, here over the next twelve to twenty-four months? KR Sridhar: That's alright. Perfect. Look. Pricing really is very much a market phenomenon be you know, you know, like, based on where people are. People are now going to places where they can get affordable power. But affordable power, remember, is value-based. Okay? Most of our customers place value on time to power. Place value on ease of permitting because we don't create air pollution. And they don't wanna get caught in a backlash or either a nonpermit or a backlash from their local community. And we feel very, very good that our customers truly value the proposition we bring to them. And so if you just looked at where we are, we don't see us having to choose between growth and profitability. Okay? Between our continuous cost reductions and efficiencies, and given their electricity prices are going elsewhere, and, you know, if you just listen to the legacy suppliers of turbines and engines, they're all talking about pricing leverage. What does that mean? They're in they're actually increasing their price. So electricity for customers is going in only one direction. What we offer is really a competitive price but at the value stack, that they're extremely happy with. And are willing to pay. So I don't think in the foreseeable future, we have to be looking at worrying about you know, like, you know, like, Colin Rusch: Thanks so much. And then, you know, the follow-up here is really around any interest in potential M&A. Obviously, you've got a lot of wood to chop with the core product here. But with an augmented balance sheet, and, you know, a very robust currency right now, with the stock, is there any reason or opportunities for you guys to start looking at incremental acquisitions to scale the platform at all? KR Sridhar: Look. We can be selective about things that matter to us and things that matter to our customers. And if we had some acquisitions, will that make it easier for us to bring that entire smart platform to our customers in a better way. Other than that, our potential addressable market and our ability to light up the planet is just, you know, it's just unthinkably big. That we don't need to be looking at what else should we be doing. You know, if we just, you know, like, lighting up the planet is a good day job. I don't need another day job. Colin Rusch: Thank you. Great. Thanks so much, guys. Desiree: Next question comes from the line of Mark Strouse with JPMorgan. Your line is open. Mark Strouse: Yes. Good afternoon. Thank you for taking our questions. KR, I thought it was really interesting when you said that over 80% of the backlog today is in some of those lower-cost states. Outside of California in the Northeast. Appreciating maybe some of that's driven by data centers. I was curious if you could maybe give that for your non-AI business. Kinda what that mix might look like? KR Sridhar: No. Sorry. We, you know, we just don't do that. Know, give me another question. I can answer you. Mark Strouse: Okay. Alright. I'll follow-up offline. Thank you. Can I ask on the book and ship business? You know, this time last year, I think you said 2024 was the first year the majority of your revenue came from book and ship. Can you talk about what that looked like in 'twenty-five and how you're thinking about that going forward? KR Sridhar: Thank you. Yeah. Yeah. Sure. You know, and that's an important thing. Right? In, like, '25, we know, we had a significant double-digit percentage. Let's just put it that way of book and ship that we were able to do booking, shipping, turning power on for our customer. And you heard one example of that where we powered a data center. In, like, fifty-five days. Right? So and so that was a significant part of the business. And we would expect there are plenty of our valued customers who are going to come to us and want that power very urgently for whatever reason they have. And most often, I can tell you, Mark, it is some other vendor who did not keep their promise? And they come to us. We see this as a competitive advantage. And we want to be able to support a customer under those circumstances. So we have the capacity to do that. We would love to do that, and I would think it will still be in, like, double digits. In terms of percentages. Thank you. Desiree: Next question comes from the line of Sherif Elmaghrabi with BTIG. Your line is open. Sherif Elmaghrabi: Hi. Thanks for taking my questions. So last month, AEP their option for fuel cells under that gigawatt agreement with Bloom. But the offtake won't be finalized until the second quarter of this year. So my question is, would you expect them to take delivery of the fuel cells regardless given the existing power demand environment? And the infrastructure they put in the ground as well. KR Sridhar: Yes. AEP very clearly said that in their press release, and we reiterated that. That our sale of that product is unconditional. And they will take possession. And, obviously, they wouldn't have accepted that if they didn't believe very strongly that they could get this going. Number one, in terms of that project. But, additionally, here is what you need to know. Right? AEP and us are working on several projects together. And they're great partners of ours. And we expect that our combined business is only gonna grow. So they didn't have any concerns about signing a definitive order with us. Even though they had to go through some formalities on their side. You know, because Bloom's energy servers are not perishable. They can, you know, they can easily put that to use. In multiple other locations that they are potentially considering us for. Sherif Elmaghrabi: Thank you. Second, I do wanna ask about the warrant transaction with Oracle. That deal helps align your interest, of course. And I'm wondering, how do you think about doing similar transactions with other hyperscalers if that's something they're interested in? KR Sridhar: Again, you know, we still haven't executed that agreement. As you know, we are working through that strategic partnership agreement that we have. And because of that, I can't speak to the details of it because it's not out there. But you'll see that soon. Everything is on a case-by-case basis. You know? In this particular case, I'll tell you what the criteria was. Is a great strategic partnership. Where both enterprises had a lot to gain. And by doing that and remember, these are not penny warrants. These were done at market pricing on the day we agreed to, you know, like, what we do. So it is not in lieu of something other than both parties enhancing enterprise value. So if so I'm not gonna say yes or no to this. It'll all be evaluated on a case-by-case basis. If there's enterprise value. So the answer is, you know, neither a yes or a no. It depends. Thank you. Sherif Elmaghrabi: Great color. Thank you, KR. Desiree: And our last question comes from the line of Noel Parks with Tuohy. Noel Parks: Hi. Good afternoon. I wanted to ask about the product margins and the supply chain. I was just wondering what your thoughts are on your visibility into your input cost for components. And I'm just wondering if you were there is any trend you're considering towards longer-term contracting or forward purchasing from vendors? To serve exercise your leverage with cost? KR Sridhar: No. Thank you so much. And I'm going to ask for your indulgence and say, let me not do a follow-up question because we are, you know, like, running on the hour. But let me answer this very good question you asked. Look. We are constantly working both internally in the company and with our supply chain partners. To figure out efficiencies how to bring scale-related efficiencies, how to bring about technology and process-related efficiencies. And continuously keep bringing down the cost. We are also extremely judicious of watching what is going on in the world and securing, you know, a crisp bias if we need to if we see, you know, certain things happen. You can see we, you know, we are not pinching the last penny on the amount of inventory we hold. You know, there are very good reasons for those things. Because we're very strategic about all those decisions. And in terms of cost reduction, overall, double-digit cost reduction is in our DNA every single year. You know? And we make that happen. Sometimes all of that translates out, sometimes because suddenly a tariff regime came along, instead of saying our cost went up. They're able to neutralize a lot of that. Or, you know, during COVID, then the cost of logistics went up. We didn't have to increase that. Our price because we could make up for that cost increase using our cost reductions. But we have always delivered that and we'll continue to deliver that. And that's in our DNA. So that's how we are gonna bring about margin accretion over a long period of time in this company and keep growing our margins. Okay? With that, let me conclude to say in closing. Look. You all see Bloom's really executing from a position of strength but we are also scaling with discipline. And we are on a very firm path to make sure that we become the standard for on-site power. The benchmark for speed, reliability, flexibility, everything. As you heard in the last couple days, from the large digital companies. They're all increasing their CapEx by amounts that would have seemed unbelievable even two years ago. These numbers are staggering. And this is all for CapEx infrastructure. Everything is digital. This is digital infrastructure. Digital runs on electricity. Electricity at that pace cannot be delivered by anyone in the free world. Today using poles and wires. On-site power is a necessity. Bloom brings very clear competitive advantages that legacy providers that built their technology for the industrial age cannot adapt to. So we are very confident in the path we have chartered for ourselves and are excited for the future. We look forward to another very good year. Thank you so much. Desiree: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Colby: My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the SS&C Technologies Holdings, Inc. Q4 and Full Year 2025 Earnings. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question, simply press star one again. We please ask that you limit yourself to one question and one follow-up. Thank you. I'll now turn the call over to Justine Stone, Head of Investor Relations. You may begin. Justine Stone: Hi, everyone. Welcome, and thank you for joining us for our Q4 and full year 2025 earnings call. I'm Justine Stone, Investor Relations for SS&C Technologies Holdings, Inc. With me today is Bill Stone, Chairman and Chief Executive Officer, Rahul Kanwar, President and Chief Operating Officer, and Brian Schell, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note the various remarks we make today about future expectations, plans, and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-Ks, which is on file with the SEC and can be accessed on our website. These forward-looking statements represent our expectations only as of today, February 5, 2026. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we'll be referring to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. I will now turn the call over to Bill. Bill Stone: Thanks, Justine, and welcome, everyone. We are all well aware of the sell-off of software company shares following the recent release of the AI-driven automation tools across legal, sales, marketing, and accounting functions. We take all competitors seriously, but we strongly believe we have a deep moat not easily navigated. For decades, we've built deep expertise across sophisticated assets and strategies. And that capability remains a trademark and a key driver of our long-term success. We are functional experts, and our software is mission-critical. We believe the AI boom will be a tailwind. We are deploying rapidly and with conviction. As we accelerate adoption of these solutions, we see a clear advantage. We're uniquely positioned and structurally protected through the ownership of our software and code, enabling us to leverage AI in ways that only we can for our customers. Fourth quarter results demonstrate SS&C Technologies Holdings, Inc.'s strength with record adjusted revenue of $1.655 billion, up 8%, and adjusted diluted earnings per share of $1.69, an 18% increase. We delivered record adjusted consolidated EBITDA of $651 million, up 9%, and adjusted consolidated EBITDA margin of 39.3%. Fourth quarter adjusted organic revenue growth was 5.3%, with performance driven by continued strength in GIDS with 13.2% revenue growth, and GlobeOp was 9.6% revenue growth. We continue to focus on international growth opportunities and on execution for our clients. GlobeOp is seeing new opportunities in Australia, leveraging our recent superannuation mandates. Prospects include local Australian firms and global firms. Interlinks display signs of improvement with modest growth in Q4, and we are seeing momentum in 2026. For the twelve months ended 12/31/2025, cash from operating activities was $1.745 billion, up 26% year over year. On a weighted average diluted per share basis, it was $6.89, up $1.42 from 2024. In Q4, we returned $384 million to shareholders, which included 3.7 million shares repurchased for $319 million at an average price of $85.81, and $66 million in common stock dividend. We allocated over $1 billion in share repurchase in 2025, purchasing 12.3 million shares at an average price of $84.12. Our strong cash flow characteristics allow us to return capital to our shareholders in multiple ways. At current levels, our conviction around share repurchase has strengthened, and we will prioritize repurchases absent high-quality accretive acquisitions. We are pleased with the early progress of the Callisto acquisition. Since closing, we partnered with key leadership and operational talent and deepened client relationships. We are seeing strong engagement and collaboration opportunities with our clients and are able to go live with projects strategically meaningful to them. We expect momentum to continue as we move through the year. I'll now turn the call over to Rahul to discuss the quarter in more detail. Rahul Kanwar: Thanks, Bill. We delivered a strong quarter with solid organic growth and continued margin expansion. We are optimistic about the future as we look at the durability of what's driving that growth. Across the business, we're seeing a consistent trend: clients making long-term decisions to outsource, simplify, and scale their accounting models on our platform, are multiyear partnerships that create recurring revenue, expand over time, and provide clear visibility into future growth. Lift outs are a good example of this dynamic. Mandates such as Insignia and Humana reflect a repeatable process where clients entrust us with complex mission-critical operations at scale. These engagements ramp in a disciplined way and often lead to broader adoption of additional services across our platform. The fact that we continue to see similar opportunities emerge across regions and business lines, whether in GlobeOp, GIDS, or health, reinforces our confidence that this is a sustainable growth engine. We see the continued advancement of AI as a positive for our business. We're well-positioned given our large datasets, deep processing technology, long-standing client relationships, and our ability to deploy solutions at scale in regulated environments. The work we do is highly expertise-driven, requires a deep understanding of complex instruments, global regulation, and how information is used by tax authorities, institutional investors, and other sophisticated counterparties. AI working alongside with the teams we've built enhances efficiency, accuracy, and scalability over time, strengthening our competitive position and supporting sustainable organic growth. With that, I'll turn it over to Brian to walk through the financials. Brian Schell: Thanks, Rahul, and good day, everyone. Unless noted otherwise, the quarterly comparisons are Q4 2025 to Q4 2024. As disclosed in our press release, our Q4 2025 GAAP results reflect revenues of $1.654 billion, net income of $193 million, and diluted earnings per share of $0.77. Our adjusted non-GAAP results include revenues of $1.655 billion, an increase of 8%, and adjusted diluted EPS of $1.69, an 18% increase. The adjusted revenue increase of $124 million was primarily driven by incremental revenue contributions from GIDS of $49 million, GlobeOp of $40 million, and acquisitions of $27 million, offset by a favorable impact from foreign exchange of $16 million. As a result, adjusted organic revenue growth on a constant currency basis was 5.3%. And our core expenses increased 4.6% or $44 million, which also excludes acquisitions and is on a constant currency basis. Adjusted consolidated EBITDA was a record $651 million, reflecting an increase of $52 million or 8.7% and a margin of 39.3%, a 20 basis point expansion. Net interest expense for 2025 was $111 million, a decrease of $2 million, primarily reflecting lower short-term rates. Adjusted net income was a record $425 million, up 16.8%, and adjusted diluted EPS was $1.69, an increase of 18.2%. Our effective non-GAAP tax rate was 19.2% for 2025. Our resulting 2025 full-year effective non-GAAP tax rate is 22%. Note for comparison purposes, we have recast the 2024 adjusted net income to reflect the full-year effective tax rate of 23.1%. The diluted share count is down to 251.5 million from 254.5 million year over year, primarily as a result of share repurchases. Cash flow from operating activities grew 26%, and our operating cash flow per share was $6.89, driven by growth in earnings, improved working capital utilization, and lower cash taxes paid. Our full-year cash flow conversion has been above 100% for the past three years. SS&C Technologies Holdings, Inc. ended the fourth quarter with $462 million in cash and cash equivalents and $7.5 billion in gross debt. Our net debt was $7 billion, and our last twelve months consolidated EBITDA was $2.5 billion, resulting in a net leverage ratio of 2.8 times. As we look forward to the first quarter and full year of 2026 with respect to guidance, we will continue to focus on client service and assume that retention rates will be in the range of our most recent results. We will continue to manage our business to support our long-term growth and manage our expenses by controlling and aligning variable expenses, increasing productivity, and leveraging technology to improve our operating margins. And effectively investing in the business through marketing, sales, R&D. Specifically, we have assumed short-term interest rates to remain at current levels, an effective tax rate of approximately 22.5% on an adjusted basis, capital expenditures to be 4.4% to 4.8% of revenues, and share buybacks and debt reduction levels remain similar to 2025, but subject to changes based on market conditions as Bill noted in his earlier comments. For 2026, we expect revenue to be in the range of $1.608 billion to $1.648 billion and 5% organic growth at the midpoint. Adjusted net income in the range of $404 million to $420 million, interest expense, excluding amortization to deferred financing costs, original issue discount in the range of $102 million to $104 million, diluted shares in the range of 249.2 million to 250.2 million, and adjusted diluted EPS in the range of $1.62 to $1.68. For the full year 2026, we expect revenue to be in the range of $6.654 billion to $6.14 billion, and 5.1% organic revenue growth at the midpoint. Targeted annual EBITDA expansion of 50 basis points with the goal of a 40% margin in Q4. Adjusted net income in the range of $1.662 billion to $1.762 billion, adjusted diluted EPS in the range of $6.7 to $7.02, reflecting approximately 12% growth at the midpoint. And cash from operating activities to be in the range of $1.713 billion to $1.813 billion, again, translating to over 100% cash conversion. And now back to Bill. Bill Stone: Brian, I'd like to summarize our key takeaways from today's call. Record fourth quarter revenues, earnings, cash flows, and over a billion dollars worth of share repurchases in 2025. We're excited about the early execution with the Callisto acquisition and other lift-out wins. And the opportunities they present for growth and geographic expansions. Our investments in artificial intelligence and automation are paying off, and we're confident in our ability to drive margin expansion. As we look to 2026, we believe we are set up for success and will drive long-term growth and profitability for our shareholders. With that, I would now open it up to questions. Colby: Thank you. We will now begin the question and answer session. Again, we please ask that you limit yourself to one question and one follow-up. Thank you. If you would like to ask a question, please press star then the number one on your telephone keypad. To withdraw your question at any time, simply press star 1 again. We'll pause just for a moment to compile the roster. Your first question comes from Jeff Schmitt with William Blair. Your line is open. Jeff Schmitt: Hi, good afternoon. Question on the healthcare business, it had a tough quarter from an organic perspective and what is its seasonally strongest quarter. So could you maybe talk about what drove that weakness and why do you think that business hasn't seen maybe better momentum yet just given how much effort you've put into it? Bill Stone: I think that healthcare is a long-term play, and, you know, trying to go quarter to quarter or even year to year is a tough comp. I think last fourth quarter, we had large license sales. We had some large license sales in the fourth quarter this year, but a notable multimillion-dollar license closed in the first ten days of January of 2026. So, yeah, you know, it's lumpy. You know, they're highly regulated. Even when you've been in highly regulated businesses like financial services. And so although there are headwinds in healthcare, it's still an enormous market. There we have new technology. We're bringing out Amesys, which has been, you know, rewritten to a very large degree, and we're gonna have, you know, a One Health with Amesys and Domain. And we're excited about offering that for both medical as well as pharmacy. And so we have some optimism. But, certainly, you know, we would prefer to have more growth than what we're having. But we're still running at pretty healthy EBITDA margins, and we're managing the business in a way where it's adding to our cash flow. It's not really detracting from our earnings. And obviously, not. It's not accelerating our growth rate. But at the same time, it's a $26.07 billion business, and we like its opportunities for the long haul. Jeff Schmitt: Okay. And then could you provide an update on the Elevance relationship? Where does that stand? Is there still, you know, a chance they could onboard some of their business on the Dominion Rx? Bill Stone: Dominion Rx is certainly ready and waiting. You know, at the same time, Elevance is a very large healthcare organization, and their relationships with other very large healthcare organizations are long-standing, and they're difficult to break. And, you know, the original sponsor at Elevance has moved on several years ago. And so, you know, often when you lose the sponsor, it's hard to find another one. So, you know, it's not unexpected, but we think we have a lot of things that entice Elevance. And they've made a big investment. So we think they're still, you know, still, you know, rays of sunshine at the end of the summer. Jeff Schmitt: Okay. That makes sense. Thank you. Your next question comes from the line of Kevin McVeigh with UBS. Your line is open. Your next question comes from the line of Peter Heckmann with D. A. Davidson. Your line is open. Peter Heckmann: Good afternoon, everyone. Great to see the encouraging 2026 guidance. I wanted to ask a question on within alternative administration. It looked like the fourth quarter had exceptional growth in assets under administration. Can you talk a little bit about that? And does that maybe indicate that the alternative fund administration business can grow maybe faster in 2026 than it did in 2025? Bill Stone: Peter, there's a couple of things going on there. One, it did have very good organic growth both quarter and year. And similarly, we've got high expectations for 2026. Included in the fourth quarter change in particular is our acquisition of Kurofun Services, so I think the breakdown is about $92 billion of that change is organic. And the rest is the acquisition. Peter Heckmann: Okay. That's helpful. Okay. That makes sense. And then just in terms of the intelligent automation business, which includes the Blue Prism business, just remind us that that business seemed to be struggling a little bit from just delays in decision-making. I guess, how are you feeling about that business going into 2026? Do you think that can, you know, approximate the overall corporate organic growth rate? Bill Stone: You know, we do. We actually feel really good about that business going into 2026. Similar to kind of the comment we just made about healthcare, that business in particular had a really large license in Q4 the year before. So, you know, part of when you look kind of look at this quarter over quarter, those are some of the changes that, you know, that kind of have an impact. But in general, many of our comments around AI are, you know, centered at least in part on that business. So that's where we're doing the bulk of our innovation relating to whether that's AI agents, use of large language models, use of our orchestration platforms, you know, governance around AI, really a lot of the things that we're rolling out across the business come out of there. We perfect them in different others of our businesses and then sell them out. So we're really pretty optimistic about the growth prospects for that in '26. Peter Heckmann: That's good to hear. I'll get back in the queue. Colby: Your next question comes from the line of Alexei Gogolev with JPMorgan. Your line is open. Ella Smith: Good evening. This is Ella Smith on for Alexei. Thanks so much for taking our questions. So first, I was hoping to ask about the organic growth guide. Your 1Q and full year '26 guide is basically the same. Do you have anything to call out regarding the cadence of organic growth throughout the rest of the year? Bill Stone: Look, I think what it really reflects is that our business is getting stronger, right? And as our business gets stronger, we have more predictability and the recurring revenue is stronger. Right? So we're able to, in effect, forecast and maintain the, you know, whereas traditionally, you might have some more in the back end of the back half of the year, you know, we've got an opportunity to get even better than this. We're basically all year gonna be pretty strong. And, hopefully, by the time we get to Q3 and Q4. Ella Smith: Got it. Very clear. Thank you. And as a follow-up, given the breadth of your business, I'm sure you've seen AI, fintechs, emerging in the landscape. How are you maintaining your competitive advantage? Bill Stone: Well, I think that you know, we see fintechs. It's not very difficult to start a fintech. Right? Have an idea. Get a programmer. Build a little app. You know, now talk in a little AI, and you've got an entree with some spice in it. But to build an organization that has 29,000 people, 23,000 products, or 23,000 customers, several hundred products and services, you know, I think it's a little more daunting. And what we see with AI and people sometimes forget that, you know, our clients are SEC regulated organizations or CMS regulated organizations. You know, large language models sometimes have hallucinations. You know, those regulators, they don't really quite understand us telling us. A hallucination. You know, it's like a bad dream. We'll get over it. No, that I don't think that flies. So, you know, we're very control conscious. Our clients are conservative by nature. Right? And, you know, they're managing other people's money or the health of other people. So we think that we're positioned in how we conduct ourselves is the right way to do it. And I think that we have the financial wherewithal to invest very, very wisely. You know, we've spent hundreds of millions of dollars on our development that we've done and we're still maintaining in excess of 39% margins, and we think, you know, we'll close out 2026 at 40% margin. So, you know, we're optimistic, and we think we have good reasons for being. Ella Smith: Great. Thanks very much. Colby: Again, if you like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Dan Perlin with RBC Capital Markets. Your line is open. Matt Roswell: Good afternoon. It's Matt Roswell on for Dan. I guess two questions if I could. Firstly, wealth and investment management, I mean, it seems like organic growth ticked up a little bit this quarter. As we think about kind of that business over the next, say, medium term, where do you think the organic growth could be and should be? Bill Stone: You know, we're very optimistic about our wealth management business. Our Black Diamond platform is, we think, the best in the industry. We have other platforms like our trust accounting that we have integrated with Black Diamond. Black Diamond has, you know, approaching $3.5 trillion that it's administrating for its various RIAs. I think we have something close to 4,000 RIAs that are using that platform. You know, we have integrated a bunch of the Morningstar that we had those we bought their wealth management platform, and we've already moved over five, 600 Morningstar clients onto Black Diamond. So we're very optimistic about that business, and I think that we have a lot of expertise and a lot of capability. And I think that that's gonna be one of is and will continue to be one of our crown jewels. Matt Roswell: Thanks. And can you talk a little bit about the M&A environment? I mean, you all have done some smaller pieces this year. I guess, what are you seeing out there in terms of asking prices, availability, etcetera? Bill Stone: You know, when you've been doing this for four decades and they start calling a billion-dollar acquisition like Callistone, things small pieces. You know what? We're constantly looking. We think we have the leverage down to a point where we could do a large acquisition, and if we could find the right one, we would, and we might find some of our competitors under different pressures than we're under. You know, we run our own data centers. Right? We have our own private cloud. We have our clients really secured. You know? Plus, we have a large-scale services business that we get to really test out our software before we, you know, send it into our client base. So we think that we're well-positioned. We think as far as all the fintechs out there that we're very well-positioned. And that our earnings, our cash flow, it really gives us a lot of flexibility. Matt Roswell: Excellent. Congratulations on the nice numbers. Colby: Thank you. And with no further questions in queue, I'd like to turn the conference back over to Bill for closing remarks. Bill Stone: There's always a lot of things that happen in the market. You know, when I first started this business, we were selling to broker-dealers. That was in 1986 and early '87. And then October '87 happened, and the market went down 25% in one day. That was the end of that. So, you know, you learn to be a little bit nimble. Right? And that's what SS&C Technologies Holdings, Inc. has been for forty years. And I think we have the talent and capability to continue. And that's what we're gonna do. So we appreciate you listening in. And we look forward to talking to you next quarter. Colby: This concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Synaptics Second Quarter Fiscal Year 2026 Financial Results 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 first speaker today, Munjal Shah, Vice President and Head of Investor Relations. Please go ahead. Munjal Shah: Good afternoon, and thank you for joining us today on Synaptics' Second Quarter Fiscal 2026 Conference Call. My name is Munjal Shah, and I'm the Vice President of Investor Relations. With me on today's call are Rahul Patel, our President and CEO; and Ken Rizvi, our CFO. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com. In addition to a copy of our earnings press release detailing our quarterly results, a supplemental slide presentation and a copy of these prepared remarks have been posted on our Investor Relations website. Today's discussion of financial results is presented on a GAAP financial basis, along with supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs and certain other noncash or recurring or nonrecurring items. All non-GAAP financial metrics discussed are reconciled to the most directly comparable GAAP financial measures in our earnings press release and supplemental materials available on our Investor Relations website. As a reminder, the matters we are discussing today in our prepared remarks, in our supplemental materials and response to your questions may contain certain forward-looking statements. These forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes the estimates and assumptions underlying these forward-looking statements to be reasonable, the statements are subject to a number of risks and uncertainties beyond our control. Synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements. Therefore, we refer you to the company's earnings release issued today and our current and periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as of the date thereof. Except as required by law, Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Rahul. Rahul Patel: Thank you, Munjal. Good afternoon, everyone, and thank you for joining our fiscal second quarter 2026 earnings call. We delivered another solid quarter with strong results and continued momentum across our business. Total company revenue increased 13% year-over-year, marking our fifth consecutive quarter of double-digit year-over-year growth. This performance was driven by 53% year-over-year growth in our Core IoT products. Disciplined execution helped deliver strong earnings growth with non-GAAP earnings per share increasing 32% year-over-year to $1.21. The Consumer Electronics Show in January was a successful event for Synaptics. We saw meaningful engagement with customers and partners as we showcased the breadth of our latest technologies and solutions. We demonstrated several use cases across our portfolio, including Google's Gemma 3 model running natively on our multimodal processors, highlighted our differentiated Wi-Fi sensing and Bluetooth channel sounding capabilities and one of our partners, Grinn, demonstrated a robotic hand built using Synaptics processors, connectivity and sensing products. We want to thank the analysts and investors who visited our booth. A defining theme at CES and across the industry is the accelerating shift towards physical and edge AI, as intelligence moves closer to the device. This evolution aligns directly with Synaptics' strategic focus and core product strengths. Our portfolio is purpose-built to deliver power-efficient intelligent systems at the edge, and we believe this transition towards physical AI positions Synaptics for sustained long-term growth. We are seeing early, but meaningful traction in robotics, where Synaptics brings differentiated capabilities across processing, connectivity and sensing. One example is humanoids. Synaptics is actively engaged and sampling products with an industry leader that is building a lineup of advanced humanoids. These humanoids incorporate multiple Synaptics touch controllers designed to enable tactile sensing as well as our interface bridge product to support high-bandwidth data transport. Touch sensing is critical for humanoids to perform physical tasks, including sensing force, proximity and surface characteristics. Our touch controllers integrate ML/AI algorithms that enable this level of dexterity, allowing a humanoid to modulate grip force ranging from delicate glassware to solid metal objects while distinguishing subtle pressure variations between plastic and paper cups. As we expand into new markets, we see growing applications for our intelligent sensing portfolio at the deep sensor edge. More broadly in robotics, we are engaging with a growing set of new customers and entering new markets. These engagements span multiple applications that tend to benefit from physical AI and leverage our portfolio of sensing, video interface, processors and connectivity technologies. Our recently introduced Astra multimodal microprocessors are seeing strong interest from both customers and partners. They are choosing Synaptics Astra over competing platforms because of its open source architecture, developer-ready software, power efficiency and differentiated AI capabilities enabled by Synaptics' Torq neural processing architecture developed in collaboration with Google. We are engaging with customers across a wide range of industries. For example, a leading security and controls company is evaluating our Astra processors along with our connectivity technology as a complete solution, citing our differentiation in AI and power efficiency. Smart home appliance manufacturers are also showing strong interest in Astra for its low-power AI native design. As physical AI continues to gain momentum, we expect customers to embed increasing levels of intelligence across their devices. Our partner ecosystem for processors continues to expand across industrial markets. We are collaborating with Toradex, a leader in single-board compute solutions, serving industrial automation, health care, transportation, agriculture, smart city and aerospace markets. This quarter, we also added another European partner focused on industrial applications. In addition to our Linux-based Astra microprocessors, we are gaining meaningful traction with our high-performance AI-native Astra microcontroller portfolio. During the quarter, we secured a design with a Tier 1 consumer electronics OEM that selected Astra for its differentiated vision capabilities, enabling gesture-based system control in smart televisions. While this is one example, the Astra MCU supports a broad range of vision modalities, including presence, object detection and security. Customer engagements are continuing to broaden across multiple end markets, and we expect to share additional design wins in the coming quarters. As our current Astra products continue to gain traction, we are executing with discipline and advancing our roadmap. This quarter, we are further expanding our Edge AI portfolio by sampling 2 new products. First, our Astra MCU with connectivity that combines our low-power microcontroller, neural processing technology and latest connectivity into a single monolithic system on a chip. Importantly, it is the only solution in its class to support Wi-Fi 7, Bluetooth 6.0 and Thread, while competing solutions remain anchored to Wi-Fi 6. This device also uniquely integrates front-end touch and voice interfaces, delivering a true system-level solution, enabling meaningful bill of material savings for customers. Second, Synaptics connectivity SoC is our latest device that supports Wi-Fi 7, Bluetooth, BLE and Thread. It is a stand-alone connectivity solution that can be easily integrated into systems using non-Astra compute platforms, furthering our participation in the broader edge IoT market. We are seeing strong interest for these products from home appliance manufacturers, security camera customers, drones, robotics and broad-based IoT module makers, and we expect revenue contribution beginning in calendar 2027. Turning to enterprise and mobile touch. We continue to focus on premium tier of the market. In enterprise, we have seen steady improvement as customers gradually upgrade their infrastructure to support return-to-office initiatives and replace an aging installed base. In mobile touch, we secured another foldable design with a leading OEM in China, reinforcing the technology leadership we bring to this market with our next-generation touch architecture and building on the momentum established by last quarter's win with a leading Korean OEM. As we have noted previously, our content is more than 2x higher in foldables. We are actively engaged with additional smartphone OEMs and remain confident in being able to scale this technology to other large display applications. As we continue to focus the company on edge AI solutions, I am combining our processors and connectivity teams into a single organization. This better aligns our resources and accelerates our roadmap to more efficiently deliver world-class integrated processor and wireless system solutions. To summarize, we are seeing continued improvement in our financial performance with double-digit year-over-year revenue growth and operating profit growing at nearly twice the rate of revenue. We are accelerating our innovation and product roadmap to capitalize on growing physical and edge AI opportunity. With a differentiated platform and expanding pipeline and growing customer engagement, we believe Synaptics is well positioned for sustained long-term growth. I will now turn the call over to Ken to review our second quarter financial results and outlook for our fiscal 2026 third quarter. Ken Rizvi: Thank you, Rahul, and good afternoon, everyone. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP financial measures in the earnings release tables found in the Investor Relations section of our website. Now let me turn to our financial results for the second quarter of fiscal 2026. Revenue for fiscal Q2 was $302.5 million, above the midpoint of our guidance and up 13% on a year-over-year basis, driven by strength in our Core IoT products. The revenue mix in the second quarter was in line with our expectations, 31% Core IoT; 53% enterprise and automotive; and 16% mobile touch products. Core IoT product revenues increased 53% year-over-year, driven primarily by continued strength in our wireless connectivity products. Enterprise and automotive product revenues were up modestly year-over-year and slightly ahead of our expectations. Mobile touch product revenues increased 3% year-over-year. While supply constraints are improving, we still see challenges in certain areas. Second quarter non-GAAP gross margin was 53.6%, slightly ahead of the midpoint of our guidance. Second quarter non-GAAP operating expenses were $104.2 million, better than the midpoint of our guidance. Our non-GAAP operating margin was 19.2%, up approximately 160 basis points sequentially and 190 basis points year-over-year. Non-GAAP net income in Q2 was $48.4 million. And non-GAAP EPS per diluted share came in above the midpoint of our guidance at $1.21 per share, an increase of 32% on a year-over-year basis. Now let me turn to the balance sheet. We ended the fiscal second quarter with approximately $437.4 million in cash and cash equivalents, down $22.5 million from the prior quarter as we repurchased $36.4 million of our shares in Q2. Through fiscal Q2, we have bought a total of $43.6 million of our shares. Cash flow from operations was $30 million in the second fiscal quarter, and capital expenditures for the second quarter were $11.6 million. Depreciation for the quarter was $7.6 million. Receivables at the end of December were $132.7 million and days of sales outstanding were 39 days, up slightly from 37 days last quarter. Our ending inventory balance was $158 million, which increased by $15 million from the previous quarter. Days of inventory were 101 days compared to 94 days at the end of the last quarter. This increase reflects our strategic decision to purchase inventory slightly ahead of demand. Now turning to our third quarter of 2026 guidance. Our guidance is subject to ongoing macroeconomic and global trade and tariff-related uncertainty. Please refer to our safe harbor statement in the earnings release and in our supplemental materials. For Q3, we expect revenues to be approximately $290 million at the midpoint, plus or minus $10 million. And our guidance for the third quarter reflects an expected revenue mix from Core IoT, enterprise and automotive and mobile touch products of approximately 32%, 54% and 14%, respectively. We expect non-GAAP gross margin to be 53.5% at the midpoint, plus or minus 1%. Non-GAAP operating expenses in the March quarter are expected to be approximately $106 million at the midpoint of our guidance, plus or minus $2 million. We expect non-GAAP net interest and other expenses to be approximately $2 million and our non-GAAP tax rate to be in the range of 13% to 15% for the third quarter. Non-GAAP net income per diluted share is anticipated to be $1 per share at the midpoint, plus or minus $0.15 on an estimated 40.6 million fully diluted shares. This wraps up our prepared remarks. I would like to turn the call over to the operator to start the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ross Seymore of Deutsche Bank. Ross Seymore: First question is probably a little bit of a negative spin and the second will be a little more positive. So the first question is we're seeing some of the supply -- you mentioned some of the supply issues going away in mobile, but we're seeing more pressure on that with memory cost availability, et cetera. So I guess, do you guys see any issues with that in your mobile touch business and perhaps your PC business? And are those 2 still roughly 30%, 35% of total revenues? Rahul Patel: Ross, this is Rahul. As you know, majority of our mobile business, in fact, all of our mobile business is in the premium to high tier. And by virtue of us being in that category, we are not seeing, as of this moment, any substantial pressure on volumes that we had anticipated we were going to experience. And so relative to the rest of the mobile market, where they may be seeing some supply pressures, the premium tier seems to be a lot more stable. And it feels like it's a bit immune to the supply challenges, especially if you are referring to memory-related challenges. Ken Rizvi: Ross, this is Ken. Just to clarify, right, our comments were related to our ability to get supply for some of our products for the mobile touch market. If you recall, last quarter, we highlighted that, that's starting to ease for us, but it is specific to us getting the supply for some of those touch products for the mobile market. Ross Seymore: The PC half of that question? Ken Rizvi: Same thing. If you look at the PC market, it's as Rahul highlighted, if you look at where we play, we play in the high end in the enterprise market. And so if you look at that demand elasticity, historically, that's a more inelastic market. If I just take a look at my own behavior for Synaptics as the CFO, if we have a new employee, I'm going to give them a PC. If that PC costs $50 or $100 more, they're going to need that PC. So for those portions of the market where we service, which is really that premium tier, as Rahul highlighted earlier, we believe there's a bit more demand elasticity in the sense that the enterprise and high-end consumer markets will still need to purchase those PCs as we go through this upgrade cycle. Ross Seymore: And I guess the positive follow-up question, the Astra side, you guys had some great demos at CES. Thanks for showing those and it sounded like some good traction, design wins, engagements, those sorts of things. Rahul, when should we start to see that be a meaningful tailwind in your Core IoT business? And does it also kick in on the gross margin line beyond just revenues? Rahul Patel: Ross, we -- as you have indicated earlier, we are still on track to see meaningful revenue contribution in calendar 2027 from our Astra line of products. And they are -- Astra as a product category is very accretive to gross margin. So you can see potentially contributing not only to the top line, but also improving our gross margin contribution as well as a result. Operator: And our next question comes from the line of Tom O'Malley of Barclays. Thomas O'Malley: Mine is on the guidance and gross margins in particular. If you look at the moving pieces, mobile is down the most. Obviously, volume is coming down a little bit. So you would expect a little bit of an impact from gross margin. But just with mobile being kind of the lowest gross margin business, you would expect some tailwinds there. Anything in particular that you want to call out on gross margins into the March quarter? Is it just mix related and volume related? Ken Rizvi: Yes, Tom, thanks for the question. I think we're still in this range here in that mid-53% range, 53.5% is where we guided. Obviously, there are some boundaries around it. We'll try to do better. But for the current mix of the product and portfolio for Q3, that's where we're ending up. Thomas O'Malley: Super helpful. And then maybe just a broader question on the portfolio. Where are you in the sampling process across new chips? You had kind of talked about the second half with the device with the lead customer that you kind of talked about. Any update there on timing? And what should we be paying attention to in terms of announcements, et cetera, in the coming months? Rahul Patel: Tom, this is Rahul. So we have started to sample our microprocessor, Astra microprocessor last quarter towards the end of calendar quarter 3, early part of calendar quarter 4. And that sampling has gone just as expected, in fact, ahead of our plans. We anticipate going into production on that part end of this quarter, early part of next quarter. In my prepared remarks, I talked about 2 new products that are in early phase of sampling at this point. The one that we talked about is the Astra product is a microcontroller that is integrating an NPU. It's also integrating certain interface for benefiting of the bill of materials and many other things. But importantly, it is in its class, I can think of, based on what I can see from my side, the only MCU that has got Wi-Fi 7, BLE and Bluetooth 6.0 and Thread integrated into silicon. That is sampling right now. And we are not going to walk away from non-Astra opportunities. And so for that, we have also built a Synaptics connectivity part that is Wi-Fi 7, Bluetooth, BLE and Thread that can integrate onto non-Synaptics processors as well. And so both of those products are in early phase of sampling. And then I believe you may have hinted about the semi-custom MCU that is still for a major customer that is still on track for being taped out in early part of the next quarter, more likely April time period. And so you can see the entire lineup on Astra processors as well as connectivity, stand-alone connectivity and integrated connectivity with market-leading Wi-Fi 7, Bluetooth 6.0 and BLE and Thread is coming out from Synaptics in the first half of this year, calendar year. And believe me, I think there's a lot more in the store that we are working towards delivering in the second half of the calendar year as well, more Astra class processors. Obviously, we are doing other things in the interface business as well, and we'll talk about them as we are about to launch in the marketplace. Operator: And our next question comes from the line of Joe Quatrochi of Wells Fargo. Travis Poulin: This is Travis on for Joe. So I had a question on automotive. I noticed you didn't touch on it in the prepared remarks. So I was just curious on how that did during the quarter? And secondly, how should we think about this portion of the business over the long term? I remember you mentioning that you were investing in this area last quarter. So just curious on getting updated thoughts. Ken Rizvi: Travis, it's Ken. Thanks for the commentary. Yes, if you look at automotive, it is a small portion of our overall business, and it's been in this range, I would say, range bound here the last few quarters. What's really propelled that enterprise and automotive space is primarily on the enterprise side. And so as we focus going forward, more of our -- not only R&D dollars, but just focus is around the enterprise market as well as around Core IoT and Edge AI specifically. Travis Poulin: That's helpful. And then I know you guys only guide like a quarter at a time, but Ken, can you help us understand like kind of what the June quarter typically looks like from a seasonality standpoint, just kind of as we calibrate our models? Ken Rizvi: Yes, happy to. We don't provide guidance more than 1 quarter ahead, but maybe I can give you a little bit of a color here, a flavor here, as we head into June. Historically, we would expect that quarter to be up a bit from the March quarter. If we look at the starting backlog as one data point, the starting backlog for Q4 compared to the same point in time for Q3 is up. Obviously, we need to continue to see progress in those trends in terms of bookings and the like, but that's at least a strong data point for us as we look to June. Operator: Our next question comes from the line of Neil Young of Needham & Company. Neil Young: I wanted to ask on Astra. So regarding the pipeline for Astra, I'm not asking you to put a number out there, but could you maybe share the rough split of that pipeline by end market? Rahul Patel: Well, I think the way to think about Astra is our pipeline is growing really fast, right? And the benefit that Astra has is it is also having a very nice companion capability in our connectivity. And so combining the 2, it becomes a very compelling solution and a starting point for many of our customers to engage with Synaptics. And so we are really encouraged by how fast the pipeline is building up on Astra and our connectivity combining together as a solution. Having said that, I think the nature of the market is such that the pipeline builds up fast for consumer applications and industrials follow. And I think it's just because of the design cycles and the entire decision-making process between consumer and industrial marketplaces, and that's how it's playing out. Our consumer pipeline is a lot larger than industrial, but that's how -- it is as expected in our launch of the Astra lineup in the marketplace. What's important is we have a SKU map, and that's extremely compelling to our customers. If you notice, we have a platform play that is built on open source platforms, very friendly to developer community. And if you heard me in my prepared remarks or the question that Tom had asked earlier, we are building our SKU map out really fast, courtesy of phenomenal IP capability that we have developed in-house that allows us to create very fast turn SoCs on Astra. And I think that is being leveraged very nicely to build out a SKU map. And what that does to our engagement with our customers is makes it very compelling because their software investment can now scale across the entire SKU map very nicely. If they are focusing on audio modalities-based MCU application, then you have Astra. If they are focusing on vision modalities-based MCU, then you have an Astra. However, your base code line and your stack for application code basically doesn't have to dramatically change as you can work within the SKU map of Synaptics' Astra MCUs and microprocessors. And so long-winded answer, Neil, but really excited about how fast the pipeline is building. Consumers definitely the lead marketplace. Industry is falling right behind consumers. Neil Young: Great. And then my follow-up, you talked about humanoids in your prepared remarks. As you engage with customers on these platforms, the humanoid platforms, could you help us think about the typical architecture, specifically how many processing, connectivity and sensing nodes one of these humanoid robots might require and where Synaptics tends to participate within that? Rahul Patel: Neil, in my prepared remarks, I talked about our engagement in humanoids. This has been in play for some time. What I was specifically calling out is we are now sampling silicon for pilot builds of humanoid at a major customer that's leading the marketplace and has made commitments to the marketplace to deliver pilots this year and go into production next year. This is on the backs of our touch sensory controllers and our bridge solutions that help transport high bandwidth data effectively in the humanoid. And so this is all underway. We are in the process of working with our customer, our lead customer, building out the pilot program that they are working towards basically and delivering in the marketplace this year. We see our opportunity in humanoids extending into the larger robotics marketplace. And what it means is, from my point of view, robotics is a very broad market. It goes from home vacuum cleaner to -- all the way to humanoid and everything in between. And in situations where you would have at the furthest end of the spectrum from humanoid, like a vacuum cleaner, an MCU class product with a native AI capability and wireless connectivity, not only Wi-Fi, Bluetooth, and Thread, but also GNSS and GPS, if it is on an industrial floor is very valuable. And that's the opportunity for Synaptics. If you take it up all the way back to the humanoid, you have sensory capabilities that are required that are going to mirror not only what a typical human nervous system could do, but maybe with a higher precision. And so the number of touch controllers would vary. We have demonstrated at CES partner that has come out and built a platform using I believe, 30-odd touch controllers in the Palm of a robotic arm, combining it with Astra, combining it with a vision processor and combining it with wireless connectivity. And so as you can see, this is where the opportunity is. And if you have a high-end humanoid, there may be a main processor, there may be a GPU, a data server type processor. However, that requires a lot of ML and AI data to be locally at a section of the humanoid level processed from the sensory inputs like a touch controller so that there's effective decision-making taking place within the tolerance of the latency that the end application may require. And so as you can see, the Synaptics portfolio scales very nicely from an MCU class AI native processing platform for a robotic and application to something that would be all the way to a humanoid. And you're seeing designs that are consuming our sensory capabilities, especially our touch interface and controller capabilities, not only in the palm, but also in the foot of a humanoid basically. And I think there's many things that will come about. But more importantly, again, I want to reiterate. What I was excited about in this quarter is we have started sampling our silicon for a pilot build to a company that's leading the marketplace, building multiple advanced humanoids to be delivered to the marketplace at the end of this year as pilots. Operator: Our next question comes from the line of Christopher Rolland of Susquehanna. Christopher Rolland: So I did want to circle back on the memory issues in PC and mobile. And I know like, for example, Qualcomm was out yesterday, and they said that there's no demand destruction that they expect because they play at the high end of the market. But also at the same time, what they said was mobile vendors, in particular, were working down their inventories. It sounded like a chips, but also in process and finished inventories and that this could take as long as 6 months to kind of work through. And so I wanted to make sure that there weren't any channel effects from that perspective that could affect you guys for both the PC market and the mobile market. Ken Rizvi: Yes. So Chris, it's Ken. Thanks for that note. So a couple of things. One, if you look at just overall mobile business relative to -- on the mobile touch relative to some of the other categories, it's a small category for us, so in terms of percent of sales. Number two is even if you look at our channel inventories, -- we -- channel services for us mostly logistics for us, but we monitor that because that's the best view we have into various markets and OEMs. And that inventory is very lean and remains very lean and has over the last few quarters. So it's tough for us to comment on other companies and their inventories and supply chains. For what we can see here, which we give guidance 1 quarter ahead, and I gave a few verbal comments in terms of how we're thinking about June. We play at that high end of the market, both on the enterprise side and on the mobile side. Obviously, it's something we'll continue to monitor and look at the memory market -- it does -- it goes into many and multiple devices, as we all know. But from what we can see for our March quarter and at least the early signs in the June quarter, we still are seeing reasonable and robust and healthy backlog and bookings levels. Christopher Rolland: And then I guess, secondly, I know mobile is smaller for you guys, but combo chips, connectivity into mobile, there can be potentially high volumes there. Is this a real opportunity, call it, '27 and beyond? Or do you think just the IoT market is really all the focus and will ultimately be all the contribution? Rahul Patel: Chris, this is Rahul. From where we stand, let me start with connectivity. Connectivity for us is the entire SKU map. From IP development point of view to delivery of end products, we intend to build out the entire SKU map. As you probably may know, we have all the way from mobile platform class, premium mobile platform class, Wi-Fi 7, Bluetooth connectivity to an IoT class integrated into Astra processor, Wi-Fi 7, Bluetooth 6.0, BLE, Thread connectivity kind of a portfolio of products. And obviously, we have obviously prior generations as well. We are also building out Wi-Fi 8 as we speak and plan to sample Wi-Fi 8 by the end of this year to our customers. And so going back to your question, generally, we start at the high end and waterfall very quickly into the IoT class products with our Wi-Fi capabilities and Bluetooth capabilities. And so going back to your specific question about play in mobile, we are going to be remaining very opportunistic in terms of the available platforms. We are not going to go head on in a platform chipset competitive situation because it just does not bode well for us in terms of competitive landscape. And so there can be opportunities as many phone OEMs are now also choosing to build their own apps processor. However, and one of them has also gone down this path of building their own cellular modem, but many of them don't have their wireless connectivity in play. And so opportunistically, because we are going to advance our wireless connectivity for our IoT marketplaces, we will continue to look for opportunities in smartphone, where it would be a reasonable gross margin and profit contributing engagement for Synaptics. And that's how I would think of our play in mobile on a going-forward basis for wireless connectivity. Operator: Our next question comes from the line of Kevin Cassidy of Rosenblatt Securities. Kevin Cassidy: Congratulations on the great results. Just maybe even along those same lines as putting wireless connectivity and mobile, is there opportunities in PC? And maybe in a bigger question, what do you see in the enterprise PC market? Is there a refresh coming? Or has the DRAM shortage put a stall to that? Rahul Patel: So Kevin, this is Rahul. Let me first take on the enterprise PC. Our play in enterprise PC has benefited on 2 different vectors. First, we see the refresh gradually coming to play. Second, our team has done a phenomenal job gaining market share within the Enterprise segment. And so we got 2 things working for us in the PC space at this moment versus the larger PC marketplace, especially being in enterprise. I think you were also asking about wireless connectivity in PC. We absolutely will not go there in -- with wireless connectivity in PC, if that is what you're asking for, largely because it's a platform play, and it's a very tightly built platform by the x86 vendors. And there's -- it's not margin conducive. It's not P&L conducive to go down this path of investing in Windows at this time. Kevin Cassidy: Great. Understood. And you've had tremendous growth in your wireless connectivity in the IoT market. What -- who do you see as your competitors in that market? And do you think you're outgrowing the market? It seems that it would be, but maybe if you could share some of what you see in the market. Rahul Patel: Kevin, I can't think of any microprocessor or MCU company investing in wireless connectivity at the pace at which we are not only investing, but also advancing to a newer generation of wireless connectivity. We have over 500 engineers right now working on Wi-Fi 8 at Synaptics, right? And we believe that an MCU play or processor play in absentia of wireless connectivity is depriving the customer of a solution and a starting point that is very cost effective to build the end product from basically. And I think -- that is where we are differentiating on advancing our roadmap being the first in the IoT world to bring wireless connectivity and also the AI native Astra processors. Having said that, I do realize that there is this huge opportunity of non-Astra MCUs and processors in the IoT world. And so if you reflect on my prepared remarks, we are also sampling host independent, independent of what the host may be, a wireless connectivity solution, Wi-Fi 7, Bluetooth 6.0, BLE, Thread, SoC that can run its driver software by itself and not bother the host processor. However, make the non-Astra non-Synaptics processor platform extend with wireless connectivity very seamlessly. And so that is what we see as our SKU map doing. Competitively, I don't see any MCU or microprocessor available outside of Synaptics that has Wi-Fi 7 integrated. The last thing I saw was Wi-Fi 6. And so competitively, we feel very strong about our position on wireless connectivity across the entire SKU map with our processors and being a wireless connectivity supplier without our processors and also where we are going on the roadmap with potentially bringing to life Wi-Fi 8 from Synaptics this year. Operator: Our next question comes from the line of Robert Mertens of TD Cowen. Robert Mertens: This is Robert on behalf of Krish Sankar. Let's see. I know we've gone over a lot of the finer points of your Astra processor platform. But maybe if you could just take a larger view in terms of the customers that you're working with and the progress that they're making with the roadmaps. Are you sort of expecting more of the additional demand to come from this industrial applications? Or is it a mix of both the industrial as well as consumer customers? Any sort of details of just sort of how that mix is playing out would be helpful. Rahul Patel: Yes. I think excellent question. So I mean, if you noticed in my prepared remarks, every quarter for the last couple of quarters or last 2 or 3 quarters, I have cited examples of our designs. And those designs are generally with leading customers in that market category or that product category. On this quarterly call, in prepared remarks, I talked about our Astra processor that brings the benefit of processing out of band certain vision modalities, ultimately creating an experience for a television OEM that is very unique and differentiating from interacting with the television. At the same time, television becoming very intelligent to understand who's in the room, what needs to be done, turning on parental control is an example, right? And so I think you will see some of these examples cited. Having said that, the scope of our engagement is a lot broader in the marketplace in terms of design activity. And majority of our initial ramp is going to be in the consumer side. There will be industrial designs that will ramp a little later than the consumer designs. At the same time, if you pull back and look at our edge IoT play, and I cited our play in humanoid, right, that in itself is an indication of where we will be going in the industrial marketplace with our product capabilities. Now having said that, this one large important customer leading the market in humanoid has indicated to the world that they are going to pilot -- ship pilots basically this year and go into production in 2027, late 2027, indicating exactly how the industrial marketplaces play out. And so giving you a taste of us leading in the consumer space from a revenue recognition point of view in '27 and maybe in '28, calendar '28 time period, you will see some revenue coming through industrial channels. Robert Mertens: Great. That's helpful. And then just a quick follow-up. In terms of just your view into the market, what's your current view of channel inventory? Are we more normalized levels? Or are there any areas of your business where inventory levels could be a near-term headwind still? Ken Rizvi: Yes. Thanks, Robert, it's Ken. On that front, if you look at our inventory levels in the channel, just to highlight the distri channel for us is primarily a logistics-oriented channel for us. It remains very lean for us. We went through what I classify a couple of years ago, this COVID boom and COVID bust. And over the last 3 quarters or so, we finally leaned out where we're shipping really towards end market demand. So we're in good shape across the board when we look at those inventories. Operator: Our next question comes from the line of Peter Peng of JPMorgan. Peter Peng: You guys have intentions to move down to the broad market. So I guess just given the recent acquisition announcement in the space, how are you guys thinking about this part of the market now? Is it becoming I think more competitive because of potential cost advantages from the other players? Maybe just share your thoughts on that. Rahul Patel: Peter, this is Rahul. First and foremost, we feel very strongly about the leadership that we have in certain edge IoT solutions play. We believe our portfolio in wireless connectivity from the edge IoT marketplace is bar none in the marketplace. And so we feel very strong about our position and what we are investing from a roadmap point of view versus everybody in this marketplace at this time, especially the MCU class and the microprocessor class products. Having said that, if you're referring to this one company that got acquired or is in the process of getting acquired, our markets did not overlap. They were largely focused on MCU with integrated BLE with some Wi-Fi coming, but not a whole lot of Wi-Fi in their end products. And so our play is vastly different. Our play is a lot more broader in terms of the end market participation within the larger edge IoT marketplace. And so we seem to be engaging with customers that I would think they may not be able to engage. And that's how I see our play on a going-forward basis continuing. Peter Peng: And a follow-up question is you talked about the semi-custom project being on track. And I think last quarter, you talked about several other engagements as well. I guess like when you think about just this opportunity, what are some of the criteria that you look for to drive the engagement, either in terms of volumes, like market success? Like maybe just give us some parameters on how you think about these certain engagements. Rahul Patel: Yes. Peter, it's an excellent question. I believe in anchoring our roadmaps to certain large customers' vision and roadmaps. And this semi-custom opportunity with our MCU is anchored to a large OEM that believes in hybrid compute for AI. And the edge of the consumer side is where we are engaged with this large company that builds products using our semi-custom MCU implementation. What will happen is this large OEM will build a software stack upon which various applications will reside. And ultimately, we become part of their reference -- our silicon becomes part of their reference design that is not only used in that first-party product, but also in the third-party product, very analogous to what you see in the phone marketplace. And so -- and not the iOS phone market, but the other marketplace. And so long story short -- that is what entails a typical opportunity for semi-custom play for us on a going-forward basis. It is an opportunity that is not just point play, but it is also something that will build around the next chip that we provide to the same OEM for advancing their product as well as our roadmap in the process. And so along the same lines, I think in the world of humanoid and robotics, we have anchored ourselves to a very large leader in the marketplace that when the day comes, I think you will be able to say, yes, it is a large leading company in this marketplace. And so those are the things that you would see in decisions that we make when we do semi-custom play with end customers. Operator: I'm showing no further questions at this time. I'll now turn it back to President and CEO, Rahul Patel, for closing remarks. Rahul Patel: In closing, I want to emphasize that the Synaptics team is executing with focus as we advance our strategy. We are expanding our portfolio with new products that strengthen our leadership in edge AI. Our financial results highlight our ability to grow the company with disciplined execution. I want to thank our global team for their hard work and dedication and to you all, our shareholders, for your continued support of Synaptics. Have a great rest of the day. Operator: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
Operator: Thank you for standing by. My name is Jaylen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Doximity Third Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, simply press 1 again. I would now like to turn the conference over to Perry Gold, VP of Investor Relations. Go ahead. Perry Gold: Thank you, operator. Hello, and welcome to Doximity's fiscal 2026 third quarter earnings call. With me on the call today are Jeffrey Tangney, Co-Founder and CEO of Doximity, and audit committee chair and board member, Tim Cabral, who is stepping in to help out with our CFO, Anna Bryson, currently on medical leave. A complete disclosure of our results can be found in our press release issued earlier today as well as in our related Form 8-K. Along with a copy of our prepared remarks, all available on our website at investors.doximity.com. As a reminder, today's call is being recorded and a replay will be available on our website. As part of our comments today, we will be making forward-looking statements. These statements are based on management's current views, expectations, and assumptions and are subject to various risks and uncertainties. Actual results may differ materially, and we disclaim any obligation to update any forward-looking statements or outlook. Please refer to the risk factors in our annual report on Form 10-K, any subsequent Form 10-Qs, and our other reports and filings with the SEC that may be filed from time to time, including our upcoming filing on Form 10-Q. Our forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, February 5, 2026. Of note, it is Doximity's policy to neither reiterate nor adjust the financial guidance provided on today's call unless it is also done through a public disclosure such as a press release or through the filing of a Form 8-K. Today, we will discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A historical reconciliation to comparable GAAP metrics can be found in today's earnings release. Finally, during the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be one-time in nature, and we may or may not provide updates on those metrics in the future. I would now like to turn the call over to our co-founder and CEO, Jeffrey Tangney. Jeff? Jeffrey Tangney: Thanks, Perry, and thank you, everyone, for joining our third quarter earnings call. We have four updates today: our CFO, financials, network stats, and AI results. First, some unfortunate news. Our CFO, Anna Bryson, is out sick on medical leave. We miss her here at the office and wish her the best. I know she wishes she could be here too. We've been fortunate to have Tim Cabral, the former ten-year veteran CFO from Viva Systems, as our audit committee chair for the past five years. Tim has graciously agreed to speak to our financials on this call and help guide our finance team. Okay. In happier news, our Q3 financials were solid. We delivered $185 million in revenue, which was 10% year-on-year growth, and a 2% beat from the high end of our guidance. Meanwhile, our Q3 adjusted EBITDA margin was 60% or $111 million, which was 7% above the high end of our guidance. All in, we had a better-than-expected third quarter and another record upfront annual buying season. Okay. Time now for our network stats. We're excited to announce that we just surpassed 3 million registered members and now have more than 85% of all US physicians and two-thirds of all NPs and PAs on our platform. Engagement in Q3 was strong. Our unique active users on a quarterly, monthly, weekly, and daily basis all hit fresh highs, with record usage of our news feed, workflow, and AI products. Our workflow users saw the largest sequential gain we've ever had. As a reminder, workflow includes our telehealth, scheduling, digital fax, and AI tools. And for the fifth year in a row, Doximity Dialer was ranked the number one best-in-class telehealth platform by health system CIOs and their teams, outperforming Microsoft Teams, Zoom, and many others. With an AI glow-up, our fax service also hit new highs. Doctors can now query or summarize long faxes as part of our AI platform. You'd be surprised how long patient record transfer faxes can be. We had one last month that was 2,600 pages. So with our AI summary inquiry tool, we're proud to help doctors save both time and toner. Okay. On that note, I'd like to share our results so far in entering the noisy, crowded, and rapidly expanding market for medical AI. First, we're proud to announce that over 300,000 unique prescribers used our AI products in Q3, and they're using us a lot. In January, Docs GPT active prescribers queried us on average four times a week. So in our first full quarter since acquiring Pathway.ai in August, we've already become one of the most used AI tools by physicians. We've done so by delivering doctors a faster, higher quality clinical answer. Indeed, in a head-to-head trial of over 1,300 high-prescribing physicians we published today, doctors preferred Docs GPT at over twice the rate of our nearest competitor. We win most often on drug-related questions, as ours is the only medical AI with a built-in deterministic drug reference. We also do well with complex cases and niche evidence as we have a licensing agreement with ASCO that gives our users access to their guidelines. And we're the only medical AI to provide full PDF access to over 2,000 medical journals. We're also doing great with hospitals. We're delighted that over 100 of the top health systems in the country have now reviewed, cleared privacy and AI committees, and ultimately bought our AI suite, which includes both our clinical reference Docs GPT and our Doximity Scribe note-taking tool. In total, these hospitals have purchased access for over 180,000 prescribers, granting them permission to put patient data into our secure tools. We've won over hospital leaders by being honest and transparent about both AI's strengths and shortcomings. To be clear, no AI has eliminated mistakes or achieved anything near superintelligence. Claims to the contrary are misleading and dangerous. A recent Stanford Harvard study found that AI can cause clinical harm in up to 22% of real patient cases. And with overconfident models, those errors can become harder to spot. So we believe physician oversight is essential. To that end, we now have over 10,000 US physician experts who have reviewed our clinical answers and that number grows every day. Medical publishers call this peer review. AI researchers call it RLHF or reinforcement learning from human feedback. We call it peer check. Before a doctor puts their license and their patient's life on the line, they'll want to see a peer check answer first. Now these aren't just any doctors doing our peer check. But rather the actual experts and authors cited by the AI for each question. For fifteen years now, we've painstakingly mapped each doctor to each paper and trial so we know the right expert right away. Our peer check editorial board is co-edited by Noted Research doctor Eric Topol and former surgeon general Regina Benjamin. In their words, quote, together, we can build AI systems worthy of our profession and our patients' trust. End quote. We're gathering with 150 other physician leaders in San Francisco next month to further build this out. Our focus today is on building AI tools doctors can trust. Outside of hospitals, we have not yet commercialized our AI tools. So we have not included any revenue upside for AI in our current guidance. At a high level, our strategy is simple. We're strengthening our AI-powered digital platform for doctors the same way we always have. By putting physicians first. Okay. As always, I'd like to end by thanking my Doximity teammates who continue to work incredibly hard. To care for those who care for us. And with that, I'll hand it over to our audit committee chair and board member, Tim Cabral, to discuss our financials and guidance. Tim? Tim Cabral: Thanks, Jeff, and thanks to everyone on the call today. Third quarter revenue grew to $185.1 million, up 10% year over year and exceeding the high end of our guidance range. Similar to prior quarters, our existing customers continue to lead our growth. We finished the quarter with a net revenue retention rate of 112% on a trailing twelve-month basis. For our top 20 customers, net revenue retention was higher at 117%, so our biggest most sophisticated customers once again represented our fastest growing. We ended the quarter with 126 customers, contributing at least $500,000 each in subscription-based revenue on a trailing twelve-month basis. This is a roughly 10% increase from the 115 customers we had in this cohort a year ago. And these customers accounted for 84% of our total revenue. Turning to our profitability, Non-GAAP gross margin in the third quarter was 91%, versus 93% in the prior year period, driven by a step up in our AI infrastructure investments from increased usage. Adjusted EBITDA for the third quarter was $111.4 million and adjusted EBITDA margin was 60%, compared to $102 million and a 61% margin in the prior year period. Now turning to our balance sheet, cash flow, and an update on our share repurchase program. We generated free cash flow in the third quarter of $58.5 million. We ended the quarter with $735 million of cash, cash equivalents, and marketable securities. During the third quarter, we repurchased $196.8 million worth of shares. We believe repurchasing our shares is a valuable use of the incremental cash we generate above what's needed to reinvest in the business. As of December 31, we had $83 million remaining in our existing repurchase program. In addition, our board just approved a new $500 million open-ended repurchase authorization. Now moving on to our outlook. For the 2026, we expect revenue in the range of $143 million to $144 million representing 4% growth at the midpoint, and we expect adjusted EBITDA in the range of $63.5 to $64.5 million representing a 45% adjusted EBITDA margin. For the full fiscal year, we now expect revenue in the range of $642.5 to $643.5 million representing 13% growth at the midpoint. And we now expect adjusted EBITDA in the range of $355.5 to $356.5 million representing a 55% adjusted EBITDA margin. Despite our Q3 outperformance, the midpoint of our annual outlook remains in line with our prior guidance. This is the result of lower Q4 revenue expectations and higher AI infrastructure investment driven by a strong increase in usage. During this year's upfront selling season, we saw significant client engagement, strong growth among many top 20 pharma customers, and high double-digit SMB growth. We also face short-term industry-wide policy headwinds. As we mentioned on our last call, we had observed client uncertainty over how recent policy changes may influence annual budgets. We saw this uncertainty continue through year-end, with 16 of the top 20 pharma companies signing most favored nation agreements with the White House. Focused on tariffs and pricing, between late December and early January. As a result, our annual selling season was impacted in two ways. First, we saw multiple customers deploy a lower percentage of their annual budgets upfront than usual, as 2026 planning wasn't fully complete. And some funds remained unreleased. Second, this uncertainty resulted in many deals we normally have signed by December 31, being delayed and pushed into our fiscal Q4. This is evident in our January pharma bookings growth rate, which is the best we've seen since going public. As a result of these Q3 bookings dynamics, calendar 2026 is off to a slower start than usual, evident in our Q4 revenue guided growth rate. With that said, we have a few reasons to be optimistic that we'll end our calendar year 2026 with significantly better growth than we started it. First, we believe the higher portion of our clients' budgets that wasn't deployed upfront will likely be available to be invested later this year during the upsell season. Second, with MFN deals now signed for six of the top 20 pharma manufacturers, we believe they should be able to more confidently complete and execute their 2026 media plans. Finally, we see strong inbound demand for our AI member engagement. Which we have not yet commercialized but expect to have a product in market this year, we believe this will allow us to meaningfully tap into our clients' 2026 innovation upsell and search budgets. Moving to our operating model, we will continue to invest in our doctor-trusted AI platform, including increases in infrastructure, development, and our peer check program. Even with these investments, we are in a position where we expect to maintain 50% or greater adjusted EBITDA margins on an annual basis. With that, I will turn it over to the operator for questions. Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, if you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And we do request for today's session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Brian Tanquilut of Raymond James. Your line is open. Brian Tanquilut: Thanks for taking the question. And first, thoughts and prayers are with Anna. Hope you can get well soon. So just starting out on the budgets for calendar year '26, I think in prior calls, you referenced the growth rate around 5% to 8%. I know you mentioned a lot of swing factors that may have influenced that. But I'm curious, is that still the case for market growth and how much was MFN a factor? Or was that the largest factor in the calendar year '26 dynamics? Any color there? Perry Gold: Brian, it's Perry. Thanks for the question. So I'll take that one. So our operating assumption right now is that the market will grow roughly 5% in calendar 2026. EMarketer was out a few months ago with a report, and they're looking at about 5% growth for all of the healthcare and pharma digital advertising, which is down from last year. So that's kind of the gross assumption for the market. On the second part of the question on MFN, we think it certainly played a role. So coming into the very end of the year, when usually we will have signed a large portion of bookings for the next year, and you have many of these top 20 pharma companies that still haven't signed off on these big deals with the White House, these MFN deals, which are pretty broad-based, to do with pricing and tariffs. So it's a large, I think, bogey, a lot of uncertainty at the very end of the year. And so what we found were many of these customers weren't ready to fully sign off on their 2026 plans. They had some funds that were unreleased from the top down. So that timing really impacted us. So it was a large part of the impact, and I think it manifests in two ways as Tim called out. So one of them was just certain deals were pushed from usually, it'd be assigned by December 31 or pushed into next year. You could see our January bookings growth rate, as we mentioned, was one of the highest we've had since going public. It was the highest. And in addition, from what we heard from multiple customers, they deployed a lower percentage of their budget upfront. And so both of those, we think, were largely impacted by MFNs. MFN played a big part. There's some other policy things going on in the background. And as you know, the year's been very noisy, but we think MFN happening as late in the year as it did was kind of one of the primary factors in that slow start to the year for us. Brian Tanquilut: Got it. Thanks, sir. Appreciate that. And, Jeff, maybe just a follow-up on AI. Congrats on getting to the 100 plus health systems. I'm just curious, as we think about your customer conversations there, does that change the pace of where innovation budgets start? Like, do you expect that number to ramp up over time? Or I guess I'm just trying to think about the AI-oriented spend for your customers, what that ramp looks like and maybe your differentiation as you go attack that AI budget? Thanks, guys. Jeffrey Tangney: Yeah. Thanks, Brian. I think we really proved this last quarter that we are indeed a trusted digital platform for doctors. Right? With over 85% of US doctors, really look to us for the latest technology to help them take better care of their patients. We've done this in the past with identity and news and workflow and AI. I have to say I'm exceedingly proud that on our first full quarter after the Pathway acquisition, we've grown to over 300,000 quarterly active doctors, which is just a terrific pace. I don't think any other company could do that. And then to sign 100 hospitals, those 100 hospitals are major health systems. So those represent 20% of all US doctors. Those rollouts we're just doing now. So we signed those contracts to start at the beginning of this year, January, of course, takes a while to get the training planned and to get the rollout plan. That's really important, I think, for our continued AI growth. Because, of course, what doctors need to do with these systems is to put in protected health information, PHI patient information, to get the right answers out. And if you aren't in a signed agreement with that hospital covered under what they call BAA, their HIPAA agreement, well, that's not something the IT department will allow doctors to use just any tool for. So we're proud again, to be powering 100 health systems, 180,000 clinicians with our AI toolset. Operator: Next question comes from the line of Michael Cherny of Leerink Partners. Your line is open. Michael Cherny: Good afternoon. Thanks for taking the question. And yes, I will probably all say the same thing, but really best wishes to Anna as she goes through her medical leave. Maybe diving back in, I'm just gonna ask one question. I know sure plenty of people are behind me, but diving back in on the demand curve and the booking side, clearly, the narrative on your stock as well as virtually anything else that touches tech and software in the market is on this dynamic AI disruption, whether that's similar look-alike peers, broader GenAI oriented players. Just the general thought process of a new paradigm going forward. As you think through moving pieces tied to your start of your bookings, the January dynamic, how do you think about where the competitive dynamic lies and your ability to continue to capture the same hearts and minds of pharma companies deliver the same ROI, relative to what other peers may be promising them, whether they're hitting them or not. Jeffrey Tangney: Thanks, Michael. This is Jeff. I'll take that. So yes, step back, big picture. Our core business is very healthy. Right? We had over a million quarterly active users of our newsfeed, record high. We had 720,000 quarterly active users of our workflow tools, which is the biggest sequential step up we've ever had. Our telehealth product does very well. I will say last week during the snowstorms, we served more telehealth visits than we really ever have. It was over 700,000, which is a big chunk of all the care that was delivered in the US that day. People were snowed in. We're really proud to have won that telehealth market back in 2020. We believe we'll win the AI market here in 2026. And we do that by just having some very large moats around having, again, so many hospitals that have already worked with us and so many doctors. So the step that I'm actually most proud of on this whole call is the number of peer check experts that we have, these 10,000 cited authors and experts, doctors who wrote the evidence that made the clinical trials spent years of their lives studying and building this medical collective wisdom that we have. And I'm proud that at 10,000, we're bigger than the largest players in the industry. The biggest publisher in the space that's the leader and has been there for decades has about 7,000 experts that inform their clinical answers. And, again, we're now over 10,000. So I feel really good about the 20% of all US docs that we've gotten to use our Doc GPT, our AI already. And, again, for the first full quarter after the Pathway acquisition, I don't think there's really any other company that could have grown into this market that fast. To your question about what that means with pharma, you know, today, we do not have a pharma product that pharma can buy in this AI suite. We are just very thoughtful, I think, about how we work with doctors and make sure that things are win-win. We're not just gonna slap a full-page banner on top of a product. We know what that does to the experience for the end user. And, certainly, we want to be finding ways to have win-wins with industry around this, and we've done a great job of that in the past. And will continue to do here moving forward. So we're excited later this year to come to market with some product there. But, again, we have no revenue in our forecast for our AI products right now. Operator: Your next question comes from the line of Allen Lutz of Bank of America. Your line is open. Allen Lutz: Good afternoon and thanks for taking the questions. I wanted to ask on the policy uncertainty that pharma has. Can you talk a little bit about your recent conversations with top 20 pharma? Obviously, at the beginning of the year, there was the uncertainty around the things that you mentioned. Can you talk about the recent conversations and if the expectation is that some of that spend that was supposed to be maybe in the beginning of the year gets pushed out? Is there any opportunity for the midyear upsell season to be a little bit stronger? I'm just curious about your recent conversations and whether or not you think that could come into play. Thanks. Perry Gold: Hey, Allen. It's Perry. I'm happy to take that one. So, you know, I think what I want to get across is, you know, there were many of our top 20 customers. We actually had really good outcomes. So it was not the case with every single one of the top 20 had an issue. But there were a bunch where it was very clear that I think the brand managers wanted to be deploying more funds with us, but they hadn't got that approval of those funds released yet. And I think a lot of that had to do with the uncertainty very late in the year. And so just didn't have access to kind of that full amount of money to go deploy with us right away. We do believe that the intent is there that when they get funds released, we will get access to that a little later in the year. So that's, I think, one of the bigger things we've seen at play. Not really the brand manager, not wanting to deploy the funds, which is not having access to them from top down. It wasn't available yet. I think that was kind of the manifestation of it that we saw. But, again, there were multiple top 20 customers who were getting really good outcomes, and we're very proud of those accounts and kind of what we did there. But it was, you know, certainly the case that this unreleased funds issue was kind of more permeated more of the top 20 than, you know, we've ever seen anything like this before. Allen Lutz: Thank you. That's helpful. And then, you know, more of a strategy question, not asking for fiscal '27 guidance here. As we think about the increasing AI infrastructure or usage cost, I look at the gross margin year over year down about 180 bps. As we think about, you know, the way that you're scaling 300,000 physicians on the platform using AI. Really, really strong, impressive growth there. You mentioned the 50% adjusted EBITDA margin floor. As we think about you scaling AI and having costs there with no associated revenue, how should we think about the intermediate-term strategy there? Is revenue on the table for the next year or two? Or should we think about this really trying to build out the user base within fiscal '27 before turning on or even contemplating turning on that spigot? Thank you. Perry Gold: Hey, Allen. It's Perry once again. Great question. I think you hit the nail on the head. So the 50% that Tim referenced in the call, think of that as a floor, not a guide. We have an incredible opportunity in front of us with AI. We've already seen it one full quarter, you know, how much engagement this can drive and, you know, it's something that we want to lean into. We want to invest in. We're in a really fortunate position. We already have best-in-class margins, so we have room to go invest. To your point, I think it's late this year when we plan to be in market with commercial AI products. So we'll eventually start to put some revenue against this. Next year, you know, 2027 will pick up even more calendar '27. And so it's probably another few quarters in which there's cost without associated revenue, but that's an investment we're willing to make all day. And if there's upside in usage, a little bit more infrastructure cost, I think it's well worth it. As you see with a lot of these technologies over time, the unit economics start to get better. They go down. So I think the unit costs start to go down. We saw something similar happen with the early days of telehealth. And, you know, over time, you know, economics got better for us. We got bigger. We negotiate better rates. So that won't be a big burden for too long. We're also investing in PeerCheck, and I think PeerCheck is something that will really differentiate the offering. That trust component is huge for doctors. We have an opportunity, like Jeff said, we can go tap into this network with 3 million members. And in, you know, a month or two, get 10,000 expert reviewers to kind of come along and review a lot of these answers. And so we've got something that nobody else can do. And I think that investment, again, well worth it, differentiated offering, and I think that this will pay dividends over time. Yeah, think of that 50% as a floor. Operator: Your next question comes from the line of Glenn Santangelo of Barclays. Your line is open. Glenn Santangelo: Yes. Thanks for taking my question. Jeff, just two quick ones for me. The prepared remarks, I think you guys were commenting a little bit on fiscal '27, where I think you said you expect to end calendar year '26 with significantly better growth than where you started. So looking at your fiscal 4Q growth, you're assuming 4% revenue growth. And so is the assumption that you'll end the year much better than that 4% for the full year? I just want to clarify what you're saying. And then I just had one other follow-up. You know, Jeff, at this point, it's pretty clear that the public markets, they've been very punishing to companies with this perceived AI disruption and whether it's reality or not, you know, we'll ultimately see. But when you look at the public markets, they may not be appropriately valuing your business. And so I'm just kind of curious to get your take on this whole sort of dynamic that we're seeing. I mean, you're a big shareholder in Doximity. I mean, does Doximity need to be a public company just given the strength of your balance sheet? Perry Gold: Hey, Glenn. It's Perry. I'm happy to take the first one, and then I'll pass the terminal multiple question to Jeff. So great question, Glenn. Yeah. I think the way to think about it is, slower start to the year, you know, the 4%, but we actually feel really good about our ability to exit the calendar year as a double-digit grower once again. And, you know, the reason for that, there's a few. I think this year, a little bit more of a ramp. But one of the reasons is we think that those funds that hadn't been released earlier in the year will be released as we go through the year. And, as they get released, we've got one of the highest ROIs in the market, and we think folks will come to us because of that with those funds. In addition, we plan to be in market later in the year with a commercial AI product. And I think by having that, we will be able to very quickly tap into kind of innovation upsell budgets and search budgets. And so, yeah, I just want to be very clear. I think we will end the year or exit the year as a double-digit grower. I think, you know, I will reemphasize we believe for the entire year, without giving guidance, but for the calendar year, we'll be able to outgrow the market. As we have every year before. But that's probably the most we're prepared to give at this point, Glenn. Jeffrey Tangney: Great. Glenn, yeah, this is Jeff. I'll just say, I think overall AI is a tailwind for us. I think the opportunity in front of us to change healthcare, wow. It's never been better. And, again, to see 300,000 doctors come use our product here in the first full quarter after acquiring something and growing with it, I mean, we're just really excited. I think the opportunity to make being a doctor a better job is really fundamentally changing, I think, the way we're gonna look at the world here in a few years. And I'll just say the only problem from the doctor's point of view when you look at AI today, you really can't trust it. And the truth is they're putting their license on the line with every patient. And, you know, these are life or death decisions that are, I mean, very, very important. And so there's still this need to go check different sources or to go back to the textbooks which are trusted. So AI is fast, but they want textbook trusted and AI fast. And, again, that's where I think PeerCheck is just an incredible opportunity for us because these 10,000 noted authors, they're putting their name at the top of that. And that name up there, that's trust. That's showing that an expert in the field reviewed this answer and that it is correct, and I can get to it quickly. With the speed of AI, but, again, with the trust of the traditional textbook and expert approach. Your last question about our public market trading, I don't know. I try not to pay too much attention to it. I'll just say that there are certainly investors asking some of the same questions that you just asked there, us. And, again, from our point of view, we're just proud to be able to continue to be a company that is both serving doctors every day and able to generate cash flows that are attractive. Operator: Your next question comes from the line of Elizabeth Anderson of Evercore ISI. Your line is open. Elizabeth Anderson: Hi. Hey, guys. Sorry. Thank you very much for the question. I guess my question is, how do you guys see the monetization evolving over the course? I know you talked about it potentially. Over the course coming later in the year, but I'm curious how you kind of what your early thoughts are at this point on that opportunity. Both in terms of sort of model and then how that might sort of play into your broader advertising portfolio? Thank you. Jeffrey Tangney: Hey, Liz. This is Jeff. I'll take that. I'll just say at a broad level, there's a whole new TAM here that we traditionally haven't played in, and it's called paid search. And if you look at that same eMarketer report that Perry referenced, from a few months ago, you'll see that 55% of digital marketing spend in healthcare is for search. And so I think this is a large market and a big opportunity for us. We're not gonna talk much about our plans there. I think we are very good at doing this, and we don't want to tip-off others too much. But suffice it to say, we think there's a really large opportunity here. And, again, there's a lot of client excitement about it as well. Operator: Your next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is open. Craig Hettenbach: Just a point on 20% of health systems using AI. What do you think that could go in the coming years and how do you think about just kind of reference cases of those health systems that have adopted in terms of bringing others kind of into the fold? Jeffrey Tangney: Hey, Craig. Yeah. This is Jeff. Thanks for the question. So, you know, we publicly said in prior quarters that we have 45% of all US physicians through their health systems that use our telehealth tools. I think that gives you a sense of some of the opportunity here. But I'll just say getting to 20% in one quarter when every major health system has not only a privacy review committee, but also an AI review committee and they only work with trusted partners. And I think over time, the tech here is increasingly, you know, a commodity. I think we're seeing this across a lot of different areas of AI. It's the trust and the relationships and the platforms that really matter. We hear it from our clients all the time, the CIOs of these hospitals, they don't want to buy point solutions. They don't want to buy features. They want to buy platforms. And, again, between our scheduling and our fax and our telehealth, and our other tools, we really are one of those platforms that they turn to. Craig Hettenbach: Got it. And then just as a follow-up, nice strong start in terms of momentum. Post the Pathway Medical acquisition. But anything surprise you at this point now that you're kind of operating the business and things that, you know, whether it's when you went in, what you saw the opportunity set versus how it's evolving. I know it's only a few months, but just what's been kind of the feedback in terms of pathway? Jeffrey Tangney: Thanks, Craig. We've been really happy with the Pathway acquisition, and its speed of adoption and growth has probably been the best surprise here. The team, we're also getting along very well with, and they continue to really lean in, which is terrific. So we're really pleased with the acquisition and the growth. I would say, if anything, the semantic datasets that they brought us, the understanding of how to read through the 2,000 journals that we provide, uniquely provide full free PDF access to for our doctors and that drug dataset that built in because a lot of questions are drug-related questions, and those are the ones you really don't want to get wrong. And the reality is LLMs do struggle with this a bit. I will say the largest player in this space who's been around for decades, they've added an LLM to their product, but they haven't added a drug reference to their LLM. And they do that on purpose because they're careful, and they see that LLMs really struggle with drug information, with dosages, with things that are easy to move a decimal plate point one way or the other and make a really serious error. So we think we've got some great IP in the past acquisition, but we also got a great team and great growth this past quarter. Operator: Your next question comes from the line of Ryan MacDonald of Needham and Company. Your line is open. Ryan MacDonald: Thanks for taking my question. Maybe to ask on the budget question a little bit of a different way. Obviously, understand the headwinds with MFN. But obviously, of the other regulatory sort of talk and chatter around has been around sort of closing some of these direct patient marketing loopholes on TV and other platforms. Are you seeing in any of your conversations pharma customers starting to react to that in terms of how they're shifting the allocations of their budgets where maybe this potentially creates a tailwind and having more spend to the HCP budget over time? Thanks. Perry Gold: Hey, Ryan. It's Perry. I'll take that question. I mean, we've been having that conversation internally and externally for a little while now about DTC, and is it gonna benefit us? I could say at least this upfront season, we didn't see it happen yet. I think part of the issue was, you know, all of these cease and desist and warning letters went out in September. I think people forget already that right after we had the longest government shutdown we've ever had. So I don't think there was much on the enforcement front for a few months. The beginning of this year, I think there's some examples of that picking up again. And I think if the FDA kind of really pushes that enforcement, you will find probably more and more of these brands having to add a lot more small print, fine print to some of their TV ads. It'll, you know, make the ROI not look so attractive. And I think over time, the smart marketers will start to move that money to HCP where and when they can. But in terms of has that impacted us positively yet, we just haven't really seen it. And so, you know, that's just kind of, like, where we are today. Ryan MacDonald: Very helpful. Maybe as a follow-up on the AI side of things, great to see all the success in sort of these hospital and health system-wide evaluations. As you're having conversations with your health system partners right now, how much of what's called the AI strategy is a sort of top-down, you know, facility or system-wide strategy versus more sort of, let's call it, one-off physician usage of individual tools. And are health systems trying to grapple with maybe changing it to the former versus the latter? Jeffrey Tangney: Yeah. This is Jeff. I'd say it's been a mix. Honestly, both bottom-up and top-down. That said, I'd say the early discussions we had in, you know, September, October with our clients about this, of course, it was with, you know, the CIOs CMIO suite. And then they try out the product, and then they show a few friends. And then it becomes more bottom-up. I will say that I think you'll see much more vigorous AI enforcement. It's been a little bit wild west, to be totally honest. You know, in the AI world with hospitals, this past year. But there are a lot of real concerns that they have about leaking patient data, and, you know, liability and the accuracy of information. So I think you'll see more of an enforcement regime this year. And, again, I think we're on the right side of that in working with them. So, you know, we've been doing this for fifteen years. We are the trusted platform for physicians. We have a process to work with our hospital partners and our doctors to do this. I think, again, we're just very well positioned to capture this AI opportunity. Operator: Your next question comes from the line of David Roman of Goldman Sachs. Your line is open. David Roman: Thank you. Good afternoon, everyone. Wanted to just start with maybe some of the signposts that you're using to project the acceleration in both your business and in the market through the balance of the year? And why, as pharma companies look at their budgets, like, how you think they're balancing figuring out how to do more with less, versus deploying resources in an accelerated manner throughout the year. Jeffrey Tangney: Yeah, David. This is Jeff. I'll take this first at least. I'll say this. In an efficiency environment, digital marketing does pretty well. Why? Because it's the highest ROI. And I'm really proud that our portal usage has doubled over the past year. This is the number of clients we have using our portal. And the great thing about our client portal is it lets them see their ROI. We have IQVIA data in there. They can actually look at their what they call, script lift or NRx lift on a monthly or quarterly basis. And so this past year, we had a record number, 965 ROI studies that were done by our clients. And we're still at that same number we were at our IPO, about 10 to one median return on investment for our clients. So I do think in efficiency-driven environments, I think digital marketing will do well, especially when every $1 you put into it, you get 10 back. David Roman: And then maybe just one of the things you talked about earlier this year was on the recruiting front, and we did see kind of a step up in stock comp associated with bringing on AI talent. And it seems like the talent race is on in that segment. I mean, you operate in a very, very talent competitive environment. With anthropic opening offices and others. Right around you. So how are you thinking about talent retention and recruiting and making sure you keep the right people on board here, especially as the stock price has drifted lower. Jeffrey Tangney: This is Jeff again. Yeah. The talent wars definitely are heating up, and yes, we are, you know, retaining our best people, offering them stock grants, and, you know, the reality is I think we've done very well at keeping, I think, a very mission-driven team here who really, you know, do love humans, do love doctors, do love working with doctors who take care of humans. So, you know, it's, I think, an advantage in this market to be a company with such a long-held purpose and such deep roots in the medical industry. I find that the folks that we have on our team who are sons, daughters, or married to physicians really are the ones that really, I think, are the cultural torch carriers for us because they come in every day, every week with examples of how doctors have used our products to, again, save them time or lead to better care. So every week, we share what we call Doc Law, which is an email or a message that's come into our inbox unprompted from a physician talking about how, you know, we've helped them that week take better care of a patient. So there's no doubt you'll see that we will have to fight the talent wars, and we will have people who, I think, get bigger stock packages. But that's all part of leading into this AI opportunity, which we think is pretty fantastic. And is playing out in our margins as well. Operator: Your next question comes from the line of Scott Schoenhaus of KeyBanc. Your line is open. Scott Schoenhaus: Questions, and best wishes for Anna here. I guess, Perry, as a follow-up here, you know, you talked about the demand getting pushed out from December into January from a select group of large pharma. You mentioned January pharma bookings having the best growth rate ever. Do you mind providing more color on what exactly this growth rate looks like? And then know it's still only the first handful days of February, but are you seeing the same kind of similar healthy growth rate in bookings in February? Perry Gold: Hey, Scott. How are you? Yeah. So January bookings growth rate was the best we've seen since going public. I can say it by a wide amount. It's a clear indication of the delayed decision-making that we referenced. It was part of the impact, but less budget deployed upfront also played a major role. I aren't gonna quantify beyond that. We never provided absolute bookings figures. And it's just really early in February. So, you know, not much to add on that front. Scott Schoenhaus: Understand. And then back to the market growth rate, 5%. And your ability to get to double digits exiting the end of the year, I mean, what how should we think you had you think we took you took some market here in the midyear selling season this past year. How do we think about your ability to take market share as you scale and ramp throughout the year? Is it you know, historically said we can take double the market share, if the industry grows up? Perry Gold: Yeah, Scott. So I know we've talked about that in the past. I don't think the two x is always a hard and fast rule. But, you know, we've continually outgrown the market since we've been public. I think part of it has to do with the fact that we continue to innovate. We continue to grow our engagement. We continue to have best-in-class ROI. And I think as soon as you come to market with something really new, like an AI commercial product, you have our customers always have these innovation budgets. And those are the types of things that kind of are generally always available for interesting new offerings. And so AI will allow us to tap into those budgets, possibly search, as Jeff referred to. And so I think these are a lot of factors that will put us in a good position to, you know, get to that double-digit exit growth rate for the year. But that's probably the most we can say on that without giving official guidance. Operator: Your next question comes from the line of Jeff Garro of Stephens. Your line is open. Jeff Garro: Yes, good afternoon. Thanks for taking the question. Was hoping you could give us some kind of update on your strategy and progress integrating your workflow tools with the broader healthcare technology ecosystem. Most specifically, curious about integrating Medical AI and Scribe with electronic health records. Thanks. Jeffrey Tangney: Thanks, Jeff. Yeah. This is Jeff. I'll respond. So, again, we're really proud to work with hundreds of health systems, and we do integrations with many of them. The integrations to date have been mostly around our telehealth service offering, but we're working on other integrations as well. I don't have anything specific to say on that front today, but suffice it to say, our Scribe product does do very well among individual doctors. It saves them a lot of time. They like that it's personal to them, and that it's something that they can carry with them in their pocket anywhere at any time. And, really, the integration isn't that heavyweight when you think about it. It's mostly a cut and paste. The other thing is our dialer tool, which is our most popular work tool for telehealth, you know, we have that button right there in the dialer call that allows you to go inscribe the visit, again, which is a great point of integration for us to be in. And, again, it's not hard to have a receptionist or staff member go cut and paste that in at the end of the day. But we're also working on integrations with folks. And I just end by saying, you know, particularly with our product, I think we have many moats. And we've seen, you know, new competitors come and go here. We've had probably five direct competitors over the years that have tried to build a physician-focused dialer. I will say it is very hard. It's painstakingly difficult to go and do all the things you need to do with all the telcos. We have unique relationships with the telcos to make sure that the caller ID and the attestation all works correctly. And in the end, that manifests itself into pickup rates that we have that are three times what others have. So in short, when you call a patient using Doximity Dialer, you will not be marked as spam. You will not be flagged as spam risk. You will get through to that patient with a number that they recognize. And that's a pretty big moat for us. And, again, we've seen a number of companies try to come at us here. Our dialer usage has actually gone up more in the last quarter, nice and steady, than we've had in the past. Operator: Your next question comes from the line of Stan Berenshteyn of Wells Fargo Securities. Your line is open. Stan Berenshteyn: Hi, and thanks for taking my questions. On the medical AI, the 300,000 unique prescribers that you talked about, if we think about the workflow, I'm curious, how are the providers using these features? Are they opening up the app and going directly into the medical AI, or are they interacting somewhere else in the app and aren't, you know, organically getting redirected? I'm curious if you can talk about the workflow that's getting them to use this feature. Jeffrey Tangney: Thanks. This is Jeff. Yeah. The full platform flow, which we're happy to demo for folks if they'd like to see, is you start with the telehealth visit. You're talking to, seeing a patient, inscribes the visit. At the end of the visit, it writes what's called a SOAP note for you. The A and the P in the SOAP note is called the assessment and plan. And a lot of times, doctors will want to double-check their assessment and plan. And, again, that's just a one-click into our DocGPT AI to do an evidence-based search and double-check your assessment and plan. So there's a lot of on-ramps, honestly, into the AI. The other one is, you know, from our news feed, which has more than a million quarterly active users. Last quarter, after reading an article about something new in medicine, maybe I have a follow-up question or two, again, that leads you directly into our AI, which can do more research and help you understand the full article or new news a bit more. So, again, we're not a feature, and that's a huge advantage here. In the end, being a trusted platform for physicians for fifteen years. It's a place that they go. They're spending, again, most of their time doing workflow, newsfeed, identity, all of that comes together into also having a question and answer tool. Stan Berenshteyn: Thanks. And maybe a quick one on bookings. Just when you're having these budget discussions, I'm curious. Are customers sharing concrete budget expectations, or is it still kind of like a framework and maybe there's some squishiness and that'll get worked out in a couple, you know, months or quarters? Thanks. Perry Gold: Hey, Stan. I think it varies. I think there are, you know, like I said before, brand managers who intend or want to spend a certain amount with us, but it really depends on kind of what gets deployed, sorry, what gets released to them and when. Yeah. Obviously, others, you know, that signed on, you know, at a large scale by December 31, you know, we've got a good sense, you know, obviously, it's, you know, a sign of what they're gonna do with us. A lot of times, they'll make that decision if they can, if they're in a position to do that, the funds will be released. Because by doing that, you know, you kind of unlock the best possible economics. But like I said, it varies from customer to customer. And, you know, I think there are folks who would like to spend more with us and, you know, just hadn't gotten access to those funds yet. And, hopefully, if and when those funds become available, they'll kind of spend kind of where they've indicated they may be able to. Operator: Your next question comes from the line of Ryan Halstead of RBC Capital Markets. Your line is open. Ryan Halstead: Maybe just a follow-up on the pharma marketing budgetary decisions. Just curious if you are seeing any change in or anticipating any change in the cadence of budgetary decisions by your large pharma customers. Is sort of the traditional seasonality of the upfront and upsell seasons kind of still the norm, or has there been any shift to a more periodic review and decision-making process? Perry Gold: Hey, Ryan. Great to see you on your first call with us. You a great question. I think the answer is this is an anomaly. This what would happen at the end of this year was very odd. I think even for our customers, it was odd. And so this isn't what you would typically see. There wouldn't typically be this much uncertainty very late in the year. And I can tell you that I think, like I said in my last response, it is to your advantage to buy, you know, at scale for the full year December 31 because you unlock the best possible economics and top benefits with us. So I think this is truly an anomaly for this year. And we're working through that. I can say if you look back two years, it's a little bit, but we had kind of a similar dynamic where 4Q was, you know, a mid-single-digit revenue growth rate. It had to do with the fact that we'd sold a lot of point of care. And content wasn't ready. But, you know, things I think a lot of the programs, the launches were delayed. When you went to the first quarter, there's a nice step up in revenue growth as those things kind of normalize a bit. Not a perfect compare, but this isn't the first time we've seen something like this. But in terms of is this a new norm for the upfront season, we think this is really an anomaly. This is not something that we expect to continue. Ryan Halstead: Got it. That's helpful. And then for my just any color around demand for the multimodule integrated offerings. Perry Gold: Yeah. So I can take that. So, DocDynamic, this quarter was about 45% of our bookings, compared with 18% a year ago. It was still a significant part of the selling season. You know? Again, you know, there's only so many people that can buy it because the minimum is high to get access to it. So it's still an interesting product for many. It's still really good tech. Folks are interested. But, yeah, the update is about 45% of the program were DocDynamic in terms of what we sold in the third quarter. Operator: Your next question comes from the line of Richard Close of Canaccord Genuity. Your line is open. Richard Close: Yes. Thanks for the question. Obviously, a lot of them questions already answered. I was just wondering, Jeff, if you could go into a little bit more detail on the background of the study you referenced with the docs using the AI and how much impact that maybe has made in terms of gaining additional utilization with other providers. Jeffrey Tangney: Yeah, Richard. I'm glad you asked. So, yeah, we did do a study as we do our own research with Tau all the time. And, again, we're about to have 150 doctors here in a few weeks to go really deep on this for a few days. But, yeah, we had 1,300 high-prescribing physicians. So these are very busy physicians who took the time to go and actually ask a clinical question that they faced in their practice that day and do a side-by-side comparison, you know, our AI versus other AI in the marketplace. And the net of it was we feel really great that we performed at twice the rate our competition did in this space. And with good reason, I think around the better drug reference, the full 2,000 journals access, and even some smaller things. They like our formatting of tables. They like the speed of the product. We're faster than any other product on the market. So, yeah, we're proud to do that research, and we just put it out today. So more can see it. I do think they probably, you know, used the product and maybe told others about it. That's how we got to from that 1,300 trial list to 300,000 to give you a sense of how quickly word spreads in medicine. But to be fair, most of that study was done in January, so pretty recently. So I don't think that that, you know, was a meaningful part of our 300,000 number. Operator: Thank you. We've run out of time for any further questions. I will now turn the conference back over to Jeff for closing remarks. Jeffrey Tangney: Thank you. I want to thank you all for joining our third quarter 2026 earnings call. We appreciate the feedback, and I just want to say thank you to the entire team here who continued to work incredibly hard to serve our physicians every day. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the Ribbon Communications Fourth Quarter and Full Year 2025 Financial Results Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star 0 on your telephone keypad. Now my pleasure to introduce your host, Fahad Najam, Senior Vice President Investor Relations and Corporate Strategy. Please go ahead. Fahad Najam: Good afternoon, and welcome to Ribbon Communications' fourth quarter and full year 2025 financial results conference call. I am Fahad Najam, SVP Corporate Strategy and Investor Relations at Ribbon Communications. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer, and John Townsend, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projection for 2026 and beyond, are forward-looking statements. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today, as well as in the supplemental financial information we prepared for this call, which again are both available on the Investor Relations section of our website. And now, I would like to turn the call over to Bruce. Bruce? Bruce McClelland: Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our Q4 results and outlook for 2026. When we spoke with you back in October, we entered Q4 with a sense of optimism but also recognized we are operating in a very dynamic macro environment, including budget uncertainty related to the recent US government shutdown. We remain optimistic as we start the year. We successfully closed multiple significant deals in the quarter and achieved record product and professional service bookings. A significant portion of these new orders is associated with new voice modernization projects where we expect revenues starting in the second half of 2026. We've expanded the customer base and reinforced our industry leadership in cloud-centric voice modernization, where our portfolio and technical teams really set us apart from the competition. We also see a significant opportunity to integrate voice technologies with the expanding set of conversational AI and agentic AI platforms. Our Acumen AI ops platform continues to garner strong interest. However, relative to our guidance for Q4, revenue was below our expectations and was impacted by several customer and project delays. The delayed programs are not lost business and are primarily tied to two key reasons. Half of the shortfall was associated with projects already in backlog where implementation delays pushed out project completion milestones or product shipments, delaying revenue recognition to future quarters. This included one of our primary US customers where deployments slowed during their recent restructuring. The remaining gap in the fourth quarter was with several customers impacted by budget availability at the end of the year. This included an IP optical project where the end customer is still waiting for bead funding to be distributed. When comparing year over year, as expected, the largest contributor to lower sales in Q4 was the reduction in new sales to US federal agencies, which were approximately $10 million lower than in 2024. The other primary contributor to the year-over-year reduction in Q4 is the challenging comparison to the record quarter we had with Verizon in '24, when we shipped significant amounts of equipment to begin to ramp the voice modernization project across multiple sites. For the full year, our business with Verizon was very strong, with sales increasing 27% year over year. And now, with the closure of the Frontier acquisition, there is a significant opportunity to expand the scope of our program across the Frontier footprint over the next several years. For the full year, sales to global service providers increased 5% and were 70% of overall sales for the company. Sales to enterprise customers increased 2% year over year, while sales to government and defense declined 23% and were 9% of overall sales. So we made good progress growing our position in telecom and enterprise markets, while government and defense were below expectations. On a regional basis, 2025 sales in The Americas were essentially flat year over year, given the reduction in US federal offset by the increased business with service providers. EMEA sales were down year over year as a result of the reduced sales to Russia starting in 2024. Excluding Russia, sales in EMEA were flat year over year. Sales in the Asia Pacific region grew 19% year over year, with a significant increase in business in India. Consolidated gross margin in the quarter was in line with our expectations, with very strong cloud and edge margins benefiting from a stronger mix of software revenue this quarter, offset by lower IP optical networks gross margin from the increased sales in India and lower sales in North America and EMEA regions. Adjusted EBITDA for the quarter was $40 million, $2 million below our guidance range due to the lower sales, offset by lower operational expenses primarily related to reduced employee variable compensation. Despite the lower-than-expected Q4 results, we ended 2025 in a solid financial position, and as expected, Q4 was the strongest quarter of the year, increasing 6% versus the third quarter. For the full year, revenue increased 1% to $845 million, excluding sales to Russia in 2024, sales to all other customers increased 4% in 2025. Also note that you'll see a significant increase to our net income and EPS quarter related to a new tax benefit that John will describe shortly. Now a little more detail on our operating segments. In our IP optical networks business, revenue was down $2 million year over year in the quarter, which was below our target of mid-single-digit growth. As mentioned earlier, we saw several projects in North America push out into 2026, including a significant new deployment awaiting the release of bead funding. Sales were lower in the EMEA region primarily due to a year-end budget freeze with the government defense agency. This was offset by continued growth in India, with sales in the fourth quarter increasing 28% year over year on the strength of deployments with Barty as well as first shipments for a new rural broadband deployment. For the full year, sales in India grew more than 40% and exceeded $100 million. In other regions, we won several optical transport expansion projects in Southeast Asia, with CONVERGE CICT and Morotel. In the critical infrastructure market segment, we won significant projects with two major European railways, Danish railway, Panemark, and pan-European operator, Deutsche Bahn. We also had a first win with one of the largest electric power generation and distribution cooperatives in The US, which provides service across nine states. IP optical product and services bookings to revenue was 1.1 times in the quarter, and bookings were the highest level of the year. For the full year, revenue grew approximately 1%, but when excluding sales to Russia in '24, revenue across all other regions increased 9% year over year. In our Cloud and Edge segment, revenue in the fourth quarter was down $23 million year over year, below our expectations as I previously mentioned. Despite the lower revenue in the quarter, Cloud and Edge bookings set a new record high, with product and professional services booked to revenue of 1.5 times. As I mentioned on our last earnings call, we're seeing an increasing number of service providers investing in modernizing their traditional voice networks. In addition to Verizon, we booked over $50 million of voice network transformation orders in the quarter across more than a dozen different customers. Revenue for these projects is normally spread out over time, typically six to twelve months, or perhaps longer for larger projects. It's a very good start, and there are several additional significant opportunities that we are pursuing. In addition to legacy class five switch replacement, another key voice modernization priority for both service providers and enterprises is to migrate from purpose-built hardware to fully cloud-native implementations. We now have several major projects underway with tier one service providers in Europe and Asia Pac, along with a significant new win with a US tier one customer this quarter to migrate SBC and routing workloads to cloud-native implementations running in both private and public cloud. For the full year, cloud and edge sales increased 1%, with service provider sales growing 8% and enterprise and government sales decreasing 16%. With that, I'll turn it over to John to provide additional financial details on our results and then come back on to discuss the outlook for 2026. John? John Townsend: Thanks, Bruce. Let's begin with financial results at the consolidated level. In 2025, Ribbon generated revenues of $227 million, a decrease of 10% from the prior year. For the full year, revenues were $845 million, an increase of 1% or $11 million year over year. Fourth quarter non-GAAP gross margin was 55.4%, down 270 basis points due to lower software revenue and higher professional services revenue. It was also impacted by geographic mix, with a very strong performance from our team in India. For the full year, non-GAAP gross margin was 52.3%, down 355 basis points from the prior year, driven by the highest sales in India and higher services revenues. Fourth quarter non-GAAP operating expenses were $90 million, a decrease of $4 million year over year, reflecting our continued focus on efficiency and cost management. For the full year, operating expenses were $352 million, a reduction of $9 million from the prior year. Reductions were driven by employee and related costs more than offsetting $4 million and $6 million of FX pressures in the quarter and year respectively. Fourth quarter adjusted EBITDA was $40 million, a $15 million decrease from the prior year, driven principally by lower revenues. For the full year, adjusted EBITDA was $107 million, a decrease of $12 million from the prior year, driven by the lower gross margin. During the quarter, we recognized a deferred tax benefit of approximately $90 million related to our investments in ECI. This had a favorable 50¢ benefit to non-GAAP EPS. The tax asset will be utilized over the next several years, resulting in cash tax savings of between $15 to $20 million per annum. Net interest expense in the quarter is $11 million and $44 million for the full year. Quarterly non-GAAP net income was $106 million, a $78 million improvement year over year, driven by the tax benefit in the quarter. This generated non-GAAP diluted earnings per share of $0.59, which was an increase of $0.43 versus the prior year. Full year 2025 non-GAAP net income was $118 million, up $74 million from the prior year. Diluted earnings per share for 2025 was 66¢, up 41¢ from 2024. Let's look at the results of our two business segments. In our IP optical networks results, we recorded fourth quarter revenues of $85 million, a 2% decrease versus the prior year. Revenues for the full year were $333 million, up 1% from 2024. Fourth quarter non-GAAP gross margin for IP optical was 34%, down 600 basis points from the prior year, due principally to the higher revenues generated in India. For the full year, gross margin was 35%. IP Optical Networks adjusted for the quarter was a loss of $8 million. For the full year, adjusted EBITDA was a loss of $27 million. Now on to our Cloud and Edge business. We generated fourth quarter revenue of $142 million, up 14% sequentially, but a decrease of 14% year over year against a record fourth quarter in 2024. Full year revenues were $511 million, a $6 million increase from 2024. Fourth quarter non-GAAP gross margins were strong at 68%, up 65 basis points from the prior year, supported by core session border controller sales increasing by 10%, benefiting the overall mix. Full year gross margin was 64%, down 300 basis points from the prior year, due to the higher level of professional service revenues related to voice network transformation programs. Adjusted EBITDA for the segment was $48 million or 34% of revenue. For the full year, adjusted EBITDA was $134 million or 26% of revenues. Cash flow was very strong in the quarter. Good collections performance drove cash from operations of $29 million, resulting in a closing cash balance of $98 million and a net debt leverage ratio of 2.3 times. Cash from operations for the full year was $51 million. Total CapEx spend in the quarter was $2 million, bringing the full year expenditure to $15 million plus an additional $10 million relating to our new Israeli facility. During the fourth quarter, we repurchased approximately 972,000 shares of our common stock under our buyback authorization, at a total cost of approximately $3.3 million, bringing the total for 2025 to 2.5 million shares at a total cost of approximately $9 million. In conclusion, we continue to improve our cost efficiency and working capital levels to better drive cash conversion in the business. We also expect our annual capital expenditure levels to return to approximately $15 million. These efforts plus lower cash taxes are expected to improve cash generation in the coming years. And with that, I'll turn the call back to Bruce. Bruce McClelland: Great. Thanks, John. Over the past four years, we've maintained steady top-line revenue performance and navigated a significant number of challenges while delivering improved profitability, with EBITDA growing at a 19% CAGR. As we enter the New Year, we're not satisfied and are anxious to drive faster growth. We ended 2025 with increasing backlog and a broadening customer base for our secure voice and IP optical solutions. We continue to strengthen our balance sheet while also investing in innovation across our portfolio to drive long-term value. Our momentum remains intact, and I'm confident we'll deliver improving results as the year progresses. We have several important elements to our strategy this year to drive improved profitable growth and unlock value. The largest area of opportunity continues to be the investment being made by service providers, governments, and enterprises to lower the cost of operating their communication infrastructure and replacing outdated equipment. With our marquee customer, Verizon, we ramped up activity in 2025 and are progressing well on the first phase of their modernization program. We believe this remains a high priority for them and believe there is an opportunity to expand as Verizon integrates the Frontier operation in the coming months. Beyond Verizon, we now have similar initiatives with a broadening number of customers, highlighted by the strong bookings in the fourth quarter. These projects are complex and can take six months or more to implement and include a significant amount of professional services that Ribbon is uniquely positioned to provide. In many ways, the upfront investment can essentially be self-funded by the savings generated, and we're exploring creative ways to further unlock and accelerate voice modernization across the industry. In addition to telecom service providers, we have a growing presence in the enterprise segment where companies are building and managing their own complex secure communication infrastructure. We have several specific market verticals that we are addressing across the Fortune 1000 landscape, including financials, healthcare, transportation, energy, and defense. The technology stack within large global multinationals is transitioning from private data centers to public cloud, adopting technologies such as containers and Kubernetes. We believe we are considerably in front of our competition in supporting these new capabilities. Within the government sector, although it may take some time, we expect improved visibility now that the US federal fiscal 2026 funding has been approved. We have several large voice modernization programs already underway and a funnel of new opportunities that we expect will provide growth in the second half of the year. A key goal is to also secure similar programs outside The US this year. Our third major focus area is to sustain global high-speed broadband infrastructure driven by exponential growth in data traffic and the need to extend connectivity to underserved regions. In The US, we're actively supporting regional service providers as they expand fiber-to-the-home networks using very cost-effective IP over DWDM architectures. We expect these deployments to accelerate meaningfully in 2026 with the support of federal funding dollars. We're seeing similar momentum internationally, particularly in India, where national broadband initiatives have already translated into early commercial success for us. These networks also provide a foundation for data center interconnect services, and we see additional upside in critical infrastructure customers across rail, energy, and defense, with a strong focus on expanding further in North America. Finally, our new Acumen AI Ops platform is an important growth initiative for us, enabling end-to-end observability and automation across multi-vendor networks, with tools that allow customers to build AI agents using multiple large language model integrations. Optimum remains our lead customer, with additional POCs planned in the first half and modest revenue expected in the second half. Beyond AI ops, as the adoption of AgenTeq AI platforms continues to grow, we see a great convergence opportunity with our cloud-centric secure voice portfolio to seamlessly integrate AI with the human interface. Partnerships are critical to success in this ecosystem, and we recently signed a multiyear collaboration agreement with AWS to simplify the transition of critical network services to the public cloud. In addition to our core strategy, our recent tax planning has created an opportunity to generate more cash over the next several years that can be used to strengthen our balance sheet as well as to potentially accelerate innovation and expansion into new immediately adjacent markets, with select investments in new private technology companies rapidly innovating in these explosive growth markets. Now on the guidance for 2026. As I've just outlined, the underlying industry fundamentals are solid, and there are multiple positive long-term drivers supporting the business. It's imperative for our customers to continue to invest. However, we're taking a more cautious approach at this point in the year given several near-term factors that are out of our control. As a result, our 2026 outlook reflects a more conservative set of assumptions, particularly around the timing of business here in the first quarter. Key factors affecting our near-term outlook include shifts in investment priorities at major US service providers amidst elevated M&A activity, sustainability of Indian service provider CapEx intensity that has resulted in 60% revenue growth for Ribbon over the last three years, and timing in US federal spending and subsidy programs in the current political environment. Reflecting these macro uncertainties, we recently completed a restructuring that eliminated approximately 85 positions, lowering our annual expenses by more than $10 million. With that context, for the full year, we're projecting revenue in a range of $840 to $875 million. This implies a consolidated year-over-year growth rate of approximately 1% at the midpoint of guidance, but it's actually quite a bit higher after excluding low-growth maintenance revenue. For the Cloud and Edge segment, we're projecting approximately 6% growth in product and professional services revenue, offset by slightly lower maintenance revenue. For the IP optical segment, we're projecting approximately 5% growth of product and professional services revenue. Maintenance revenue is expected to be lower by approximately $10 million related to the completion of a maintenance contract with a European customer associated with legacy access equipment. On a consolidated basis, we're currently projecting gross margin to increase 50 to 100 basis points year over year, and we're projecting OpEx for the year to increase approximately 2% year over year due to normal inflationary increases, offset by the restructuring savings I mentioned earlier. As a result, adjusted EBITDA for the year is projected in a range of $105 million to $120 million, which would be approximately 6% higher than 2025 at the midpoint. For the first quarter, we expect a slower than typical start given lower sales in India and lower maintenance revenue, and are projecting revenue in a range of $160 to $170 million and adjusted EBITDA in a range of minus three to plus $1 million. In conclusion, we're taking a cautious approach given several factors I've outlined that can affect the timing of the business this year. We expect improvement as the year progresses. Operator, that concludes our prepared remarks, and we can now take a few questions. Operator: Thank you. We'll now be conducting a question and answer session. Please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing 1. One moment, please, while we poll for questions. Our first question today is coming from Michael Genovese from Rosenblatt Securities. Your line is now live. Michael Genovese: Great. Thanks very much. Bruce, I'd like to hear more about these new cloud and edge bookings. Just, you know, more detail on the size of those bookings. And then also, are those all coming from new customers, or does that also include new programs with existing customers like Verizon in that number? Bruce McClelland: Yeah. Hey, Mike. Thanks for the question. So the $50 million of new bookings that I mentioned were non-Verizon for all. These are other customers on top of the business we have with Verizon. And I think I mentioned there are about a dozen different customers, so it's kind of spread across a growing base of customers focused on similar modernization. There were a couple of reasonably large ones and then a longer list of more single-digit millions sort of thing that contributed to the $50 million in bookings. And, you know, the revenue associated with that, a portion of that, we shipped some of that in Q4, probably around 25%. And then the rest of that revenue associated with those bookings kind of plays out over the next, say, fifteen months, something like that. Michael Genovese: Great. And, I mean, do any of those dozen or so customers, I mean, are any of them of the size where they could be eventually like a Verizon or even like a BrightSpeed, or, you know, is there anybody large on that list? Bruce McClelland: Yes. Michael Genovese: Okay. Yeah. Yeah. I guess we'll leave it at that. I guess my other question is I just want to get more follow-up on some of these delays that you're seeing because, you know, it sounds like it's cutting across government in The US, government in Europe, plus some US service providers. That's, like, multiple vectors of delay and budget issues. So just, you know, more color on what's going on in all of these places and how long this could last would be helpful. Bruce McClelland: Yeah. No. I definitely understand the question. You know, I wish I could point to one specific thing that was kind of two groupings. One I think the one I was probably most frustrated with was business we already had in backlog that we were expecting to score revenue in the quarter. That moved out of the quarter. And, you know, these are basically professional service programs where we're deploying product. You know, I mentioned as one example, you know, a large US customer that was going through restructuring. And, you know, these programs were basically joined at the hip with the customer, doing the planning, out in the field, basically installing the equipment, doing the migrations, etcetera. And we recognize revenue as these migrations complete and, you know, all the lines are cut over to the new platforms. And, you know, so we saw some delays in those deployments. And that kind of immediately moves out revenue for us. And, you know, those types of major restructurings obviously have an impact on those types of programs. So that was the first big bucket. And then the other was what I described as year-end budget issues. You know, the one that was kind of the best example was the project that I talked about last quarter that's associated with the bead funding. And, of course, if you follow that closely, there's a lot of frustration over when those funds start to really get released to the individual states. Most of the NTIA approvals are now completed, but now everyone's waiting for NIST approval, which is really, you know, the final government contract to release the funds. And so, you know, that's an example of something that moved out of the quarter. There's a couple of other smaller examples like that. Michael Genovese: Okay. You know, maybe I'll ask one last question if you don't mind. You know, I guess, given where we're starting the first quarter and the guide for the full year, it looks like we need some pretty significant sequential growth, I'd say, throughout the year, right, throughout the remaining quarters. Is that the right way to think about it? Because I know typically, you know, the third quarter can be down sequentially. But in this kind of when you're starting the first quarter this low and you have this kind of guide, I'm just thinking ahead to the third quarter. You know, I know it's early to think about the third quarter, but should we think about sequential growth every quarter this year unless seasonality after we get by the first quarter? Bruce McClelland: You know, that's the way we're profiling it at this point. And, yeah, we're, you know, slow here in Q1, obviously. As I mentioned, you know, we expect revenue in India to be lower than the peak levels that we've had last year. You know, I think there's a couple of reasons why you're seeing us be more conservative. Obviously, starting slower in Q1 is one of them. But there's a number of macro things going on here. You know, the large changes going on at Verizon, our key customer here, you know, we feel like we're well-positioned because we're ultimately helping them reduce the cost of operating the networks. And as they integrate the Frontier footprint, we think there's just a great opportunity for us in the midterm here to expand the programs we have going. And, you know, I think they're delighted with the progress and everything we've made. But when they go through a major restructuring like they are, you know, it definitely has some near-term impact just on the velocity of getting the work done. So that's one of the key reasons we're being more conservative, you know, until we really understand exactly how that plays out. The second, you know, is still tied to the US federal government spending. Not that, you know, obviously, things are back in business there and budgets are now kind of established for all the agencies, etcetera. But it takes a bit of time for that all to start to ramp back up again. We have, in particular, two major programs going on there today where we're in the deployment phase. And, you know, kind of similar to the Verizon program, we're out helping, you know, deploy and operationalize the infrastructure that we've already sold them. So we think that ramps significantly again back in the second half, and that's why we think it's, you know, kind of back-end loaded as the year progresses. The third item I flagged, you know, Mike, in the commentary was around India. You know, we've had a great run there, increased 40% in 2025. You know, we think there's a possibility it continues at that rate, but we're not sure yet until all the budgets are finished. You know, they're on a fiscal year ending March. So we're trying to be just a little more thoughtful around the targets that we set, and hopefully, we can improve that as the year progresses here. Michael Genovese: I appreciate all the response, all the color. Thanks very much. Bruce McClelland: Thanks very much, Mike. Operator: Thank you. Next question is coming from Tim Savageaux from Northland Capital Markets. Timothy Savageaux: Yes. Hey, good afternoon. I guess the first question, and I think you said you might have some, don't know if you specified big US tier one carriers in that $50 million of orders. But is there a way to relate those initial orders to the total opportunity at those customers? Is that sort of those are pretty big deployments, but I guess how much of your estimate of the total opportunity at those customers for voice upgrade does that $50 million represent? Bruce McClelland: Yeah. Hey, Tim. You know, it's absolutely a fair question. You know, I've hesitated to put a specific number on the total addressable market for modernization. Part of my reluctance is not everybody's adopting the same approach. You know, obviously, what the tactics at Verizon look different than, let's say, what Lumen's doing today or what AT&T is doing today. You know, the additional backlog that we built here in the fourth quarter is obviously meaningful and, you know, covers deployments over the next, say, twelve months as I mentioned. And there's some larger names in that that, you know, are maybe not committing to a larger multiyear program. Maybe it's more targeted on the different regions where the cost of operating those networks are higher, or it's more challenging to just switch off the offices and turn off the copper loop. So depending on just how big and broad these programs go, this is a sizable large market. The last number I saw, the number of POTS lines in The US is something like 20 million. I don't know if anybody has an exact number on that, but it's a large addressable market. As I mentioned in my commentary, you know, if you look at the numbers, as far as the cost savings that you generate from doing the modernization, you know, depending on your time horizon, this becomes a self-funding program, and if you're not modernizing, eventually, you know, your costs start to be higher than your revenue. And so I think there's, you know, we're looking at some creative ways to really unlock and move more quickly. Just a final comment, you know, if you look at Verizon, you know, we've obviously in the first phase of that program with them, you know, I think it addresses about a third of their network. And so there's, you know, significant opportunity still with them as we progress over the next several years. And then, you know, I think it's a key part of how they're thinking about reducing cost operating the Frontier network as well. So yeah, there's lots of activity, lots of opportunity here for us. Timothy Savageaux: Yeah. I mean, that's kind of the color I'm looking for. You know, you're obviously a pretty big deal with Verizon. I think you mentioned up 26%. I don't know if getting close to $140 million or something like that. But just to try to relate then, you know, they've sort of committed to, you know, that three-year rollout. I guess what I'm trying to get to is it doesn't sound like within that $50 million of bookings, there are commitments for three-year rollouts or from big carriers, but maybe there are. Right? So, you know, to the extent you're relating what you've done with Verizon as a third of the network, it seems like this range of commitments from current customers should represent a lot less than that in terms of proportion of their networks they're upgrading. That's directionally kind of what I'm looking for. Bruce McClelland: Right. I think those are all the right observations. You know, none of the bookings in Q4 were for, like, a three-year horizon. You know, this is all kind of twelve to fifteen-month horizon programs. And just on Verizon, again, the, you know, the contract we have in place for the first three years, kind of a third of their footprint, we're now kind of halfway through that from a timing perspective. You know, we're about a year and a half since we initiated the program. And, you know, we estimate we're 35% or so through that effort. So a lot of work left to go on the first contract. We think, you know, there's likely a second phase and then Frontier on top of that. So, you know, there's, yeah, there's quite a runway here for us. Lots of work ahead. Timothy Savageaux: Right. Exactly. I guess it's closer to $150 million for Verizon now that I look at it. Now, obviously, there's, you know, kind of announced a draconian cut in their combined CapEx with Frontier and looking to maintain, I guess, at least the current level, if not accelerate a fiber build. And you mentioned a restructuring, but would you say your, and I guess you got a bunch of factors going on, but maybe just uncertainty around where that cut's coming from, perhaps has given this merger just happened, is likely what's impacting you as well as just a lower bogey envelope for capital spending overall? That kind of fair to say? Bruce McClelland: Yeah. I guess what I would say is we're being cautious here until, you know, plans are finalized. They're only, you know, kind of weeks into running the Frontier network. And, you know, again, I think there's obviously opportunity for expansion associated with that. But until we, you know, we and they have had a chance to kind of nail all that down, I just want to be cautious in how we think about how the year is going to play out. And, you know, I'm convinced there's tons of business and growth here with them, but until they get through their planning, I want to be more cautious. And as you said, they've made some big macro changes. So until that kind of rolls out to everybody, I think it's the right way to manage it. Timothy Savageaux: Fair enough. And last one for me, and then I'd say most of understanding the fine points of the process, but certainly most of what we've been hearing in recent quarters around bead has been pretty positive with the approvals and a lot of the access guys getting a lot more visibility on network planning designs, you know, rollout, what have you. So it would seem like that should be a good news story in calendar '26 at least in the second half, you know, at the very least. But how are you looking at it right now at a higher level versus the push you described in Q4? Bruce McClelland: Yeah. No. I resonate with all those comments. You know, we think it's a great opportunity for us. We think that segment of our business grows, you know, reasonably significantly this year for us. I'm a little frustrated because we expected it to get started in Q4. I think everybody did. So we're a little delayed from that. But I think we've got a really nice funnel of opportunities in that space for us. And, you know, hopefully, we're weeks and, you know, kind of months away from all of this being settled and moving out, but we're not quite there yet. Operator: Thank you. Next question is coming from Ryan Koontz from Needham and Company. Your line is now live. Ryan Koontz: Great. Thanks. Appreciate all the color, Bruce, on the voice modernization. You covered most of the kind of the bigger tier one opportunities. You know, do you have any updated thoughts on down market opportunities there in terms of the rurals? Are they any idea what kind of approach they're going to be taking as they start to retire copper and deploy more fiber here and going to do with their existing infrastructure, their class fives? Bruce McClelland: Yeah. That's a great question. You know, what we're seeing most of the activity is in the, I'll call it the tier two, operator space where, you know, they're committed to that as a service offering. They want to lower the cost of operating the network. And, you know, we're a great solution to help them do that. You get into the much smaller operators, I think you see different things there. You know, I think voice looks like a nice lead service, but it's not necessarily a good revenue generator or profit generator for them. See different things happening. Some look at that as an entry point to sell more fiber. So not only do they want to maintain the relationship with subscribers on the copper network, they maybe even want to grow that because it's an entry point for them to differentiate. You know, once you've got a relationship with the consumer, you know, it's easier to maintain it. Others we see, you know, just wanting to kind of manage it in place. They don't want to invest anything incremental. You know, we have a decent service and support revenue stream from that segment of the market. And we see it kind of similarly where it's a great entry point for us to come in, introduce our IP optical products, and grow our business within that space. And we've built in some capabilities that help them migrate off of legacy TDM networks onto IP networks. So it's a great entry point for us there. But, you know, we don't think of it as a great revenue generator for voice modernization necessarily. I'm not sure they're investing. You know, that's not a top priority investment for them. Ryan Koontz: Yeah. Makes sense. And on your legacy maintenance business, what kind of decline is that typically seeing? Like, 10% a year, kind of double-digit declines typically? Bruce McClelland: No. No. It's much steadier than that, you know, and we've in select places, we've been in a position where we are raising prices. Yeah. You know, I think we see a few million dollars a year erosion kind of in the base from our voice business. In our IP and optical business, it's actually been growing, you know, as we increase the base. We have one customer where we completed a long-term maintenance contract supporting their access business that we exited or completed in Q4. So that's a step down going into this year. I kind of mentioned that on the call. But for the rest of the market, that part of the business is actually growing for us. Ryan Koontz: Got it. Thanks. And then following up on the packet optical side, are your main kind of use cases you're most excited about here in the next, you know, eighteen months or so? Is it still, you know, broadband aggregation and backhaul, or are you seeing alternate type use cases for your new platforms? Bruce McClelland: Yeah. That's really the focus and, you know, I've mentioned a couple of times that I think our area for best differentiation is around integration of IP networks with optical networks or IP over DWDM. And, you know, that's the most cost-effective way to build a new network. You're integrating the transponder technology into a pluggable that goes into the router. We've invested a lot in a broader set of platforms for IP routing. And, you know, most of the growth here in North America has been IP with optics integrated into the routers and maybe an OLS that we, you know, that we include for the transport network. And similarly, in, you know, the high growth area we've had in India with the portfolio, the majority of that growth has been around our IP portfolio, our IPMPLS portfolio and the growth there. So that's really the focus. Ryan Koontz: Sounds great. And any commentary on kind of enterprise SP market? I assume that's also, you know, somewhat a legacy product you're not investing a whole lot. Is it a profitable business line for you still? Bruce McClelland: Yeah. No. It's a great business for us, and most of the investment, the innovation there has been, you know, taking the traditional kind of bespoke products and turning them into cloud platforms. And, you know, anybody that's been through that knows, you know, it's not a lift and shift. You know, in many cases, you're reengineering the implementation into a cloud-native elastic, you know, fault-tolerant implementation. And I think we're out in front of the competition in that space. I mentioned in the call, we have now kind of tier one carriers in all regions migrating their traditional SBC infrastructure into a true cloud-native implementation with a complete DevOps software delivery model, which is a, you know, a big shift for that market. We see the same thing in the enterprise market where customers want to move to a much more of a public cloud implementation. You know, I mentioned that we have a partnership with AWS where we integrate our SBC and routing platforms and management systems into the AWS cloud to really simplify the onboarding of new customers. And we had two fairly significant wins last quarter based on that integration into AWS. So there's, yeah, there's a lot of activity. In fact, I think John mentioned our SBC sales in Q4 were up pretty considerably. It was one of the big growth areas in the contributor from a margin perspective in the quarter. Ryan Koontz: Great. Appreciate it, Bruce. Thanks much. Bruce McClelland: Thanks very much. Operator: Thank you. Next question is coming from Dave Kang from B. Riley Securities. Your line is now live. Dave Kang: Yes. Just on the federal segment, I think you said the amount as far as how much it was down. Can you repeat that? I missed that one. Bruce McClelland: Yeah. So the US federal business, which was one of the drivers for our great Q4 a year ago 2024, was a little over $20 million. And in the fourth quarter, 2025, it was $10 million down from that. So call it $10 million in the quarter. Dave Kang: Got it. And then regarding all the delays, were they mainly in optical? Or CNE or both? Bruce McClelland: It was almost evenly split. And I would say the, you know, the again, the ones I mentioned that I'm probably most frustrated with the deployment delays, the stuff that was already in backlog, a large portion of that was cloud and edge, obviously, with all the services that go with that. And the ones that were more, I'll call it, budget-oriented, like the bead delay was more IP optical. Dave Kang: But based on your outlook for the first quarter, it doesn't sound like they're being pushed into the first quarter. Can you just provide more color as far as when you expect to capture all these delayed projects? Bruce McClelland: Yeah. If you, you know, if you kind of did the arithmetic on the $227 million we did in Q4 relative to guidance, it's about $13 million below the mid. And I think we pick up about $6 million of that in Q1, and then the rest is kind of linearly into other quarters. You know, the deployment-related delays probably just all kind of move out so you don't catch up on that. I mean, eventually, we'll catch up if we can accelerate the deployments. But we need the customer to go faster with us to kind of catch that back up. So, again, you know, we're trying to be, you know, more conservative here in how we, you know, put together the outlooks, and, you know, I think that's the right profile for the first quarter. Dave Kang: And then you mentioned about certain customers with budget issues. So as far as timing is concerned, I mean, have they given you some kind of a timing, you know, as far as when that budget will be available, or is it still uncertainty going forward? Bruce McClelland: Yeah. I think it varies a little bit. You know, our larger customers, we get good visibility. Generally speaking, we get good visibility, particularly around the hardware products where we have to drive supply chain, and, you know, if we're not forecasting and they're not forecasting, you know, it's difficult to supply. So there's a lot of cases where you do get good visibility, and then, you know, there's a portion of our business which is still book and ship inside the quarter. And particularly with software where it's really easy to fulfill, there's not as much pressure to forecast that as accurately. So maybe we have more variability around that part of the business. Dave Kang: Got it. Thank you. Bruce McClelland: Thanks, Dave. Operator: Thank you. Next question today is coming from Rustam Kanga from CitiSens. Rustam Kanga: Afternoon. Thanks for taking the question. Just curious to sort of peek into the growing POC opportunities in regards to the Acumen platform. Are customers still evaluating the solution there just relative to their own DIY approaches? And then, additionally, any update on sort of initial reactions to pricing perhaps on OpEx-based savings? Bruce McClelland: Yes. Thanks, Russ. Good question. So we're, you know, we're in the heavy lifting, getting into the with our lead customer Optimum on integrating Acumen into their operation. Then we probably got about a dozen other POCs lined up for the next few months. And I think similar actually, we have the same experience as we're integrating AI platforms into our back office. We really want to see them in operation in the network and see the savings from them before you make a larger longer-term commitment. We're seeing kind of the similar phenomena as we position Acumen. The kind of the easiest introduction is with customers that already have our analytics platform deployed. They're already they already have a large data collection infrastructure we're able to tap into and feed all of that up into the Acumen layer into the large language model, etcetera. But I think customers really want to see it in action. They want to see the translation and OpEx savings. I think, you know, the next six months, I think, is really focused on these POCs so that we can start to, you know, turn that into real revenue in the second half of the year. Rustam Kanga: Anything else? Bruce McClelland: Yeah. Thanks, Russ. Operator: We've reached the end of our question and answer session. I'd like to turn the floor back over to Bruce for any further or closing comments. Bruce McClelland: Great. Thank you. Thanks for everyone being on our call and your interest in Ribbon Communications. We look forward to speaking with many of you at the investor conferences as well as some of the major trade shows, Mobile World Congress coming up in Barcelona, and then the large OSC optical conference in Los Angeles in March as well. So thanks very much. That concludes our call. Operator: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Insight Enterprises Q4 2025 Earnings Conference Call. [Operator Instructions]. I will now hand the call over to Ryan Miyasato, Director of Investor Relations. Ryan, please go ahead. Ryan Miyasato: Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter and full year ended December 31, 2025. I'm Ryan Miyasato, Investor Relations Director of Insight, and joining me is Joyce Mullen, President and Chief Executive Officer; and James Morgado, Chief Financial Officer. If you do not have a copy of the earnings release or the accompanying slide presentation that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under the Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately 2 hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, February 5, 2026. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will be referring to non-GAAP financial measures as we discuss the fourth quarter and full year 2025 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today. Please note that all growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Also, unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation to update any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce. Joyce? Joyce Mullen: Thank you very much, Ryan. Good morning, everyone, and thank you for joining us today. We are pleased with our fourth quarter results and the momentum in our business after a challenging year. Strong execution in our Cloud business and strong growth in our Core services business, driven by our acquisitions enabled us to deliver record gross profit, record gross margin and record adjusted earnings from operations margin. We delivered strong growth in adjusted earnings from operations across every geography and achieved double-digit growth in adjusted diluted earnings per share. Specifically in the quarter, overall revenue was down 1% due to the netting impact of on-prem software migrating to cloud. We are pleased that our influence of partners and clients continues to expand, which you can see on our balance sheet. Total gross profit grew 9%. EMEA had strong growth, driven in part by UAE and Saudi Arabia demand. Cloud gross profit increased 11%, ahead of our expectations, led by double-digit growth in SaaS and Infrastructure as a Service. This performance was partially offset by the impact of the partner program changes we've previously discussed, which are now largely behind us as we begin 2026. Core services gross profit grew 16%, driven by acquisitions as well as organic growth. These factors, along with incremental netting, contributed to expanded gross margin again this quarter to 23.4%. And by prudently managing our adjusted expenses, we delivered adjusted earnings from operations growth of 13% and adjusted earnings per share growth of 11%. We are encouraged by the progress in our services business. We've streamlined our services offerings, implemented disciplined processes and augmented our leadership team. Best practices from acquisitions have been adopted across the business, resulting in improved pipeline. We are also pleased with the cross-selling momentum. Core Services results were strong and delivered a second consecutive quarter of organic bookings growth. Growth of core services is central to our strategy. Clients expect a comprehensive approach to realizing value of their technology investments. To support those requirements, we have expanded our technology consulting capabilities, which is improving our overall performance, especially in EMEA. The Inspire11 acquisition expands our advisory capabilities in North America and supplements our strength in infrastructure, cloud, edge, data and security services. We expect these advisory capabilities will also increase demand for our core solutions. I'd like to share an example of how an initial advisory engagement pulled through solutions in EMEA. Our client, a European green IT provider, is building sustainable data centers, engineered and optimized for AI workloads. They engaged us to support both the build-out of these data centers and the development of a SaaS Gen AI platform, enabling them to design, develop and visualize AI models and their interactions. Our senior technical advisers drove the conceptual discussions and are now delivering end-to-end program leadership for this large-scale program, which includes network and data center, security and software development work streams. The team implemented a structured governance framework, strengthened delivery performance and ensure the client's business outcomes were met. Since project inception, the client has signed an additional multimillion euro agreement to extend both the scope and duration of the program. This is an example of how our teams can drive value, beginning with advisory discussions and expanding to include modern platform investments. Our deep expertise in platforms is also demonstrated through our engagement with Sedgwick, a global leader in claims management and risk solutions. The Inspire11 team designed and implemented a modern unified claims management platform that streamlined operations, enhanced employee productivity and elevated customer experience. This transformation has since become a model for success within Sedgwick, sparking new innovation across other areas of the business. Recognized as one of the most successful projects, the organization has delivered, it demonstrates how the value we create extends beyond a single program and continues to scale as organizations identify new opportunities for impact. As our clients look to modernize, many are hitting the same wall, legacy systems that have become so customized so heavily over the years that they've become too rigid to move at the speed of business. To stay competitive, these organizations have to get back to basics, stripping away that complexity so they can innovate again. Our teams are effective in assisting clients with this challenge. Never has innovation been more exciting than with the current AI tools and capabilities. Client interest remains strong and focused on tangible business outcomes. We are very well positioned to help clients move from hype to how. We are proving this by advancing our own internal AI transformation, developing and operationalizing use cases within Insight that we showcase and replicate with clients. In the fourth quarter, as part of our Insight AI launch, we introduced Prism, our AI platform for clients, which has received very positive feedback. Prism is a business transformation platform designed to help our clients simplify AI adoption by identifying and prioritizing high-impact use cases through a proprietary data-driven transformation index. The platform evaluates potential AI initiatives across key elements such as value, feasibility, access to data and risk to provide a clear, actionable road map. Prism enables our clients to manage the entire life cycle of an AI project from initial assessment to measurable outcomes. Our partner ecosystem is central to our success and a critical accelerator of our strategy. These partnerships strengthen our capabilities across technologies, platforms and services, helping us to stay agile and responsive to the rapidly evolving technology landscape. In 2025, we received numerous awards and recognitions from our partners. There are too many to list here, but notable Partner of the Year awards include those from Google, Cisco, HP, HP Enterprise, Intel, Databricks and others. We were also the first partner to build out, demonstrate and launch the Cisco Secure AI factory with NVIDIA. You can find more details in the earnings presentation. Additionally, our portfolio of offerings and technical expertise have been recognized by leading industry analysts, including Gartner, IDC and Forrester. These recognitions span software, AI and cloud capabilities and workspace solutions, reflecting the breadth of our end-to-end solutions integrator capabilities. Insight's more than 6,600 technical professionals bring deep specialized expertise across the major platforms that are most critical to our clients' success. To safeguard and formalize our proprietary IP developed by our technical talent, Insight has filed more than 200 patent applications globally, resulting in more than 70 patents issued to date, covering innovations in AI, machine learning, among other things. Our teammates are the source of the value we deliver to clients. We cultivate a culture of collaboration, knowledge sharing and continuous improvement. And Insight is consistently recognized as an employer of choice by Forbes Fortune and Great Place to Work. Despite the challenging backdrop in 2025, we made meaningful progress in transforming Insight into the leading AI-first solutions integrator. We pivoted our Google and Microsoft resale business towards the corporate and mid-market space. We use this transition to sharpen our focus on efficiency and improve our operating leverage, leading to record cloud gross profit of $495 million. We improved profitability in Core services and increased bookings performance with our aligned structure in North America and advisory pull-through in EMEA, leading to record core services gross profit of $320 million and margin of over 32%. The increase in mix of services resulted in record total gross margin of 21.4%. We successfully integrated acquisitions and drove cross-sell and best practices across all businesses. We added Inspire11 and Sekuro, strengthening our technical expertise in data, AI and cybersecurity and expanded cross-sell and pull-through opportunities across our global client base. We applied our own client zero approach, deploying AI agents internally to improve our own productivity and building compelling reference cases for our clients. To help clients move from AI experimentation to production, we've completed hundreds of AI assessments, developed road map recommendations and begun implementations. All this resulted in record adjusted earnings from operations of $504 million and margin of 6.1% in addition to adjusted diluted EPS of $9.87. As we look towards 2026, our outlook reflects cautious optimism as we anticipate subdued spending across the industry. The macro environment has largely remained unchanged and our corporate and large enterprise clients remain cautious. PC and infrastructure investments will continue at a moderate level in the near term, and we're closely monitoring industry supply chain dynamics and memory pricing. Clients are making infrastructure investments as they prepare for AI implementation. At the same time, we see opportunity in cloud modernization, security and AI adoption, and we will continue to invest in these areas to position Insight as the leading AI-first solutions integrator. Our strategy remains clear: Simplify complexity for clients, deliver measurable outcomes and accelerate time to value through integrated solutions. With that, I'll turn the call over to James. James? James Morgado: Thank you, Joyce, and good morning, everyone. Our Q4 results met our expectations for the quarter. Net revenue was $2 billion, a decrease of 1%. The decrease was driven by a 4% decline in product, primarily due to on-prem software, which declined 18% and was a result of netting as clients shift to cloud-delivered software. Hardware revenue increased 2%, the fourth consecutive quarter of growth with growth in both devices and infrastructure. Core services revenue was up 7%, primarily driven by the acquisitions completed in the quarter. Gross profit increased 9%. EMEA gross profit increased 30%, driven by ongoing transactions in UAE and Saudi Arabia, where we act as the agent. Growth in core services across EMEA also contributed to this increase. Cloud gross profit was $138 million, an increase of 11% with growth in both SaaS and Infrastructure as a Service, partially offset by the partner program changes we previously discussed. Insight Core Services gross profit was $90 million, an increase of 16% due to contribution from acquisitions as well as growth in our organic business. Hardware gross profit was up 1%. Hardware gross margin improved sequentially and was down year-over-year due to mix. As a result, total gross margin was 23.4%, an increase of 220 basis points. Adjusted SG&A increased 7%, driven by acquisitions and variable costs primarily in EMEA. This resulted in adjusted EBITDA of $156 million, up 11%, while margin expanded 80 basis points to 7.6%. And adjusted diluted earnings per share were $2.96, up 11%. Overall, 2025 was a challenging year that fell short of our gross profit growth expectations entering the year. Spending from our corporate and large enterprise clients remain subdued, weighing on growth in both core services and hardware. However, there were bright spots that are consistent with many of our long-term goals. Gross margin expanded for the fourth consecutive year. Cloud remains a key element of our strategy, and we are successfully navigating the impact from the partner program changes. We further strengthened our technical expertise through the Inspire11 and Sekuro acquisitions. And through disciplined expense management, we met our profit expectations. I'll now get into greater detail for full year 2025 results. Net revenue was $8.2 billion, a decrease of 5% as netted transactions continue to mute revenue growth. Despite this decline, gross profit was flat, and we expanded gross margin by 110 basis points to 21.4%. Our gross profit and gross margin results were driven by cloud and services as well as a mix of higher netted agency transactions. Cloud gross profit was $495 million, an increase of 2%. SaaS and Infrastructure as a Service growth offset partner program changes. Adjusted SG&A expenses were flat due to disciplined expense management, partially offset by recent acquisitions. Adjusted EBITDA margin expanded 40 basis points to 6.6% and adjusted diluted earnings per share were $9.87, up 2%. For the year, we generated approximately $300 million in cash flow from operations. In Q4, we increased our share repurchase authorization by $150 million, bringing the total amount to $299 million at year-end. In 2025, we settled $333 million of convertible notes and all associated warrants. For the year, the combined effect of share repurchases and settlement of the warrants associated with the convert, reduced our adjusted diluted share count by approximately 3 million shares. We exited Q4 with total debt of approximately $1.4 billion compared to approximately $900 million a year ago. The increase in debt was primarily related to acquisitions, the settlement of warrants and share repurchases. In Q4, we raised the limit of our ABL facility to $2 billion and extended the term for another 5 years. As of the end of Q4, we had access to the full $2 billion capacity under our ABL facility, of which approximately $1.1 billion was available. We have ample liquidity to meet our needs. Our adjusted return on invested capital for the trailing 12 months at the end of Q4 was 15.2% compared to 15.3% a year ago. As we look towards 2026, we have considered the following factors in our guidance. Adjusted diluted earnings per share growth will be more heavily weighted toward the first half. For the year, we expect our corporate and large enterprise client spending to remain subdued. Hardware gross profit will be approximately flat as component costs may impact demand. We expect hardware revenue to grow faster than gross profit, primarily due to customer mix. We expect Core services gross profit will grow in the high single digits as our organic business returns to growth, coupled with contribution from our recent acquisitions. We anticipate cloud gross profit to grow in the low double digits as we move past the majority of the partner program changes we have previously discussed. And we will continue to prudently manage SG&A and expect growth slightly slower than gross profit. Finally, we intend to start repurchasing $75 million in shares beginning in Q1. Considering these factors, for the full year of 2026, our guidance is as follows: We expect to deliver gross profit growth in the low single digits and that our gross margin will be approximately 21%. Including stock-based compensation, adjusted diluted earnings per share is expected to be $10.10 to $10.60. Beginning in 2026, our adjusted guidance excludes stock-based compensation. We, therefore, anticipate our adjusted diluted earnings per share will be between $11 to $11.50. This represents approximately 5% growth at the midpoint compared to 2025 adjusted diluted EPS of $10.75, excluding stock-based compensation. Please refer to the investor presentation for a historical view of our results, excluding stock-based compensation. Finally, we expect cash flow from operations in the $300 million to $400 million range. On a go-forward basis, guidance excludes stock-based compensation and includes interest and other expense to be approximately $85 million, an effective tax rate of 25.5% to 26.5% for the full year and capital expenditures of $20 million to $30 million and an average share count for the full year of approximately 31 million shares. This outlook excludes stock-based compensation, excludes acquisition-related intangible amortization expense of approximately $83 million, assumes no acquisition-related costs, severance and restructuring or transformation expenses and assumes no change in our debt instruments and no meaningful change in the macroeconomic outlook. I will now turn the call back over to Joyce. Joyce? Joyce Mullen: Thanks, James. 2025 was a year of resilience and transformation. We navigated macro headwinds, evolving client priorities and significant partner program changes. Through it all, we strengthened our capabilities and sharpened our focus on the areas that matter most to our clients, cloud, data, AI, cyber and edge. As we enter 2026, we are confident in our ability to execute and capture emerging opportunities. Our strong portfolio of offerings and expertise, disciplined approach and commitment to innovation position us well to capture future growth opportunities. Finally, regarding the search for my successor, the Board's orderly transition process is well underway. Our public external search is progressing as planned, and I remain committed to ensuring a smooth handoff as we identify the right leader to guide Insight through its next phase of AI-driven transformation. We expect to name a successor in the next few months. I want to thank our teammates for their unwavering commitment to our clients, partners and each other, our clients for trusting Insight to help them with their transformational journeys and our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments, and we will now open the line for your questions. Operator: [Operator Instructions]. Our first question comes from Adam Tindle from Raymond James. Adam Tindle: James, I wanted to start with 2026 guidance. I just was curious, I saw the low single-digit growth expectation. It seems like you may be a little bit more conservative this year than in prior years. So maybe just talk about your process to annual guidance this year, how it might be similar or different than prior years. And Joyce, if you could add maybe a little bit of color outside of this guidance, just kind of boots on the ground, your conversations with customers as they think about or thought about their budgets in 2026. I'm sure you've been having those conversations with your sales force as well into year-end. What does IT budgets for your customer base look like in 2026? And any early indications on how the year is starting? James Morgado: I'll start. Thanks for the question, Adam. So here's the approach that we took this year for guidance. First, when we set guidance, we always look at many factors, what we hear from our customers, what we hear from our partners. We obviously take into consideration any disruptive events like what we're experiencing now with the memory costs, the partner program changes from last year, et cetera. This year, what I would say that the difference in the guidance is, I place greater emphasis on 2 particular areas. The first is exactly that last point that we said with the potential disruptions. The environment is still complex and fluid. There's a continuation of many of the factors we saw last year, which creates a degree of a bit of uncertainty that we have to account for in our outlook. The second point, which is different than previous years is I more heavily weighted our past performance in terms of the guidance that we set at the beginning of the year. Look, the last couple of years have had twists and turns, and I think FY '26 has them as well. And so I think we're trying to balance the internal ambitions that we have as a company with a bit of the market realities that we see. And so our approach to guidance is similar in many ways, but what I would say is I place greater emphasis in those 2 particular areas. Joyce Mullen: And then in terms of IT budgets, Adam, and kind of how we're thinking about the various market segments, I think in general, it's just a bit more of the same. Uncertainty persists, especially with large enterprise and large corporations. So we've been -- I think one thing that's different is we aren't assuming any kind of massive improvement in spend in the large enterprise, that's different. But they continue -- they're really worried very -- I mean, they're very excited about and worried about making sure they preserve some of their IT budgets to support the transition to AI. That means a lot of different things to a lot of different people. That includes things like infrastructure, which is aging and likely to be a more important factor. It includes security, of course, networking to get the data moving around so you can actually leverage AI. They're continuing to spend significant money on existing infrastructure requirements, for example, VMware and Broadcom. So that's continuing. But I think they are thinking carefully about how to preserve some of their IT budgets to make sure that they can invest in making sure their company is ready for AI. That also could mean some data projects and making sure that they have the right kind of connections. So I feel like that is really very much more of the same on the large enterprise space. Commercial has been really robust, and we expect that to moderate just a tad over the next year. They've done -- we've had really good success in the commercial space, 7 quarters of growth in a row. But we do think that those growth rates are likely to moderate just a bit. And then the public sector is very sort of spiky up and down. It has a lot to do with kind of what's going on in the government and where funds are coming from, et cetera. And then we also see a whole lot of netting there. So we spend a lot of time thinking about what's going on with GP there. But overall, we expect this to be a whole lot like the 2025 in terms of IT spend with a bit more emphasis on security and preparation for AI. In terms of how the year is starting, we're pleased with the momentum coming out of Q4. We continue to see that momentum into the early parts of Q1 in terms of bookings. So that's a great sign. And we expect to continue to build a bit of backlog, especially as there's supply chain constraints start to hit due to memory pricing. I guess that's the other sort of thing that is a bit different this year. Everybody is very much expecting memory prices to increase, supply chains to probably slow down a bit because of availability. And that is a factor that's kind of weighing on our customers' minds, making sure they preserve some of their IT spend to support some of the memory increases. We also expect a level of elasticity, especially around devices to kick in given those increased prices. Adam Tindle: Very helpful. Maybe just as a follow-up, James, I hope we don't have to talk about partner program changes anymore going forward. I'm sure you feel similarly about that. But now that we're done with 2025, I think you were helpful in being explicit about quantifying those. If you could just maybe like summarize the partner program change impact in 2025. And I think you were thinking there might be, maybe a little bit left in 2026, kind of how you're thinking about that. And I'm asking just in light of the EPS guidance, you talked about it being more heavy weight to the first half, but I thought there was a little bit more partner program changes still coming through. So if you could just lay that out and then put a little bit finer point on the -- how heavy in the first half and the rationale for that for EPS, that would be helpful. James Morgado: Yes. Thanks, Adam. Yes, we certainly would love to not have to talk about partner program changes. Joyce Mullen: Ever again. James Morgado: Yes. What I would say is the $70 million gross profit impact that we called out at the beginning of the year, it landed very, very close to that number in terms of the impact. The reason that we overperformed in cloud last year from our beginning of the year expectations was because of a more effective pivot. But the gross impact was still $70 million. So that was an area that we called correctly. In terms of the partner program changes in the pivot, what I would say is that we are done with the pivot internally, in terms of the engine that we have internally focusing on the mid-market space, I think the team has completed that pivot. But as we mentioned last year, there would be a tail of a financial impact into this year. We see that tail a little more in the second half, candidly, and that is because of the dynamics associated with Google and the Google solution line. And really from the acquisition, it dates back to the acquisition of SADA, which they had a very heavy presence in enterprise. And so to build that installed base in the corporate and mid-market space just takes longer than it would in, for example, compared to the Microsoft space, where we had a nice presence already a good growing presence in the mid-market space. And so it's a bit of a tail into building that installed base still on our Google solution line. And the reason that the impact is a little more heavily weighted in the second half is because of the seasonality associated with the SADA business. It is more acute in -- it's greater in the second half and in fact, in Q4. So when I think about cloud to the guidance that I gave, what we're likely to see is a first half that performs a bit better than the cloud guidance that I gave and a little more challenged into the second half. And by the time we exit the second half, I think the Google space, the Google solution line then has a good installed base and these dynamics completely -- we're expecting these dynamics that would go away completely in 2027. But still a bit of a tail impact into 2026, and you'll see it again, a little more in the second half than the first. Operator: Your next question comes from Luke Morison of Canaccord Genuity. Lucas Morison: So maybe just to start, you highlighted an AI optimized data center engagement that I thought was pretty interesting in your remarks. I'm curious, as we think about that engagement, how should we be thinking about the repeatability of that opportunity maybe as AI data center investment accelerates across the U.S. and Europe? And how do you see AI data center build-outs becoming a more meaningful recurring growth vector for your business over the next few years? And how does that play into your overall growth algo? Joyce Mullen: Thanks, Luke. Yes. I mean -- so that is a great example. I think there's a couple of things to take away. One is that it is a more complex data center solution than we've -- than historical data center solutions have been. There's just a lot more choices. There's a lot more complexity. There's a lot more considerations that probably gets exacerbated as you think about memory optimization coming over the next couple of years as well as power optimization, et cetera, et cetera. So we think we're at the very -- and I would say we're not alone in this. I would say a very -- all of sort of basically the industry is believed that we are primed for broader enterprise adoption as enterprises consider their opportunities and consider their cost structures and think about multi-cloud in a broader way because there's definitely cost constraints associated with running everything in a public cloud. So we have definitely seen more interest in on-prem enterprises. I would say that our partners are making that easier with sort of prepackaged, not exactly simplified yet, but prepackaged AI factories. We were the first partner, as I noted, to launch the Cisco Secure AI factory with NVIDIA into our labs. So there -- we believe we are ready to see enterprise adoption of AI infrastructure, specifically in data centers and specifically in a multi-cloud environment. So we've also been working really, really hard to make sure that there's portability between the solutions and the workloads that we are building out, for example, to start with in public cloud. And they can run in public cloud, they can run in a different public cloud and then they can also run on-prem. So all of those things are critical, I think, to giving our customers the right kind of options and the right kind of cost profile solutions that they're looking for. So we're very, very excited about this. We are absolutely at the very beginning stages, as I noted. This is a function of a couple of things. One is GPU availability. I would say also, there's increased knowledge and understanding of when we can use CPUs and GPUs and what the right combinations are, again, to manage the cost structure and also AI skills and understanding kind of what those workloads and use cases look like. So this should be a significant tailwind for the industry as we move beyond just funding the public clouds and the neo clouds in terms of building out data centers. Lucas Morison: That's great color. And maybe just a quick follow-up here. Maybe just putting a finer point on sort of the memory cost supply chain disruption that's going on right now. How should we be thinking about the potential for that to impact your customers and your business if trends there continue the way they look -- they're going right now? Joyce Mullen: Yes. Well, it's been moving pretty fast, and it's changed a lot, I would say, in the last 90 days, and it probably has changed again in the last 30 days. So the memory price expectations will result in something somewhere between 10% and probably 20%, 25% increases in PCs this year. We've seen those price increases documented from most of the OEMs. A few have decided not to do that. But anyway, but generally, I would say that's the right kind of range. And historically, and I hesitate to say this because every time I've said historically before, it doesn't actually continue now. But historically, as prices go above kind of 15%, elasticity kicks in and the volume is impacted. So generally, I would say, as an industry, we're expecting prices to increase 15% or so on average and volume to units to decline kind of just barely low single digits. And what happens to our business from a device point of view is that we pass along those price increases. But of course, we're always managing the elasticity as well. So that's kind of how -- that's what we saw during COVID. I think there's also an incredible -- there's an opportunity for us to help our customers navigate the supply chain impact, which is what we did pretty well during COVID and help them understand alternatives. So this is, I think, a place where partners can add a whole lot of value and Insight will add a whole lot of value to our customers as they navigate that. On the infrastructure side of this, we're basically rounding a refresh cycle on infrastructure. And those prices will also go up significantly given the memory constraints and the memory price hikes. We think there's a little bit less elasticity there. And -- because, again, the compares for on-prem infrastructure are really the public cloud compares in terms of cost for customers, and we still think that's going to be relatively favorable. But it will cause a bit more, I would say, caution as customers decide which investments to make in terms of infrastructure and how it will play out. As a general rule, we pass along those cost increases. As a general rule, those are helpful to us. But again, the wildcard there is the elasticity. Operator: Your next question comes from Joseph Cardoso from JPMorgan. Joseph Cardoso: Maybe just for the first one regarding the full year guidance. James, I appreciate the color on the weighting towards the first half of the year. But any additional color you can give relative to the magnitude that you're thinking of in terms of the full year guide first half versus second half? Just trying to understand the balance for the year given the commentary. And then if I take that question and then I add to it, how are you thinking about the concentration of the drivers of that dynamic relative to the underlying portfolio? Is it primarily hardware and PCs? Or is there -- or is it a broader dynamic that we should be considering in terms of the first half, second half weighting? James Morgado: Thanks, Joe. Great question. I'll jump in and then Joyce, if there's anything you'd like to add, please jump in. So Joe, in terms of how to think about the year, first half, second half. So in my prepared remarks, I talked about the first half growth rate being a little bit stronger from an EPS standpoint in the first half and second half. What I would say is the best way to think about that is the first half growth rates are likely to be closer to the upper end of our range and the second half a little bit below the midpoint to the lower end of that, at least based on what we currently see today. And the dynamics in there -- and by the way, I would remind within the first half, I still see Q2 as our seasonally stronger quarter. So if you think of the split between the first half, I would expect to see a slightly stronger Q2 than Q1. In terms of the reason behind the dynamics, one of them is the one that I called out earlier regarding the cloud situation, which I think cloud will grow more strongly in the first half than the second half. The other dynamic is hardware. I think that follows a similar profile with more strength in the first half than the second half. The Core services business is the one that is more of an equalizer through the year. I think that, that performs more steadily through the year. So I think when you add up all of those factors, you get to a slightly stronger first half than second half. Joyce Mullen: You mentioned cloud stronger than the first half. James Morgado: Yes. Joseph Cardoso: Great. Appreciate the color there. And then maybe just a quick clarification question on the cloud gross profit growth for the quarter. First part of it is just more wondering if we were to ex out the partner headwinds or the partner headwinds there, what -- where would have growth tracked for the quarter? I believe over the last couple of quarters, you've been mid-teens, high teens in kind of that ballpark. So just curious if momentum exited the year in that range. And then as we think about the guidance for double digits, is that -- does that imply an acceleration from those levels? Or are you kind of embedding something similar for the year? James Morgado: So what I would say is our performance in Q4 was similar to what it was all year, kind of in that mid-teens range. So the underlying performance was strong. When I think about this in terms of first half versus second half for cloud, I would actually expect the first half cloud number growth to be slightly above my guidance for the year and the second half to be slightly below that guidance. And then the full year ends up close to the double digits as the low double digits as we mentioned. And I think as we exit the year from a financial stand -- like I said, I think from an operating the business standpoint, the pivot is done. And then the financial -- any of the financial tail that was there impact is done as we exit FY '27 -- FY '26, sorry. Operator: Our next question comes from Vincent Colicchio from Barrington Research. Vincent Colicchio: Joyce, how did your share changes play out in your key focus areas in North America? Joyce Mullen: You mean market share or... Vincent Colicchio: Yes. Joyce Mullen: So well, we believe -- so we're generally -- we basically put together all of the IDC data and try to figure out this with OEMs. We feel like we are on par with the market in terms of devices. And we feel like we are basically on par with infrastructure and probably a little bit ahead in cloud, I would say. Vincent Colicchio: Okay. And do you think you currently have the resources on the AI side to meet current demand? Or is it hard to access the supply you need? Joyce Mullen: So we are doing our level best to build the skills and buy the skills as demand increases. And I think that's going to be kind of a constant theme for a very long time. We are -- we've really doubled down on the development effort, and we're seeing some really good success with our internal development and training programs. That's really important to us, but we've also begun specific recruiting programs to find the AI talent that we need. So far, we've been in pretty good shape. Operator: There are no further questions at this time. I will now hand the call over to Joyce Mullen, President and Chief Executive Officer, for closing remarks. Joyce, please go ahead. Joyce Mullen: Thank you very much to all of you for your questions and interest, and I think we're ready to close the call, operator. Thank you. Operator: That concludes today's call. Thank you very much for attending. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. [Operator Instructions] I will now hand the conference over to Vince Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince. Vincent Anzalone: Thank you, Victor. Good afternoon, and thank you for joining us today to discuss Arrowhead's results for its fiscal 2026 first quarter ended December 31, 2025. With us today from management are President and CEO, Dr. Chris Anzalone, who will provide an overview; Andy Davis, Senior Vice President and Head of the Global Cardiometabolic Franchise, who will provide an update on commercialization activities; Dr. James Hamilton, Chief Medical Officer and Head of R&D, who will discuss our development programs; and Dan Apel, Chief Financial Officer, who will give a review of the financials. Following management's prepared remarks, we will open the call to questions. Before we begin, I would like to remind you that comments made during today's call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward-looking statements and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. I'd now like to turn the call over to Chris Anzalone, President and CEO of the company. Chris? Dr. Christopher Anzalone: Thanks, Vince. Good afternoon, everyone, and thank you for joining us today. We had another quarter of strong execution across all areas of our business, and we are well positioned to build on this progress throughout 2026 and beyond. In fact, the recent months have included some of the more significant achievements in Arrowhead's history. Let's talk about some of these. First, on November 18, 2025, Arrowhead received its first regulatory approval and began the next phase of growth as a commercial company marketing its own medicines. The FDA approved REDEMPLO as an adjunct to diet to reduce triglycerides in adults with familial chylomicronemia syndrome, or FCS. FCS is a severe rare disease with an estimated 6,500 people in the U.S. living with genetic or clinical FCS, characterized by TG levels that can be 10 to 100x higher than normal, leading to a substantially higher risk of developing acute recurrent and potentially fatal pancreatitis. This approval was supported by clinical data from the Phase III PALISADE study in adults with either clinically diagnosed or genetically confirmed FCS. The PALISADE study demonstrated deep and durable reductions in TGs with a median reduction of 80% from baseline and a lower numerical incidence of acute pancreatitis events compared to placebo. Arrowhead launched REDEMPLO independently in the U.S. with the One-REDEMPLO pricing model that creates one consistent price across current and potential future indications. This is important. We're committed to sustainable innovation, and this requires a rational drug pricing according to the value a medicine offers to patients and health care systems. REDEMPLO is a pancreatitis drug. And when we think about pricing, we look to those patient populations at greatest risk of acute TG-related pancreatitis. We've only had drug in channel for about 10 weeks, which included Thanksgiving, Christmas and New Year's holidays. So it is difficult to infer too much about launch. However, initial trends in prescription payer interactions and shipments have been encouraging. To date, over 100 prescriptions for REDEMPLO have been received from a diverse prescriber base with geographically balanced uptake across the U.S. Early patient starts fall into 3 categories: patients transitioning from our expanded access program, patients naive to the APOC3 class and patients switching from olezarsen. In addition, REDEMPLO shipments are being made for patients with clinically diagnosed and genetically confirmed FCS. In addition to FDA approval, we announced in January 2026 that REDEMPLO also received approval for the treatment of FCS from Health Canada and from the Chinese National Medical Products Administration. REDEMPLO will be available later this year in Canada, and we anticipate it will be marketed independently by Arrowhead. Pending regulatory review and approval, we expect to potentially launch REDEMPLO later this year in select EU countries and in the U.K. In Greater China, REDEMPLO will be marketed by Sanofi. Our cardiometabolic pipeline is off to a good start with REDEMPLO and the ongoing Phase III study of zodasiran in homozygous familial hypercholesterolemia, or HoFH. We are actively expanding this pipeline with a number of discovery programs and importantly, 3 clinical programs. ARO-INHBE and ARO-ALK7 being developed as potential treatments for obesity are in Phase I/II studies. We also recently initiated a Phase I/II study of ARO-DIMER-PA in patients with mixed hyperlipidemia. For our initial obesity candidates, we recently announced some early interim clinical data. ARO-INHBE enhanced weight loss and fat reduction versus tirzepatide alone in obese patients with type 2 diabetes. More specifically, 2 administrations of ARO-INHBE at the 400-milligram dose in combination with tirzepatide achieved approximately twofold better weight loss at week 16 than tirzepatide alone. This appears to be a high-quality weight loss as we saw an approximately threefold reduction in each of total fat, visceral fat and liver fat measures based on week 12 MRI versus tirzepatide alone in these patients. ARO-ALK7 Phase I/II study is approximately 2 quarters behind the ARO-INHBE study, but early data are encouraging. We believe this is the first RNAi therapeutic to show a adipocyte gene target silencing in the clinical trial, and we've seen dose-dependent reductions in adipose ALK7 mRNA with a mean reduction of minus 88% at the 200-milligram dose at week 8 and a maximum reduction of minus 94%. While these are very intriguing data, they are early and incomplete. So we have substantial work ahead of us before we get too excited about how these candidates could eventually be used. We will continue to run both Phase I/II studies. We are expanding existing cohorts to increase power, and we are adding new cohorts to better understand these candidates and underlying biology. We intend to report additional results later in 2026. ARO-DIMER-PA is being developed as a potential treatment for atherosclerotic cardiovascular disease, or ASCVD, due to mixed hyperlipidemia, where both LDL cholesterol and triglycerides are elevated. We believe there are approximately 20 million people in the U.S. with mixed hyperlipidemia, and this is a patient population without adequate treatment options. We recently announced that we dosed the first patients in the Phase I/II clinical trial of ARO-DIMER-PA, which is a dual functional RNAi therapeutic designed to silence expression of the PCSK9 and APOC3 genes, thus designed to reduce both LDL cholesterol and TGs. This represents an important step forward for the RNAi field as we believe it is the first clinical candidate to target 2 genes simultaneously in 1 molecule and an important step forward for preventative cardiology as both LDL and TGs have epidemiologic support as being important drivers for ASCVD risk. We expect to have interim data for ARO-DIMER-PA in the second half of 2026. If we see good LDL and TG reduction in a well-tolerated manner, we may have something truly special for a very large and currently underserved patient population. Outside of cardiometabolic, we made important advances in our CNS portfolio, specifically in programs that utilize a new proprietary delivery system designed to achieve blood-brain barrier, or BBB, penetration, utilizing subcutaneous administration. In nonclinical studies across multiple animal models, we saw deep target gene knockdown across the CNS, including deep brain regions. This underscores Arrowhead's leadership in the delivery of siRNA to multiple tissues and cell types throughout the body, utilizing the proprietary TRiM platform. Our first wholly owned program using the BBB platform is ARO-MAPT, being developed as a potential treatment for tauopathies, including Alzheimer's disease. During the last quarter, we announced that we dosed the first subjects in a Phase I/II clinical trial that will include healthy volunteers and Alzheimer's patients. ARO-MAPT targets the tau protein in the brain, which has good biological validation as a potential driver of pathology and has emerged as a promising target for Alzheimer's disease and additional tauopathies. We anticipate interim clinical data from the healthy volunteer portion of the study should be available in 2026, with data from the Alzheimer's patients to follow in 2027. This is a very exciting program for us. The second program to use our BBB delivery system is SRP-1005, formerly called ARO-HTT for the treatment of Huntington's disease. This program is partnered with Sarepta, which recently announced the submission of its CTA for study SRP-1005-101, also known as INSIGHTT, in approximately 24 participants. While our cardiometabolic and CNS work by no means encompasses everything we are doing, they are areas of substantial focus and potential value drivers in the near, mid and long term. Within these areas, we are addressing three of the greatest public health challenges of our time, obesity, cardiovascular disease and neurodegenerative conditions. Now I'd like to move on to some key events during the recent period that have dramatically strengthened our balance sheet and give us the necessary resources to push multiple programs toward commercialization. We anticipate being funded through multiple potential independent and partner launches. These meaningfully increase revenue opportunities for the company and push us toward becoming cash flow positive and self-sustaining from commercial sales. Since our last reporting period, we have completed transactions with gross proceeds of $1.33 billion. Let's break that down. First, we completed a global licensing and collaboration agreement with Novartis for ARO-SNCA, Arrowhead's preclinical stage siRNA therapy against alpha-synuclein for the treatment of synucleinopathies such as Parkinson's disease. The collaboration includes a limited number of additional targets outside our pipeline that will utilize Arrowhead's proprietary TRiM platform. Arrowhead received a $200 million upfront payment and is also eligible to receive development, regulatory and sales milestone payments of up to $2 billion. Arrowhead is further eligible to receive tiered royalties on commercial sales up to low double digits. Second, we earned $200 million milestone payment from Sarepta following a drug safety committee review and subsequent authorization to dose escalate and achievement of the second prespecified patient enrollment target for ARO-DM1. And third, we closed concurrent public offerings of $700 million aggregate principal amount of 0% coupon convertible senior notes and $230 million of common stock. Both offerings were several times oversubscribed and priced at company-friendly terms. As I mentioned at the beginning of the call, we demonstrated strong execution across all areas of our business. We received regulatory approval in 3 different countries. We launched our first commercial product. We continue to grow our cardiometabolic portfolio. We had encouraging early results from our obesity programs. We advanced our TRiM platform and CNS pipeline, and we meaningfully improved our financial position to push these and other programs forward. It has been a productive last few months at Arrowhead with so much potential to continue the strong progress in 2026 and beyond. With that overview, I'd now like to turn the call over to Andy Davis. Andy? Andy Davis: Thank you, Chris, and good afternoon, everyone. It has been just over 2 months since the approval of REDEMPLO on November 18, 2025, and we are very pleased with the progress we are seeing. I'd like to share some early insights across health care provider engagement, patient dynamics and payer developments. I'll start with health care provider engagement. As a reminder, we are targeting approximately 5,000 health care professionals through personal promotions, complemented by a much broader omnichannel effort. Early prescribing has been led by preventive cardiologists and endocrinologists, who together account for approximately 70% of total prescriptions, with the remainder coming from internal medicine physicians focused on lipid disorders. In addition, advanced practice providers, including nurse practitioners and physician associates working within multidisciplinary care teams; are playing a meaningful role in patient identification and treatment decisions. Turning to patient dynamics. As Chris mentioned, over 100 prescriptions for REDEMPLO have been received to date. We see this as a very strong start that exceeded our expectations for the early months of the launch. We are also seeing geographically balanced uptake across the United States. Early patient starts fall into 3 categories: patients transitioning from our expanded access program, patients naive to the APOC3 class and patients switching from olezarsen. Class-naive patients represent the overwhelming majority of starts with expanded access and switch patients contributing evenly to the remainder. Patients receiving REDEMPLO include both clinically diagnosed and genetically confirmed FCS, with the majority not required to submit genetic testing to gain access. Importantly, a high proportion of patients are enrolling in the rely on REDEMPLO patient support program. And in the fiscal first quarter, patients eligible for co-pay assistance paid $0 out of pocket. Next, I'll touch on payer developments. While it is still early, we remain encouraged by positive payer feedback on both the clinical profile of REDEMPLO and our unified One-REDEMPLO pricing approach. We are actively engaged with the largest payers and discussions to date reflect a willingness to cover REDEMPLO to label, including access based on either genetic or clinical diagnosis of FCS. I'd like to conclude with a brief comment on execution. Within days of FDA approval, we had product available in the channel for FCS patients. Our REDEMPLO care coordinators, rare disease specialists and field reimbursement navigators were deployed on day 1 to support prescribers and patients, and our payer account team continues to work closely with customers to minimize access barriers. The teams are off to a great start. And our teams are highly encouraged by early stakeholder feedback. This feedback further reinforces the key differentiating attributes of REDEMPLO. As a reminder, in the PALISADE study, REDEMPLO reduced triglycerides by 80% from baseline as early as month 1 and maintained this reduction with minimal variability through 12 months of treatment. In addition, the numerical incidence of acute pancreatitis was lower in REDEMPLO-treated patients than in placebo. And the U.S. approved prescribing information includes no contraindications, no warnings and no precautions. And REDEMPLO can be self-administered at home once every 3 months, just 4 injections per year. With that, I'll turn the call over to James Hamilton to discuss the R&D portfolio. James Hamilton: Thank you, Andy. I'd like to start with a review of the REDEMPLO FDA approval and information in the label and contained in the package insert. REDEMPLO is approved as an adjunct to diet to reduce triglycerides in adults with FCS. The recommended dose of REDEMPLO is 25 milligrams, and it can be self-administered at home by subcutaneous injection once every 3 months. REDEMPLO has no contraindications, warnings or precautions in the U.S. FDA-approved label. The most common adverse reaction includes hyperglycemia, headache, nausea and injection site reactions. REDEMPLO was studied in patients with both genetic FCS and clinically diagnosed FCS in the Phase III PALISADE study. Patients achieved deep and durable reductions in median triglycerides of around 80% from baseline with reductions largely maintained below the guideline directed threshold of 500 milligrams per deciliter throughout the year of treatment. Importantly, patients with genetic FCS versus clinical FCS showed similar reductions from baseline. We see the clinical FCS population as having the same high unmet need as the genetic FCS group. And as such, we think it's crucial to have shown that both patient populations showed similar large reduction from baseline in triglycerides. In PALISADE, treated patients also had a reduced rate of adjudicated acute pancreatitis events, a very welcome finding for FCS patients and their caregivers and an important validation that reduction in triglycerides can, in fact, lead to reductions in pancreatitis. In addition to FCS, we are also investigating plozasiran in patients with severe hypertriglyceridemia or SHTG. We announced last quarter that the FDA granted breakthrough therapy designation to investigational plozasiran as an adjunct to diet to reduce triglycerides in adults with SHTG. Breakthrough therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapies on clinically significant endpoints. This is another important step for the program. The global Phase III studies of plozasiran designed to support the supplemental NDA filing to expand the label beyond genetic and clinical FCS are the SHASTA-3 and SHASTA-4 studies, which enrolled approximately 750 patients; and MUIR-3, which enrolled 1,400 patients. We're also enrolling patients in SHASTA-5 to directly assess the ability of plozasiran to reduce the risk of acute pancreatitis as the primary endpoint. We remain on schedule to complete the blinded portion of the SHASTA-3, SHASTA-4 and MUIR-3 Phase III clinical studies in mid-2026. We expect top line data to be available in the third quarter of 2026 with planned sNDA submission for SHTG before the end of the year. We presented the study design and baseline characteristics of the SHASTA-3 and SHASTA-4 studies at the 23rd World Congress Insulin Resistance, Diabetes and Cardiovascular Disease in December 2025. I'd like to spend a moment to go over a few key parts of that poster. The primary endpoint of the SHASTA studies and the accepted regulatory endpoint is TG lowering versus placebo. Plozasiran has been highly active in all patient populations studied. So these studies are overpowered to show TG lowering. One of the additional objectives and key secondary endpoints of SHASTA-3 and SHASTA-4 studies includes the assessment of acute pancreatitis rates. To be clear, the study was not designed or prospectively powered to demonstrate AP rate reduction after just a near treatment. However, there are a meaningful number of SHTG patients enrolled that would be considered at high risk for AP. Specifically, among the 2 studies, which will be pooled for AP event assessment; 37% of enrolled patients reported TGs greater than 880 milligrams per deciliter, an accepted high-risk threshold for AP. In addition, 20% of enrolled patients had a prior medical history of pancreatitis. Lastly, we are seeing AP events in the studies. We are, of course, still blinded and have about another 4 months before the last patient reaches the end of the blinded period, but overall, the studies are progressing as planned. Chris mentioned the interim obesity results from our ARO-INHBE and ARO-ALK7 programs earlier, but I'd like to add some color and talk about what we are adding to these programs. First, these early results were very encouraging. The next steps would be to investigate whether and where there is a therapeutic benefit and in the patient segments and treatment settings where it may be applicable. To review, the interim clinical trial results represent the first demonstration in humans that the Activin E/ALK7 pathway, a genetically validated pathway that regulates adipose fat storage, may potentially be harnessed therapeutically to improve body composition and enhance weight loss versus tirzepatide treatment alone in obese patients with type 2 diabetes mellitus. This patient population typically experiences less weight loss with incretin therapy. They're less likely to reach weight loss targets and need more effective treatment options. Importantly, ARO-INHBE in combination with tirzepatide achieved approximately twofold weight loss and approximately threefold reduction in visceral fat, total fat and liver fat versus tirzepatide alone in obese diabetics. We saw signals that the pathway was active in the nondiabetics as well. But based on early data, the diabetic signal, particularly in combination with tirzepatide; appeared to be the clearest. We are planning -- we are already in the planning and execution stage of the following next steps. increasing numbers of patients in the Phase I diabetic cohorts, including longer follow-up and better -- to better understand drug durability and activity out to 1 year; and initiating monotherapy cohorts in obese diabetic patients. We expect to have more data later in 2026 from these programs as we see data from the new expanded scope of the Phase I/II studies. I will now turn the call over to Dan Apel. Daniel Apel: Thank you, James, and good afternoon, everyone. I'll provide a brief outline of our financial picture. As we reported today, net income for the quarter ended December 31, 2025, was $30.8 million or an income of $0.22 per share based on 140.7 million fully diluted weighted average shares outstanding. This compares to a net loss of $173.1 million or a loss of $1.39 per share for the quarter ended December 31, 2024, based on 124.8 million fully diluted weighted average shares outstanding at that time. Revenue for the quarter totaled $264 million, driven primarily by our license and collaboration agreements with Sarepta and Novartis. Of this amount, approximately $229 million related to the Sarepta collaboration, and this included $181 million from the achievement of the second DM1 milestone, $32 million from the ongoing recognition of the initial Sarepta consideration and $17 million related to reimbursement of incurred collaboration program costs. In addition, we recognized $34 million of the $200 million upfront payment we received from Novartis under our global licensing and collaboration agreement with them. The remainder of that $200 million will be deferred over time as we fulfill our preclinical collaboration obligations. Finally, on revenue, we also recorded our first commercial sale of plozasiran in FCS. As both Chris and Andy have mentioned, we are very encouraged with the feedback and uptake we are seeing with patients and providers. For now, we are not disclosing specific sales numbers until such time as they become a meaningful driver to our financials. Turning to expenses. Total operating expenses for the quarter were approximately $223 million compared to $164 million in the prior year quarter, representing an increase of $59 million year-over-year. This increase was driven by $40 million of higher R&D expenses and $19 million of higher SG&A expenses. To break that down, the increase in R&D expense was primarily attributable to, as planned, higher clinical costs associated with our Phase III registrational studies for plozasiran in SHTG as well as increased clinical supply chain costs. Nearly half of our clinical trial spend in the quarter was associated with our 3 registrational SHTG studies, namely SHASTA-3, SHASTA-4 and MUIR; which again should read out in the summer. SG&A expenses increased year-over-year compared to the prior year's fiscal first quarter, primarily driven by investments to support the commercialization of REDEMPLO. As previously discussed, in advance of the U.S. launch, we built robust commercial capabilities to fully support FCS and importantly, capabilities that were intentionally designed to be highly leverageable downstream should we obtain approval for plozasiran in SHTG and sulastiran in HoFH. Turning now to the balance sheet. Cash and investments totaled $917 million as of December 31, 2025. Common shares outstanding at quarter end were 137.4 million. To be clear, the reported cash balance does not include the $200 million that we earned for the DM1 second milestone, which was received in January; nor does it include the $50 million anniversary payment that we expect to receive from Sarepta on or before February 10. Finally, and importantly, the cash balance of $916 million also does not include the financing transactions announced in early January, consisting of a concurrent offering of convertible senior notes and common stock, along with associated capped call transactions. As Chris mentioned, these were on company-friendly terms in the sense that the convertible was 0% coupon and the initial conversion premium was 35%. Said another way, the 0% coupon means the notes will not bear regular interest and the principal amount of the notes will not accrete. The initial conversion price represents a significant premium of approximately 35% over the public offering price per share of common stock in the common stock offering. Moreover, the private cap calls will prevent any dilution to existing shareholders up to an 85% of the premium over the offering price or roughly $119. We estimate that the total cost of capital of that convertible at any share price below that $119 to be very attractively below 1.5%. All that is to say that we have very significantly and efficiently strengthened our balance sheet, which provides additional flexibility to support ongoing clinical development, current and future commercialization activities and other long-term strategic priorities. With that brief overview, I will now turn the call back to Chris. Dr. Christopher Anzalone: Thanks, Dan. This is indeed an exciting time to be at Arrowhead or an Arrowhead shareholder. We're coming off a historic period for the company where we executed extremely well and all the hard work of the last several years is starting to pay off. While 2025 is productive, we look to the remainder of 2026 and the years ahead to be even more transformational. Let's look at some key 2026 events that we anticipate could be important value-creating events for the company and our shareholders. Commercial sales progress for REDEMPLO, Q3 2026 readout of Phase III SHASTA-3 and SHASTA-4 studies of plozasiran in patients with SHTG, which we believe has the potential to be a $3 billion to $4 billion commercial opportunity; second half 2026 readout for ARO-DIMER-PA targeting PCSK9 and APOC3 for LDL and TG lowering, which may address mixed hyperlipidemia, a population of potentially 20 million patients in the U.S.; additional ARO-INHBE and ARO-ALK7 data presented in 2026 that may build on the already encouraging early data for this novel non-incretin strategy; and early ARO-MAPT data in 2026, potentially providing validation for this drug candidate and our emerging CNS pipeline with systemic delivery via subcutaneous administration. These are just a few potentially important events in 2026 alone. If you fast forward 1 to 3 years, we expect many more opportunities in our pipeline to build value and potential commercial launches, both independently and with partners. Thank you for joining us today. And I would now like to open the call to your questions. Operator? Operator: [Operator Instructions] Our first question will come from the line of Mike Ulz from Morgan Stanley. Michael Ulz: Maybe just one on REDEMPLO. Can you just give a little bit more color on the breakdown between the different categories of patients transitioning from expanded access, naive and switch? And then maybe on the latter in terms of switch, just any key reasons you're seeing a switch? And does it have anything to do with coverage and pricing? Andy Davis: Thanks, Mike. This is Andy. Yes, I can comment that the vast majority of patient origination is from APOC3-naive segment, with the remaining balance split roughly 50-50 between those that are coming from switch and those that are transitioning off of the expanded access program. As it relates to switch, we're seeing switch patients that are coming both from efficacy, but also from safety as the two principal drivers for why physicians might be considering REDEMPLO as an alternative. I hope that helps. Operator: Our next question comes from the line of Maury Raycroft from Jefferies. Maurice Raycroft: Congrats on the progress. I'll ask one on obesity. Just wondering if you've had discussions with FDA about the development path or when would it make sense to do this? And what could timelines for your Phase II start look like? And do you need to have all the data, including combo data in hand, before you can determine next steps for the development path? James Hamilton: Yes, sure, Maury. I can take that. This is James. Probably middle of the year, we would be having some of those discussions with FDA. I don't think we need all of the data from all of the cohorts. As I mentioned in the prepared remarks, we expanded some of these cohorts, so they'll be going on some of them for a longer period of time. So FDA conversations probably middle of -- around middle of the year, and then we'll be looking to file an IND shortly thereafter. Operator: Our next question will come from the line of Andrea Newkirk from Goldman Sachs. Andrea Tan: Maybe I can ask you one here on the ARO-DIMER-PA asset. Just as we think about the data set that are -- that's coming later this year, just curious if you might be willing to speculate or share what you are looking for or how you've defined a TPP, what level of reduction in LDL-C and you're hoping to see? And then how that might inform a go/no-go decision for advancing the asset forward? And what extent of reduction would give you confidence that you could then see that translation to a benefit on MACE? Dr. Christopher Anzalone: Yes, sure. We'll see. I think we probably don't have to reach the level of reduction in terms of APOC3 and triglycerides that we're seeing with plozasiran, for example. Something less than that with the combination of the LDL cholesterol reductions would probably be sufficient. So I think if you look at some of the monkey data that we presented in the dyslipidemic monkeys, we were seeing reductions in LDL and in triglycerides of around 40%, 50%. So I think something like that, if you could do both of those, that would be really encouraging. But we'll see what the data show later this year. Operator: Our next question comes from the line of Luca Issi from RBC Capital Markets. Unknown Analyst: This is Cathy on for Luca. Congrats on strong REDEMPLO launch and progresses. My question also on INHBE and ALK7 since we just talked about the regulatory path. Andy, I appreciate early days, but how are you thinking about potential pricing for INHBE and ALK7? I mean Lilly now offers Zepbound via LillyDirect at $300 a month and the compounders announced today that you can get oral Wegovy basically at the same monthly price as YouTube TV. So what is your latest thinking on pricing? And how should we think about COGS for INHBE and ALK7? Andy Davis: It is -- as you expected, it's way too early for us to think about that. We're inherently in the biology here to see how these drug candidates could potentially work in various patient populations. Until we have a better understanding of that, it's really too early to speculate on potential pricing. Operator: Our next question comes from the line of Prakhar Agrawal from Cantor. Prakhar Agrawal: Congrats on the quarter and the progress. So I think, James, you mentioned that about the Pancreatitis event rates in the ongoing Phase III SHASTA-3, 4 trials. Maybe if you can talk about the blinded AP events that you're seeing in those trials and whether it's in the same ballpark of what Ionis saw? And just a follow-up to that, would you expect the placebo event rate on AP reduction to perform similarly to olezarsen core trials, given the population looks similar? Or are there any nuances that we should be aware of? James Hamilton: Yes. So on the first one, we're not going to give any additional details on event rates or the number of events that we've seen other than to say that we are seeing events. On the second question, I mean, I think it's rational to look at the CORE and CORE2 placebo rate that the population was similar to ours. So they are obviously different studies, but the population was similar. Operator: Our next question comes from the line of Jason Gerberry from Bank of America. Jason Gerberry: You mentioned payer feedback for REDEMPLO. I believe that was in the context of FCS. But I'm curious if in those discussions, SHTG came up at all and whether that price point that you guys have for FCS is appropriate for a market the size of SHTG and the likely benefits that APOC3 would provide. It seemed pretty derisked at this point, but just kind of curious if those discussions came up and how the view was on the $60,000 price point. Andy Davis: Thanks, Jason. This is Andy. I appreciate the question. I won't get into the details of any specific payer discussions, only to say that our team is laser-focused on ensuring we can gain coverage and access for those patients that have FCS, either genetically confirmed or clinically diagnosed. I would just add that the payers with whom we're discussing represent over 90% of U.S. lives and both the clinical teams and the economic teams recognize the clinical value and the economic value of REDEMPLO at the One-REDEMPLO price that we've previously announced. Dr. Christopher Anzalone: And you mentioned the size of the SHTG market. We think there are somewhere around 3.5 million people with triglycerides above 500. But that market is not all created equal. When we look at our -- at least initial target market there and we look at how we price REDEMPLO, it is really focused on those very high-risk individuals, those maybe 750,000 to maybe 1 million people who are -- who have triglycerides above 880 or history of pancreatitis. That's -- at least initially, that is the real core market that those are the patients who really need this new medicine. So again, don't get lost in the 3 million to 4 million people with trigs above 500 really focus on that high risk group. That's what we're focusing on at least initially. Operator: Our next question will come from the line of Patrick Trucchio from H.C. Wainwright. Patrick Trucchio: My question is on ARO-MAPT. I'm just curious, with the interim data from the healthy volunteer portion and then with the patient data to follow, I'm wondering, what specific elements of the healthy volunteer data, safety, CSF tauopathies knockdown or downstream biomarkers would most likely increase your confidence in this program and as well the data we should look for in patients to follow? And if you could also just talk about just the confidence this would give in the CNS targeting and platform overall and how we should expect the CNS platform to develop from here? James Hamilton: Yes, I can take that, Patrick. This is James. So maybe I'll take the second question first. We don't have any data in the clinic yet, any data in humans, but we do have data using the platform with multiple different targets in multiple different monkey studies, and they're pretty consistent in terms of the drug concentration that we get in various CNS regions and the knockdown we're able to achieve in the deep brain. So that is helpful and certainly enhances our confidence. But of course, the large leap in confidence will come once we see the clinical data. And to your first question, I think the key data that we anticipate being confidence building, of course, safety and then the CSF knockdown will be key in the healthy volunteers. There's not a lot of other downstream biomarkers to measure in the healthy volunteers. But then going forward into the patient cohorts, we can measure some of the [ phospho ] tauopathies varieties in the blood, also in the CSF. And then, of course, we can look at tau PET, although those readouts will take a while to see the tau PET signals in the patients. I think seeing a reduction in tau PET signal will be really very encouraging. Operator: The next question will come from the line of Edward Tenthoff from Piper Sandler. Edward Tenthoff: So thanks for all the detail. Really exciting to see the pipeline advancing. I'm wondering when it comes to the recognition of revenues, at this point, are you guys anticipating breaking out a cost-of-goods-sold line? I'm sure a lot of the manufacturing expense has already been expensed to R&D. But I'm just trying to think about how you're planning on reporting COGS going forward? And will you break out REDEMPLO product sales in the future? Daniel Apel: Yes. Thanks, Ted. Thanks for the question. Yes. As you pointed out, the cost of goods sold prior to launch are going to be in the R&D, and that's the majority of what we're going to see in the short term. We said in the prepared remarks, we're not going to disclose this actively until such time as they are meaningful drivers. So we will, at some point, I'm not going to hazard a guess as to when that will be. But then you would -- at that point, you would normally see then sort of the traditional product revenue and product sales. Operator: Our next question comes from the line of Joseph Thome from TD Cowen. Joseph Thome: Maybe just based on the differential biology of Activin E/ALK7, can you talk a little bit about your expectation to see monotherapy weight loss in obese nondiabetic patients with the ALK7 program? And a point of clarification, when you talk about the expansions of the studies in terms of including that monotherapy diabetic population and expand the overall size, was that for the Activin E/ALK7 programs already, both of them? Dr. Christopher Anzalone: Yes. I think -- well, we don't really have expectations in terms of monotherapy weight loss. We'll see what happens. I think we've said a few times that we view these studies as hypothesis generating. So we'd like to see if there's an early signal and then potentially expand cohorts to confirm that signal. So I can't really predict ahead of time what we're going to see. Then on your second question, the addition of the monotherapy cohort, we did add that in the INHBE study. We will likely have that in the ALK7 study as well. Operator: Our next question comes from the line of Mani Foroohar from Leerink Partners. Mani Foroohar: I know earlier, so I'm not sure this was asked earlier, but could you give us a breakdown of the EAP versus non-EAP patients out of the 100-plus prescriptions? And how should we think about the total pool of EAP patients rolling on to commercial drug? Is that -- is there a tail of that remaining? And I have a follow-up question. Andy Davis: Thanks for your question, Mani. This is Andy. At this time, we're not going to provide any further details aside from the previous remarks, which the vast majority of patients are APOC3 naive. It gives us a lot of optimism about our ability to identify and diagnose both genetically confirmed and clinically diagnosed FCS patients. And again, with respect to the balance, we do see that fairly evenly split between those patients transitioning off of the expanded access program and those that are coming via switch. Mani Foroohar: Okay. That's helpful. And a separate question, what are the expectations we should have over the next 12 to 18 months around potential data sets admittedly perhaps early on novel tissue types and further expansion of the platform? Dr. Christopher Anzalone: That's a good question, Mani. We've not given any guidance to that at this point. I think we have enough exciting stuff with more ALK7 data, with initial MAPT data, with initial [ Zimer ] data, with SHASTA-3 and 4 reading out with sales that we feel pretty good about those things. But you know us, Mani. We are always developing the platform, and we are always expanding to the sites. And so I can't -- it's possible that you may hear something about where we're going with the platform as well as maybe new candidates within the existing platform. I just can't give you any guidance on when that might be, I apologize. Operator: Our next question will come from the line of Madison El-Saadi from B. Riley. Madison Wynne El-Saadi: On the 100 prescriptions you mentioned, I'm curious how many of those do you expect to be converted to paid drug? And how long does it take to get from prescription to drug [ and ] body? And then relatedly, how should we think about the pace of both patient onboarding and competitive switching? Is this kind of a leading indicator for SHTG dynamic? Andy Davis: Thanks, Madison. Happy to comment. What we're seeing are really high-quality prescriptions in the sense that we believe these prescriptions truly represent either genetically confirmed or clinically diagnosed FCS patients. So we do have high confidence that a significant proportion of those prescriptions will, in time, translate into drug shipments and drug in patients. As far as the time it takes from prescription to drug shipment, again, that does vary by patient, by insurance and by prior authorization. But I would say, in general, we're able to do that within just a couple of weeks from prescription to patient receiving drug. So I've been incredibly pleased with the patient identification including both genetic and clinically diagnosed and incredibly pleased with the operational execution from the team in converting prescriptions to shipped medicine. Dr. Christopher Anzalone: And also just broadly be careful about reading too much into where we are right now. We've only been actively in market for 10 weeks now. And so we're still working with payers. We're still working with physicians to get comfortable prescribing this. We're still informing and educating patients and prescribers about the medicine. So we have a long way to go. Let's see where we are more towards the end of the year. We have a pretty small sample set at this point. Operator: I'm not showing any further questions in the queue. I would now like to turn it back over to Chris for any closing remarks. Dr. Christopher Anzalone: Thanks, everyone, for joining us today, and we look forward to speaking with you next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.