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Operator: Welcome to MACOM Technology Solutions Holdings, Inc.'s First Fiscal Quarter 2026 Conference Call. This call is being recorded today, Thursday, February 5, 2026. At this time, all participants are in a listen-only mode. I will now turn the call to Mr. Steve Ferranti, MACOM's Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead. Stephen Ferranti: Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM Technology Solutions Holdings, Inc.'s financial results for 2026. I would like to remind everyone that our discussion today will contain forward-looking statements which are subject to certain risks and uncertainties as defined in the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM Technology Solutions Holdings, Inc.'s filings with the SEC. Management statements during this call will also include a discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results is provided in the company's press release and related Form 8-Ks, which was filed with the SEC today. With that, I'll turn over the call to Stephen Daly, President and CEO of MACOM Technology Solutions Holdings, Inc. Stephen Daly: Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q1 results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for 2026 and then we will be happy to take some questions. Revenue for 2026 was $271.6 million and adjusted EPS was $1.02 per diluted share. Demand for our products is strong across our three end markets, and our backlog continues to build. Our financial performance improved across most key metrics in Q1. At quarter end, we held approximately $768 million in cash and short-term investments on our balance sheet. Our Q1 book-to-bill ratio was 1.3 to one, and orders booked and shipped within the quarter were 23% of total revenue. Our Q1 turns business was higher than recent quarters due to strong early quarter bookings. Our current backlog remains at record levels. Turning to other recent trends, Q1 revenue performance by end market was as expected and all end markets grew sequentially. Industrial and defense was $117.7 million, data center was $85.8 million, and telecom was $68.1 million. Data center was up approximately 8% sequentially, telecom was up 3% sequentially, and industrial and defense was up 2% sequentially. Both industrial and defense and data center revenues were at record levels. As we review our full fiscal year forecasts, we are gaining confidence that our data center revenue could achieve 35 to 40% year-over-year growth. Hyperscaler's capital investments are robust, which is driving demand for our 801.6T optical and high-speed analog products. To capitalize on this opportunity, we have been expanding, and we will continue to expand our data center product portfolio. As a reminder, our portfolio currently supports NRZ, PAM4, and coherent modulations. We provide products that support VCSEL, EML, and silicon photonic-based optical transmission technologies as well as electrical connectivity solutions over copper. Revenue growth inside the data center is robust, primarily in pluggable optical modules and optical cables with our 800G and 1.6T PAM4 products. We support our customers' DSP, LPO, and LRO module architectures. We also support customer requirements for coherent DCI hardware, including ZR and ZR Lite. MACOM Technology Solutions Holdings, Inc.'s coherent light solutions designed for shorter reach coherent applications enable higher bandwidth performance with significantly improved power efficiency compared to traditional coherent systems. Interest in LPO continues to spread, and we are further supporting customers as they leverage the benefits of a low power and low latency 400G and 800G optical solution. In addition, we see interest in enabling a similar value proposition at 1.6T using LRO or LPO implementations. In this case, a 200 gig per lane solution would be used. We are also supporting LPO use in PCIe and NPO implementations as the industry strives to optimize interconnects for both scale-up and scale-out. Notably, we are starting to see interest in LPO from telecom front haul applications. Demand for our 200 gig per lane photodetectors continues to grow, supporting 800G and 1.6T connectivity. As I highlighted on our last earnings call, we are adding manufacturing capacity to keep up with our customers' forecasted demand. We have indications that demand will remain strong into calendar 2027. Further, MACOM Technology Solutions Holdings, Inc. is positioning itself to support next-generation opt receiver platforms at speeds beyond 200 gig per lane. Part of our near-term and long-term growth strategy is to expand our photonics portfolio with higher speed photodetectors and new CW lasers. We are also seeing renewed interest in our linear equalizer products that help extend the reach of copper interconnects in 800G and 1.6T. Linear equalizers enable longer reach active copper cables or ACCs and can enhance signal integrity when used in backplane applications. We are working closely with multiple customers to address their program-specific requirements and various use cases. MACOM Technology Solutions Holdings, Inc.'s roadmap extends to 3.2T technologies, and we have aligned our product roadmaps and resources with our customers' needs to ensure we deliver the right technology at the right time. Our future products are increasingly optimized for co-packaged and highly integrated architectures, like CPO and NPO. We can differentiate in this market based on our strong customer relationships, IC and system design expertise, as well as our unique photonic materials and product design expertise. Finally, we have successfully launched a PCIe 6 optical chipset that supports sideband data streams over fiber. We have expanded the portfolio with a new PCIe 7 equalizer. These ICs provide new exposure to the compute side of the data center network. These products and associated solutions will be on display at the DesignCon show in Santa Clara, California later this month. Similar to the data center, we see many growth opportunities across the industrial and defense markets, primarily in the defense segment. Advanced radars, electronic warfare, and new communication systems are using higher frequencies, higher RF or microwave power levels, and higher levels of integration. These requirements play to our strengths, and we offer our customers turnkey support from custom chip design to subsystem solutions. We are a supplier of choice among many of the large US defense OEMs, and we continue to work to expand MACOM Technology Solutions Holdings, Inc.'s presence and brand in Europe. The pace of innovation in the defense market is accelerating by both the traditional defense primes and the newer, more nimble defense companies. As an example, new risks from drone attacks are driving the need for an entirely new platform to detect, identify, track, and respond to these threats. MACOM Technology Solutions Holdings, Inc. has a portfolio of products and system engineering capabilities to support our customers' fast design and manufacturing timelines. Our defense customer base is large and very broad, and we typically support radar systems, missile and missile defense systems, drone and drone defense systems, and wideband electronic warfare systems. I'll illustrate four examples where our products have a competitive advantage in the defense market. MACOM Technology Solutions Holdings, Inc. has developed a family of industry-leading, high-efficient, wideband gain MIMIC amplifiers that significantly reduce the transmitter's heat dissipation. This is critical for small form factor applications. Our GaN technology supports directed RF energy solutions, and our seven-kilowatt devices lead the industry. Our RF over fiber products enable the distribution of RF microwave signals over long distances using linear photonics. Our products are typically used in phased array radars, remote antennas, and towed decoy applications. When it comes to receiver protection diodes, whether in a radio or a radar, MACOM Technology Solutions Holdings, Inc. is the golden standard in the industry for performance and quality. We like to combine our proprietary core technologies with microwave systems engineering capabilities. This enables us to engage much earlier in our customers' project design cycles and presents the full scope of MACOM Technology Solutions Holdings, Inc.'s capabilities to help solve the customer's technical challenges. Within the telecom end market, satellite-based broadband access and direct-to-cell opportunities remain robust with numerous LEO networks in the planning stages. The number of LEO satellites planned to be launched continues to grow as more companies compete to provide commercial broadband data, voice, and video communications by satellite. These networks typically use microwave or millimeter wave frequencies and free space optics or FSO communications for satellite-to-satellite or satellite-to-ground communications. LEO and MEO constellations have many key areas where MACOM Technology Solutions Holdings, Inc. can contribute, including large phase array antennas with active beam steering, direct-to-device links operating at UHF or S band, backhaul links operating at Ka, Q, V, and E band, data center-like electronics with high-speed optical links transferring data within or across the satellite, free space optics for satellite-to-satellite communications, and ground terminal and gateway linearization for high power transmitters. Ground stations and gateways are a key part of the LEO networks. MACOM Technology Solutions Holdings, Inc. specializes in designing products and solutions that overcome nonlinearity of RF, microwave, and millimeter wave signal transmission for satellite communication systems. In many cases, ground-to-satellite links prefer linearization of SSPAs or TWTAs to boost the linear power efficiency of the link. I would like to update investors on the status of our $55 million satellite contract that we were awarded and announced previously. Production is planned to start in 2026. The schedule delay is primarily driven by satellite system changes flow down from our customer, which impact the design of the hardware we deliver. Overall, we view this as a positive because the system changes can add new functionality, which broadens the application space for the constellation. Turning towards the 5G segment we serve, our global team continues to secure new business in the macro base station market, driven by the need for high-performance amplifiers in multiband radios. We are making good progress improving the overall performance and competitiveness of our base station portfolio, with major improvements in the 2.7 and 3.5 gigahertz bands. Our RF power team is sampling products using our new GaN4 technology, which will further improve our competitiveness. We recognize the two major European base station OEMs expect the global RAN market to be flat in 2026, with regional variations. Both companies recently commented on a significant potential upside from the EU's high-risk vendor replacement initiative, and this might provide MACOM Technology Solutions Holdings, Inc. upside growth over the long term. Future base station demand is supported by additional 5G rollouts, growing AI-driven connectivity needs, and emerging mission-critical defense markets. We believe the cable infrastructure market segment is also improving. Cable networks are in transition from 3.1 DOCSIS 4.0, and we have been releasing new products and working with customers on design wins to support this upgrade. We expect the cable TV market will be a modest contributor to our telecom revenue growth in FY26. Next, I'll quickly summarize progress on our five goals for FY26, which we outlined on our last earnings call. First, take advantage of the data center opportunity. We continue to enhance our design teams and expand our presence in the data center, and we are raising our data center year-over-year revenue growth base case from 20% to 35 to 40%. Second, to expand our 5G market share. We are excited to be sampling our next-generation GaN4 products to our customers. In addition, we see that one of our competitors is exiting the 5G RF power GaN market, and we hope to benefit from this competitive landscape shift. Related to this event, we recently hired a team of experienced engineers to complement our existing RF power team. Third, extend leadership in industrial and defense. Our defense business continues to grow, and our team continues to win large IC module and subsystem programs. Fourth, continue to develop advanced 3-5 semiconductor technologies. Our technology teams are making progress developing advanced GaN on Silicon processes while also installing new equipment to modernize and expand manufacturing capabilities. Last, to manage our capital and investments. As Jack will note, our return on capital metrics and trends continue to improve, and we plan to manage investments to achieve superior returns. In summary, our strategy is to continue to build a best-in-class and diversified semiconductor portfolio that will enable MACOM Technology Solutions Holdings, Inc. to capture a larger share of the three markets we focus on. Our agility and strong teamwork across our organization help us address opportunities and ultimately beat our competitors that are often larger and have more resources. Jack will now provide a more detailed review of our financial results. Jack Kober: Thanks, Steve, and good morning, everyone. The results from our first quarter were solid, and MACOM Technology Solutions Holdings, Inc. achieved a few new quarterly records associated with our financial performance. Our teams continue to focus on executing our strategic plan and driving increased revenue and profitability. Fiscal Q1 revenue was $271.6 million, up 4% sequentially and up 24.5% year-over-year, driven by growth across all three of our end markets. We have seen continued strong bookings across all of our end markets, resulting in a book-to-bill, which increased to 1.3 to one. This was one of our strongest quarterly bookings in the company's history and our highest quarterly book-to-bill ratio since Q3 2021. On a geographic basis, revenue from US domestic customers represented approximately 45.6% of our fiscal Q1 results, a slight increase over both the prior quarter and Q1 of fiscal year 2025. Adjusted gross profit for fiscal Q1 was $156.5 million or 57.6% of revenue. Through the diligent and consistent hard work of our dedicated operations team, we have continued to increase our capacity and improve yields, and we expect to see ongoing incremental progress across all four of our fab operations during fiscal 2026. The increase in product demand across our internal fabs has resulted in improving utilization and associated incremental gross margin improvement. As a result, we continue to expect sequential quarterly gross margin improvements of between 25 to 50 basis points as we move through the remainder of fiscal 2026. These improvements include any potential offsets to cost increases such as gold and other precious metals, depreciation, and labor costs. Total adjusted operating expense for our first quarter was $82.5 million, consisting of research and development expense of $55.8 million and selling, general, and administrative expense of $26.7 million. The anticipated sequential increase in adjusted operating expense compared to Q4 was primarily driven by ongoing R&D investments and employee-related costs. As our business continues to grow, we expect associated growth, primarily related to higher R&D and higher variable costs. Consistent with our practice, we will remain very focused on managing our OpEx balance, long-term revenue growth, and profitability, with continued investment in the business. Depreciation expense for fiscal Q1 2026 remained stable at $8.7 million, the same as the prior quarter. Adjusted operating income in fiscal Q1 was another record, coming in at $74 million, up 10.4% sequentially from $67 million in fiscal Q4 2025 and up 33.5% year-over-year. For fiscal Q1, we had adjusted net interest income of $6.7 million, a slight decrease of less than $100,000 sequentially from $6.6 million in Q4. Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $2.4 million. As of January 2, 2026, our deferred tax asset balances remained at $208 million. We anticipate further utilizing our deferred tax asset balances, including R&D tax credits, through fiscal 2026 and beyond, helping to keep our cash tax payments relatively low over these periods. We expect our adjusted income tax rate to remain at 3% as we continue through fiscal 2026. Depending on the jurisdictional mix of our income, we expect the US government's recent tax legislation to support a low to mid-single-digit adjusted tax rate for the next few fiscal years. Fiscal Q1 adjusted net income increased approximately 9.6% to $78.2 million compared to $71.4 million in fiscal Q4 2025. Adjusted earnings per fully diluted share was $1.02 utilizing a share count of 76.7 million shares, compared to $0.94 of adjusted earnings per share in fiscal Q4 2025. I'll note exceeding $1 per share of quarterly EPS is a milestone for the company. Our team continues to optimize the business's performance, which has resulted in sequential increases in our adjusted operating income and EPS over the past ten quarters. Now on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $160 million, up from $148.6 million in fiscal Q4 2025. The increase in our accounts receivable balance was driven by sequential quarterly revenue growth as well as the timing of customer shipments and payments. Our day sales outstanding averaged fifty-four days compared to the previous quarter at fifty-two days. Inventories were $238.9 million at quarter-end, up sequentially from $237.8 million, largely driven by additional work in process inventory at the RTP and 1.9 times the same level as the preceding quarter. Fiscal Q1 cash flow from operations was approximately $42.9 million, down $26.7 million sequentially. The sequential decrease was primarily due to the typical timing of employee-related payments as well as other changes in working capital balances during the quarter. We expect that our Q2 cash flow from operations will be in excess of $60 million. Capital expenditures totaled $12.9 million for fiscal Q1. We continue to estimate fiscal year 2026 CapEx to be in the range of $50 million to $55 million as we upgrade and enhance our production and engineering equipment facilities, expand capacity where needed. Moving on to other balance sheet items, cash, cash equivalents, and short-term investments for the first fiscal quarter were $768 million. We are in a net cash position of more than $268 million as of January 2, 2026, when comparing our cash and short-term investments to the book value of our convertible notes. In mid-March, we anticipate retiring our 2021 convertible notes by paying out $161 million of principal value in cash and settling any conversion premium with shares of our common stock. Shares associated with this settlement have been included in our fully diluted share count as well as our guidance for Q2. Our remaining debt balance is approximately $340 million of convertible notes, which mature in December 2029. I would like to highlight that over the past several years, we have been focused on growing our profitability and carefully managing our operating asset base, resulting in an improving return on invested capital. We feel this ROIC improvement demonstrates the effectiveness of our business strategy and furthers our goal of building long-term financial strength for the company. Thanks to the entire MACOM Technology Solutions Holdings, Inc. team for their contributions to help make this another quarter, which included the achievement of additional record results. Now back over to Steve. Stephen Daly: Thank you, Jack. MACOM Technology Solutions Holdings, Inc. expects revenue in fiscal Q2 ending April 3, 2026, to be in the range of $281 to $289 million. Adjusted gross margin is expected to be in the range of 57 to 59%. And adjusted earnings per share is expected to be between $1.05 and $1.09, based on 77.7 million fully diluted shares. We expect sequential revenue growth in each of our three end markets. We expect that data center will achieve low to mid-teens sequential growth, and we expect telecom and industrial and defense will achieve low single-digit sequential growth. As Jack highlighted, we expect to make incremental progress improving our profitability and financial performance in Q2. Lastly, I would like to welcome Brian Ingram, who joined our board of directors on January 12. Brian's industry experience and strategic acumen managing large multibillion-dollar businesses will be an asset to our management team and the board. I would now like to ask the operator to take any questions. Operator: Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press 11 on your telephone and wait for your name. To withdraw your question, simply press 11 again. As a reminder, in consideration of time, please limit yourself to one question and one follow-up. Now, the first question coming from the line of Quinn Bolton with Needham and Company. Your line is now open. Quinn Bolton: Guys, congratulations on the nice results. Steve, I wanted to ask, obviously, a nice uptick in your annual outlook for the data center business from 20% to 35 to 40% this year. I wondered if you could just spend a minute talking about what gives you the confidence to raise that outlook. Is it just sort of the rising tide? Do you now have better visibility as orders have filled in? Is it driven by share gains? What's driving the improved outlook in the data center? Stephen Daly: Thank you, Quinn, for the question. To some degree, it's a little bit of all of the above for your question. But the key underlying driver is 1.6T. That's where we see the most activity, the most design wins transitioning into production runs. So I would just highlight 1.6 is really the long-term or near, I would say, the long-term trend that will be very favorable to MACOM Technology Solutions Holdings, Inc. And you're correct that as we look at our data center business today, we have a very healthy backlog. We think our second half will be stronger than our first half in terms of the overall absolute dollars of revenue shipped. So we are in a very good position. We have programs that are ramping. That gives us confidence to, as a base case, hit 35 to 40%. There's also upside to that number, which is a bit unquantifiable right now. And we'll update everybody, certainly on our next call, as to more specific guidance for Q3 and Q4. Quinn Bolton: Excellent. And, Steve, you'd mentioned, I mean, there's not a lot of talk about CPO in the past couple of weeks and months, I guess. You mentioned NPO, maybe even CPO in your script, but maybe just spend a minute talking about how MACOM Technology Solutions Holdings, Inc. could benefit to the extent we start to see a shift more towards either near-packaged or co-packaged optics? Stephen Daly: Yes. And the product set that we would sell into a CPO or NPO platform is very similar to what we sell into pluggable modules. So it's the same drivers, TIAs, photodetectors, and possibly lasers. I will highlight that a lot of these platforms are moving quickly to silicon photonic-based solutions, which is putting a heavy demand on the optic, certainly the CW laser and the photodetector optical chips. We have a very competitive photodetector today. It's ramping in production, primarily for pluggables. We are making very quick progress on our CW lasers. We now have two customers that have confirmed that our CW lasers are meeting their requirements electrically. So now we are going through a qualification phase, which will last some number of months, and also looking at the production readiness of our fab. These are 75-milliwatt lasers. These are not what I would consider the higher power 400-milliwatt class lasers. Those are not the type of lasers that we make today. But we do think that the CT and the NPO sort of transition is a benefit to MACOM Technology Solutions Holdings, Inc. I'll also add that from an overall architecture, you see many, many channels in a smaller form factor. So a lot of the traditional chips that we sold into pluggables are becoming more complex for NPO and CPO. There's far more channels per chip, and this is a change that we have a lot of strength in terms of design capability. The last thing I'll add is some of these systems are actually moving towards coherent modulation and coherent light specifically. In this case, we have a very strong design capability, given the history with our metro long-haul chips that we've been shipping for years. Operator: Thank you. And our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is now open. Vivek Arya: Thanks for taking my question. Steve, you were nice enough to give us the prospects for data center growth this year. I was hoping you could give us kind of some similar growth potential in your other two segments also. I'm particularly interested in the telecom side because of this RF power exit that NXP announced. I think they had close to a $300 million or so business last year, which is larger than your entire telecom segment. So I'm curious, when do you think you can start to gain some share? When does it start to really become accretive to your base telecom business? Thank you. Stephen Daly: Yes. So it was certainly a fortunate stroke of serendipity that one of our competitors is exiting the business. I can't really comment on how much market share this will translate to. I think it will take one or two years for that to play out. Our goal is to strengthen our design team, accelerate product development, and go to the market with more intensity to try to maximize the opportunity. But I think it's premature today to put a dollar value on that. The 5G market space is a relatively slow-moving market where it might take one year to get a design win, and then after that, you have a ramp. We want to engage the same customer base that we have today with more intensity. We also want to let them know that we're going to be there not only for the current 5G generation but also the next generation platforms. As they move to different architectures, some of which will include more fiber right up to the remote radio unit, we want to be there and offer the full suite of products. We do find this to be an exciting time to be addressing the market. Now with that said, the market is flat, as I mentioned in my prepared remarks. So the overall number of radios being manufactured per year is relatively flat. But we believe we can grow through share gains. That is certainly front of mind for us. The other important area that we focus on in the telecom space is SATCOM. As I mentioned, we have a very large backlog. We have a LEO program moving into production in 2026. We have many significant opportunities that we're working on, which will provide growth in our 2027 and beyond time frame. We see an incredible amount of investment going into LEO constellations for direct-to-device applications. We think there are certain structural reasons why the market wants space-based, direct-to-cell connectivity. We want to make sure that we offer the full suite of products to these different satellite systems. Every customer is doing something a little different. Our content varies dramatically from customer to customer. But we have a rich treasure trove of technology we can offer our customers here. Vivek Arya: Anything on the overall segment growth for this year? If I could just squeeze in my second question there on the gross margins. If your mix shifts to data center and more optical components, several of your peers tend to have somewhat lower margins. I don't know what is the right way to do apples-to-apples margin comparison between several of your optical peers because they sell complete transceivers and modules as well, which you don't. So I'm just curious if the mix shifts to data center, what that does to gross margins. Steve, if you could help us with the overall growth prospects for IND this year. Thank you. Stephen Daly: Sure. Why don't I start with the first part of that question, and then Jack can address the second part. We don't give full-year guidance, and I think you're asking what the rest of our fiscal 2026 looks like. Last year, we grew by 32%. That was driven in part by our telecom business, which grew over 40% last year. This year, we don't expect the same level of growth. It's more likely going to be high single-digit, maybe low double-digit. We'll have to wait and see on the timing of some of the programs that I've talked about. But it is growing. As I talked about, the market opportunities for us not only in 5G but also SATCOM and, of course, cable improving is providing us with those growth opportunities. The last segment, just for completeness, I'll talk about is our industrial and defense. Industrial and defense last year also did very well, close to 20% year-over-year growth. As we look out into the second half of the year and look at the tea leaves, again, we probably are unlikely to hit 20% growth. It's probably somewhere between 15-20%. If we look at our backlog and all the different moving parts. Collectively, MACOM Technology Solutions Holdings, Inc. should grow, and we have internal targets that put us somewhere in the 20% range, plus or minus. But, of course, all of this is dependent on booking orders, ramping successfully, and executing on various programs. There are fundamental growth opportunities that are intact. The movement to higher data rates inside the data center, the movement to more optics in the data center, this is a tailwind for us. In our industrial and defense, more and more GaN on silicon carbide, and we're providing more modules and subsystems to our customers. In the telecom space, as I talked about, we see opportunities with LEO in 5G. These are really the primary pieces that we get excited about. On the profitability side, as Jack mentioned, we do expect incremental improvements during the course of the year. I'll let him comment further. Jack Kober: Back to the root of your question, Vivek, with regard to our profitability profile versus some of our other peers. We're going to be different in terms of how those peers may look, whether it's within the data center end market or within industrial and defense and telecom. The mix of fabs that we have versus things that are maybe fabbed externally may create a different answer. As Steve mentioned, that 25 to 50 basis points of sequential quarterly increases on the gross margin side is comprised of a number of different items that we've got, which we think are working in our favor, including some volume increases as well as some new product introductions across the business that is supporting that expected gross margin improvement as we work our way through the remainder of the year. Operator: Thank you. Our next question coming from the line of Thomas O'Malley with Barclays. Your line is now open. Thomas O'Malley: I just wanted to dive a little bit more on the gross margin line. You pulled in the RTP fab in-house. You talked previously about bringing more products into that that MACOM Technology Solutions Holdings, Inc. used to run externally. Can you maybe give us an update on how that's going so far? Then you've guided that 25 to 50 basis points of incremental improvement over time. Do you think that RTP could contribute a little bit more to the upside on that gross margin profile? Any update there would be helpful. Stephen Daly: Thanks for the question, Tom. Just to highlight, since we closed that acquisition of the RTP fab, our team in North Carolina has been incrementally improving the profitability ever since we purchased the fab. Almost every quarter, we've seen a positive movement in terms of cost of manufacturing, improving yields, lowering the scrap, improving overall efficiencies throughout the building, and removing costs. The team has done a phenomenal job there. The improvements that we're seeing this year and going into next year for gross margins will primarily revolve around improving the utilization of our Massachusetts-based fab and, to some degree, our French-based fab. We do see increased demand, and that is improving the overall gross margin and operating margin models. That's being driven by the market. I will say that there's significant more work to do at our North Carolina fab. One of the primary goals there is to increase output. We have a very aggressive plan to increase output by 30%. We have bought some amount of equipment to support that. But a big part of that added capacity will be reducing the cycle times. That site's number one corporate priority is to speed up not only development wafers but also production wafers. That just has so many benefits to the business. That is a key focus for that particular fab. As it relates to insourcing some of the components that we currently outsource, those benefits have not hit the P&L. Those items will really come on most likely into 2027 and beyond. You're talking about taking IPDs or capacitors from a third-party vendor and replacing them in new products with MACOM Technology Solutions Holdings, Inc. content. That has to go through a design cycle, and those benefits will come on incrementally over time. You're not seeing that shine through today. The last thing I'll highlight is our French fab is doing a phenomenal job with the transition of their technology from a three-inch wafer to a six-inch wafer. We are just about ready to wrap up that work and release to production all of the different processes. We sort of have a goal of by June 2026, everything will be fully qualified and released to production. As we go into 2027, that will also provide a benefit not only from a quality point of view and efficiency point of view, but we're also seeing improved performance of some of our chips in the processes as we migrate to newer equipment. In our low fab, I'll just add one other item. It's a high mix fab, so we're running GaAs, GaN, silicon, indium phosphide, and we continue to, the team here does a phenomenal job balancing all of the different technologies. You're starting to see that come through now, Tom, is the conclusion. Jack, I know that was a long-winded answer. Do you want to add to that? Jack Kober: I think the short answer, Tom, is it's not any one specific item that we have that's helping to drive the improvement that we see in front of us. It's a combination of a lot of things happening across the entire organization where we're looking to take out costs where it makes sense, try and be more efficient, work with our supplier. So there's a lot of contributing factors to this as we go forward from a gross margin standpoint. Thomas O'Malley: Super helpful. Just as a follow-up, I'm going to cheat here and kind of ask on two at once, but two growth drivers where people are really focused this year are SATCOM and then also ACCs. It's difficult to get the relative sizing of these given they live within larger buckets. Historically, you haven't really broken that out. But any help on the relative sizing of those two drivers? As you look into the out year, I think you talked about strong telco growth and pointed to SATCOM specifically. You spent most of your time on the data center talking about 1.16 modules in the optical side. Maybe a little bit on the ACC market and how that can contribute to data center growth as well. Stephen Daly: Sure. Certainly, I tried to address the ACC question in my prepared remarks. I'll just add to that that as we look at our revenue for Q1, there was no ACC revenue in there. In terms of the SATCOM market, it is a growth market. Not only on the commercial side, I'll add, but also on the military side and the DOD side. We do expect our SATCOM business to grow very nicely as we move into 2027. We have multiple SATCOM LEO programs in the design phase today. By the way, I'll also highlight that the telecom revenue last year growing by 40%. One of the drivers, not the only, but one of the drivers was some of our LEO business. We don't typically size product lines or market segments. We have our own, I mean, we do it internally, but we don't typically share that externally. I know there's certainly a lot of very good information in the industry about sort of peeling the onion back on those market sizes, and we would deflect the answer to maybe having you look at that other information. But we don't typically give out SAMs by product line or market segment. Operator: Thank you. Our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is now open. Karl Ackerman: Yes. Good morning, gentlemen. Two for me as well, please. Steve, going back to SATCOM, if I could for a moment, you indicated that satellite system changes can support more functionality than before. Is it fair to assume the size of the satellite program is the same or larger than your previous view? As you address that, could you also speak to the breadth of satellite programs that you are engaged on? Stephen Daly: We think that, if you're referring to the large contract that I mentioned, we believe our customer is adding functionality that will bring new customers to that constellation, which is a positive for the long-term prospects of that platform. I hope I answered that particular question. What was the second part of the question? Karl Ackerman: Just the breadth of satellite programs that you have engaged on. Stephen Daly: We have multiple, as I mentioned. We are addressing not only on the microwave side, which would be either a backhaul link ground to satellite. Also, we're engaged with satellite-to-satellite communications. We're engaged with optics. It's probably fair to say that we are engaged at some level with all of the major LEO constellations today. Some of that is narrow support. Maybe it's direct-to-device or direct-to-cell circuitry or electronics. Some of it's on the optic side. Some of it's on the microwave side. Some of it's on the ground station side. But it's fair to say that we have blanketed the major players, as well as the up-and-coming companies that are trying to produce their first satellites. It's a strategic focus for the company. We have a lot to offer. I think over time, the business will grow. Just maybe more specifically on that larger, I think we said previously, it was a $55 million contract with the potential of an additional $25 million add-on. In our minds, what we think will happen is once we're in steady-state production, we'll be turned on for additional orders that will dovetail onto the back end of the contract. Karl Ackerman: Very helpful. Thank you. Operator: Thank you. Our next question coming from the line of David Williams with The Benchmark Company. David Williams: Hey. Good morning. Let me add my congratulations to the really solid progress and the demand here. I guess maybe first, gentlemen, thinking about your demand across the data center, is there a way to kind of think about that from a regional perspective? Are there transitions or maybe the pace of transition that's happening in terms of the speeds between the different regions you service? Stephen Daly: There is certainly a geographic spread, but I would highlight maybe more one area that we focus on in the way we look at the data is also by data rate. A significant portion of our data center revenue is 400 gig and above, with the fastest-growing portion of the market being the 1.6T applications. We do, as you know, still service a lot of the other traditional older-style data centers. For example, we still sell today 25 gig per lane NRZ chips with CDRs. That business is hanging in there and doing reasonably well. Our 50 gig per lane PAM4 business is also, I would say, sort of flat, not really growing. Our traditional 100 gig per lane PAM4 business is solid, both in multimode and single-mode fiber. The real action is at 200 gig per lane PAM4 and also some of the next-generation coherent systems is an area of intense focus for us. I would also just add that it's fair to say that we are supporting all of the hyperscalers here in the US, as well as international hyperscalers. We typically find our products being sold into people building modules, AOCs, or cables, and they are disseminated across the various hyperscalers. David Williams: Great. Thanks for the color there. Then maybe just secondly, in terms of shortages and pricing environment, can you talk maybe about just what you're seeing in terms of your supply on the IMP side and anything that's impacting you there? How is the pricing environment as we think about going through the rest of the year? Thank you. Stephen Daly: Yeah. I think on the pricing side, I think our competitors and MACOM Technology Solutions Holdings, Inc. are being rational. I don't think there's any news there. Certainly, all of our markets are very competitive. The customers are price-sensitive. We try to balance our pricing with the value we're offering. But I would say we're in an environment where there is scarcity in some areas, and in that case, one would generally not be lowering their prices. But that's not always the case. On the supply side, we are absolutely in ramp mode in various programs, and there's always stress on the supply chain as well as on the execution side. Our global supply chain management team does an outstanding job making sure we have what we need when we need it. It's certainly a key area of focus, especially as it relates to, as you mentioned, indium phosphide, but also other exotic materials. We're always keeping an eye on availability and potential constraints around those areas. Operator: Thank you. Our next question coming from the line of Harsh Kumar with Piper Sandler. Harsh Kumar: Yeah. Hey, guys. Congratulations on very good results and possibly even better guidance. Maybe, Jack, one for you, housekeeping, and then I'll ask my real question. The 1.3 book-to-bill is very strong. I think you mentioned, Steve, that it's the strongest probably in the last four, five years. Is that primarily driven by data center, or are there other components you're seeing within that? Then I wanted to kind of, for my main question, wanted to go back to the one that Vivek asked about. Gross margins on the data center business. Is it fair for me to assume that your margins on the data center business are below your corporate goal of 60%? Jack Kober: Yeah. Thanks for the question, Harsh. With regard to the book-to-bill, we generally don't break it out by end market. But obviously, on the guide that we put out there and some of the other items, we did see a fair amount of strength within the December as it relates to the data center book-to-bill. So things are definitely going in the right direction there. In terms of the data center profile margin profile, as I said, we manage a portfolio of products, and gross margins will vary across the business. I don't know if there's any other commentary that you'd like to add on that. Stephen Daly: That's a perfect answer, Jack. Harsh Kumar: Okay. Great. Maybe one thing that didn't get touched upon on the call is the LPO business. I think you mentioned in one of the earlier quarters that you were expecting revenues, I think maybe last quarter already. If you can just update if you already have commercial revenues. Then also, I wanted to ask about kind of how you're thinking about the OPO business. You talked about it in commentary. Seems like a lot of exciting things going on. What kind of market size do you think LPO can deserve for your company or TAM or however you want to scope it in the next two to three years? Stephen Daly: Thanks for the question. We are very bullish on LPO. In fact, we now have three hyperscalers embracing LPO. We are in various phases of production with those three hyperscalers. Just to remind everybody, these are typically or in all cases, 100 gig per lane for generally 800 gig modules. We also see that LPO will evolve to NPO in CPO or XPO if you want to include everything. We're following that trail into different form factors. We're finally getting success here. I think it's still a small part of the market. We get various data points from various resources about how big the market could be. But I think today, it's small. I would expect it will remain small in the next one to two years, and maybe over time, it grows. But you have to be careful with the use case. It is certainly compelling, the power savings that you're getting with LPO is compelling for the end users. But again, as I mentioned earlier, we're a little hesitant to size the market because we really have to wait and see. But we do have a full suite of products here. The fact that we have three hyperscalers in production or at various stages is great. I think the one thing maybe that I should highlight in my answer is we're also seeing our customers investigate LRO at 1.6T using 200 gig per lane chips. That is exciting for us. That is an area of focus currently. Operator: Our next question coming from the line of Blayne Curtis with Jefferies. Your line is open. Blayne Curtis: Hey, guys. Thanks for taking my question, and nice results. I just want to go back to the strength in the data center. Obviously, 1.6 is ramping. The market is very strong. I'm just kind of curious for you in particular, whether there's a share aspect as well to the growth you're seeing in 1.6T for the analog components, which I'm assuming is the bulk of that growth? Stephen Daly: I'm not sure it's so much share growth per se. As we look at our dashboards and where we have content and where we don't have content, we see competitors on all sides. I wouldn't necessarily say that this is a share gain. I think the market's growing. We're winning designs. We always go up against the same competitors. It's a combination of timing and support and having new products. One of the key growth drivers for MACOM Technology Solutions Holdings, Inc., of course, is the 200 gig per lane portfolio, but also on the optic side. We do see significant opportunities with our photodiodes. As I mentioned, we have arguably one of the best 200 gig PDs in the market today. We are working on higher speed PDs to support higher data rates. Lastly, as I mentioned, we have two customers that are very excited about our CW lasers for their silicon photonics solutions. This would certainly be picking up market share because today, we don't sell lasers into 1.6 applications. Blayne Curtis: Perfect. Then maybe just some housekeeping with Jack. I just want to understand the impact. I always hate modeling converts. When you look at March, maybe just comment on, I think you said the shares to settle are already in the share count. What's the impact, positive or negative, on OI and E? Just trying to triangulate how the rest of the P&L and OpEx is guided. Then maybe you could just also talk about capital returns. I think you had signaled maybe you'd do some share buybacks, but I'm assuming that debt retirement takes precedent in March. How are you thinking about it for the rest of the year? Jack Kober: Yeah. Thanks for the question, Blaine. With regard to the share count, yeah, there's a number of factors that can contribute to share count as we go forward. Part of it is just our normal employee equity that's awarded, and we've kept pretty well control over that in terms of adding to our outstanding over the past number of years. The convert is another piece. We've been adding some of the additional shares to the share count as we work our way through the year and leading up to the final settlement, which we expect to be in mid-March. With regard to your capital allocation question, yeah, I think our primary focus is getting through this debt repayment, which is $161 million in the mid-March time period. I'll just add to that that as it relates to share buybacks, that is not something that we're contemplating, and you should not expect that in the future. Operator: Thank you. Our next question coming from the line of Tore Svanberg with Stifel. Your line is now open. Tore Svanberg: Yes. Thank you, and congrats on the record results. Steve, I wanted to go back to a comment you made on growth in telecom for this year. I know it wasn't guidance per se, but it just feels like high single-digit or low double-digit for telecom growth this year. It seems quite conservative, especially given your position in SATCOM, 5G coming back, and so on and so forth. Is that kind of just like a really base case number? Stephen Daly: Yeah. I think also, keeping in perspective that last year, we had about 40% growth. So we're coming off a pretty high base there. I highlighted that the RAN market is sort of relatively flat with us having potential to pick up market share. We have a great position in the SATCOM market, and these are generally long design cycle complex builds that take time. A lot of the growth in SATCOM, I would say, is more of a late 2026, early 2027, which makes it difficult for us today to sort of settle in on a, let's say, a best-case number. So I think thinking below 10% is a good way to think about it today. Tore Svanberg: That's fair. Then as my follow-up, I believe last year at OFC, you guys were sampling a 1.6T LPO solution. Now when you talk about LPO with 1.6, there's more references to LRO. I'm just curious, based on your conversations, are we going to see 1.6 LPO, or is the thinking now that LRO is probably the better way to go, specifically for 1.6? Stephen Daly: I would have to go back and check on that one. I know we certainly were demonstrating 1.6T ACCs and AOCs, but I have to go back, Tore, and check on the LPO version of that. Certainly, we were demonstrating 400 and 800 gig modules in the booth from our customers. I think the answer to your question is the customers are evaluating both right now, but there's significant benefits even with LRO. It gets down to the specifics around really the DSP, the power budget, the link length. It's really TBD. There's a higher probability of LRO working than LPO working because there's just more capability from the ASIC itself, let's say, to support the interface. From a probability point of view, I would say LRO is more likely to happen first. Then LPO, there's still more work that needs to be done there. But we see that work happening at our customers. Operator: Thank you. Our next question coming from the line of Sean O'Loughlin with TD Cowen. Sean O'Loughlin: Hey, guys. Thanks for taking my question. Congrats on the nice set of results. Had a quick question about the CW laser customer commentary. Just wanted to clear up. Are those customers, if you're able to disclose, are we talking about module maker customers, or was that a reference to more hyperscale type customers? Stephen Daly: Yeah. I would say that we're engaging with more the former. So it's really the module customers that are our first line of entry. We want to make sure that they are able to use our laser. They're getting good module-level results. The next step is to collect a large body of reliability data. When our customer is happy with that dataset, then they go to the hyperscalers and run through a PCN process to get us on the approved vendor list, let's say. We're early in that phase. But it is a watershed moment because six months ago, we were not in a position where we had a compliant laser. Today, we do. We're excited about that. We also recognize there's a process to get into production, and we're in the early stages of that. Sean O'Loughlin: Great. Thanks. Yeah. It's great to hear on the progress there. Then just sort of a blue sky question. I was interested to hear you mention front haul as an application for LPO. As some you've often reminded us, LPO is typically suited for short-reach applications within the data center. Typically, I don't think of front haul as a short-reach application. So I'd love to hear just any more details on that application potential for a linear pluggable option? Thanks, guys. Stephen Daly: Yes. I think your question speaks to the fact that our customers are critically looking at the network connections and where they use optics for their next-generation systems and how do they reduce cost and complexity. LPO brings that benefit. Yes, we are going through design and trials with various customers to see if it works in the system. The benefit they see, quite frankly, is that it is a low latency solution. It's more of a real-time transmission, let's say, than a retimed solution. We'll have to wait and see. As AI starts to creep into the networks and as things move towards the edge, a lot of the optical interconnect becomes more relevant. The other sort of tangent I'll add is we are engaged also to help customers rearchitect remote radios where you bring fiber right to the radio. We want to be involved in that part of the network as well. Operator: Thank you. Our next question coming from the line of Christopher Rolland with Susquehanna. Your line is now open. Christopher Rolland: Hi, guys. Thank you for the question. I guess my question here is around linear equalizers. I think on PCB, which you mentioned in your prepared remarks, if you could talk a little bit more about that, the growing interest there. Do you think this could be a bigger product than ACCs, linear equalizers and ACCs? What do the economics here look like for you versus the ACC approach? Thank you. Stephen Daly: Yeah. Adding the linear equalizers to various backplanes is of interest to lots of customers. Not only in the traditional AI construct but also closer to the compute, we see opportunities to eliminate retimers in various compute connections. That's number one. Number two, as things move to 400 gig per lane, having equalization on these boards is going to be very important. Customers recognize there's trace losses and interface issues. They're going to need something to compensate. The use case at a 400 gig lane speed is compelling. Today, though, with our 200 gig per lane, you're looking to augment passive DACs is something we're looking at. But I don't think all of those things combined will be as big as the ACC opportunity. It becomes architectural, and there's lots of cables, and we just see that as a bigger growth opportunity. The volumes that some talk about on the ACC side are quite large compared to the backplane applications. The last thing I'll add is we also have customers looking at AECs and asking themselves, can I convert this to an ACC? We're trying to help them answer that question as well. Christopher Rolland: Very helpful. Thank you. Then I was wondering if maybe you could just provide kind of a big picture answer here. You have such a diverse product set. You also have new products coming onto your roadmap. What are, in your opinion, the biggest needle-moving new offerings that you think are really going to make a difference on the top line for MACOM Technology Solutions Holdings, Inc. over the next couple of years? Thank you. Stephen Daly: Well, I think that's a great question. I'll just highlight that this management team, in about four years, has doubled the size of the company. Our fundamental focus has been on high power, high frequency, and high data rate. When we look ahead, we want to double the size of this company and not take four years. We want to do it faster. So we're trying to execute our strategic plan that gets us to $2 billion with a reasonable CAGR, and we want to double the share price, the earnings per share. That is our focus, and that means non-commodity differentiated products stay with the large growing markets but also diversify. That is a big part of our story here, and that from us, I think, from a lot of the companies that are very focused on, let's say, indium phosphide components for the data center. These are structural organizations that do not have diversity. Our approach to these large opportunities is to bring the diversity. When you look at our fabs as an example, they're running lots of different technologies. There'll be periods where some technologies grow very quickly and periods where they don't. Fundamental to our business model is diversification in product lines, geography, and end markets. Operator: Thank you. Our next question will come from the line of Timothy Savageaux with Northland Capital Markets. Your line is now open. Timothy Savageaux: Good morning, and congrats on the results. Good timing here given you just mentioned indium phosphide. That's my question. Actually, you mentioned capacity addition. I'm really looking for kind of magnitude and timing for that capacity addition, say, from the beginning to the end of the fiscal year. What are you targeting there? As a quick follow-up, how material are those optical devices within the overall data center unit right now? Where do you expect that to go? Thanks. Stephen Daly: Thank you. We're not going to really disclose the amount of capacity we're adding for competitive reasons. I can tell you that our indium phosphide PDE business is growing rapidly. It's primarily focused on 200 gig per lane. But I don't really want to talk about the number of wafer starts or where we started the fiscal year and what will end the year. I will say that it's a major focus to bring on capacity, and we've been doing that. The results of that will be reflected in the guide and in our general comments. Again, akin to that, the materiality of that business, we really don't disclose the revenue by product line or by technology. I would just highlight that we, as I just mentioned, we do have a diversified business. When we look at our data center revenue today, it consists of TIAs, drivers, combo chips that are basically TIAs and CDRs. We've now added photodiodes or photodetectors. The next step is to add lasers. We also have in the back room, we're working on EML lasers. We have various versions of that in test right now. I think you should think of our data center business as diversified by end customer, by data rate, and by product family, both on the optical side and on the electrical side. We do recognize, as an example, there's opportunities for us on the compute side of the network, and we're investigating and designing products for things like PCIe 6 that will also add new growth vectors. Operator: Thank you. Our last question will come from the line of William Stein with Truist Securities. Your line is now open. William Stein: Great. Two quick questions. First, on the LEO satellite business. Can you talk about average dollar content per satellite and the duration between your revenue recognition and a satellite launch? Is that like a quarter or like a year? I mean, color there would help. Stephen Daly: Well, we recognize the revenue when we ship our products to the customer. It's a hardware deliverable. It's a hardware shipment. We don't wait for the customer to launch the satellite to take our revenue. In terms of the dollar content per satellite, it varies quite a bit. As I mentioned, there's a lot of variation in the construct of these satellites. Some of them have very large beam-steered arrays. Some of them have very complex optics. Some of them have data center-centric electronics, so moving high-speed data across the bus of the satellite. Some are using linearizers to communicate back to the ground. It would be very difficult to put a dollar value on that. It varies quite a bit. I'll also argue that, as I mentioned earlier, we're dealing with all the major constellations in different ways. Some, as an example, some customers want to buy wafers from us. They want to be a foundry customer. We have other customers that want us to design an entire subsystem. We have the full gamut. William Stein: Thank you. But to clarify with the first part of my question, I fully understand that you recognize revenue when you ship. But we don't necessarily get alerts to that, whereas we do get alerts as to launches. So I'm just trying to line up when we see a launch happen, what that relates to in terms of your revenue. Is that revenue that you would have recognized a quarter ago, a month ago, a year ago, so we can try to sort of align the parts of the market that are visible to us with your revenue generation? Stephen Daly: Yeah. I think those are dots that it would be difficult for us to connect here on the call. But I understand certainly it's measured in many months. Beyond that, we would have to do work, and it'd be very situational. Jack, did you want to add to that? Jack Kober: Even though it'd be situational, it probably wouldn't be accurate either, just based on the ebbs and flows of this end market. William Stein: Got it. Thank you. Operator: Thank you. I am showing no further questions at this time. I will now turn the call back over to Mr. Stephen Daly for any closing remarks. Stephen Daly: Thank you. In closing, I would like to thank all of our employees for their continued hard work and dedication, which has made these results possible. Have a nice day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Asbury Automotive Group Fourth Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Chris Reeves, Vice President of Finance and Treasurer. Please go ahead. Chris Reeves: Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's fourth quarter 2025 earnings call. The press release detailing Asbury's fourth quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer, Dan Clara, our Chief Operations Officer, and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and be available later for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts, and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our upcoming Form 10-Ks for the year ended 12/31/2025, any subsequently filed quarterly reports on Form 10-Q, and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated Investor Relations presentation on our website, investors.asburyauto.com, highlighting our fourth quarter results. It is now my pleasure to hand the call over to our CEO, David Hult. David? David Hult: Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter earnings call. As I said in our earnings release, 2025 was a productive year for Asbury Automotive Group, Inc. We grew the size of our business both in terms of revenue and in the geographic areas of the country in which we operate, acquiring $2.9 billion in revenue. More importantly, the composition of our portfolio continued to improve through strategic divestitures. Because of the discipline in running our business, we were ahead of where we thought we would be from a leverage perspective, at 3.2 times versus our forecast of 3.5 times. We deployed $186 million in CapEx and continued our share repurchase efforts, buying back $50 million in shares for the quarter and $100 million for the full year. We transitioned 15 additional stores onto Techeon during the quarter, ending the year with 38 stores operating on our new DMS. Managing our portfolio and allocating capital to areas that generate the greatest returns for the business and our shareholders has long been a core pillar of Asbury's strategic plan. And I am proud of the team's efforts to both grow the company and maintain our focus on expense control. Moving into 2026, we are confident these collective investments and the strength of our team position us to win, delivering value to our guests and returns to our shareholders. Next, I'd like to highlight some same-store operating metrics for the quarter. New vehicle sales volume was a reflection of the prior year post-election surge. PVRs on new vehicles continue to normalize, and we reiterate our view that new vehicle profitability will eventually stabilize in the $2,500 to $3,000 range. In used vehicles, we are beginning to see the results of our efforts to improve our performance, and while volumes continue to reflect the supply-constrained environment, gross profit rose 6% year-over-year with used vehicle retail PVRs up 18%. On the ground, we noticed a pullback in consumer spending in parts and service. However, we are optimistic about the outlook and positioning of our fixed operations business. Later in the call, Dan will provide additional details on our operational performance. Our same-store adjusted SG&A as a percentage of gross profit was up 162 basis points versus the prior year, reflecting the impact of lower new vehicle profitability. We remain committed to operating our business in the most efficient way possible and will continue to adjust our cost structure as business conditions change. Moving to capital allocation, we divested four stores in the quarter and are on track to divest another nine stores by the end of the first quarter. These 13 transactions, collectively representing $750 million of annualized revenue, are at attractive multiples and will further accelerate our path to reducing our leverage, giving us additional flexibility to pursue share repurchases. We expect to continue our repurchasing activity in 2026, the pace of which will be dictated by our share price, leverage profile, economic conditions, and trade-offs with strategic tuck-in acquisition opportunities. And now for our consolidated results for the fourth quarter. We generated a fourth-quarter record of $4.7 billion in revenue, at a gross profit of $793 million, also a fourth-quarter record. A gross profit margin of 17%, an expansion of 31 basis points. We delivered an adjusted operating margin of 5.4%, and our adjusted earnings per share was $6.67. Our adjusted EBITDA was $250 million. I'm proud of what the team accomplished in 2025, and with the foundational investments we've made in our business, I'm excited about the path ahead for 2026. Now Dan will discuss our operational performance in more detail. Dan? Dan Clara: Thank you, David, and good morning, everyone. I would like to start off with a thank you to the team for the positive momentum going into this year as we undertook a number of growth objectives in 2025. Thank you. Looking back at the fourth quarter, we increased our same-store used gross profit thanks to our continued progress and execution by our team members. We also rolled out Techeon to an additional 15 stores during the quarter, and in January, added eight more stores, which brings our current count to 46, or more than 25% of our portfolio. And on an all-store basis, we can see the positive lift from the Chambers group in our new and used PVRs. And now, I'm going to provide some updates on our same-store performance, which includes dealerships and TCA, on a year-over-year basis unless stated otherwise. Starting with new vehicles, same-store revenue year-over-year was down 6%, which followed the SAAR contraction of 5%. We faced a tough comparable from last year's post-election surge and the pull-forward effect of demand earlier in the year. We did see some disruptions in our DC market as expected. New average gross profit per vehicle was $3,135, a slight decrease sequentially as import brand PVRs gave some ground but were offset by the seasonal strength in luxury. Across all brands, our same-store new day supply was 49 days at the end of December versus 58 days at the end of the third quarter. All three segments were at lower day supply versus the previous quarter, led by several luxury brands in the domestics. Through 2026, we will manage our business based on what we're seeing in our markets and execute accordingly. Turning to used vehicles, fourth-quarter total used gross profit was up 6% year-over-year. Used retail gross profit per unit was up 18% at $1,749, a $271 increase over the prior year and a $198 increase over our reported third quarter 2025 number. Our same-store used DSI was 35 days at the end of the quarter, in line with our DSI at the end of the third quarter. Shifting to F&I, we earned an F&I PVR of $2,335. The noncash deferral impact of TCA was $105, so without the year-over-year impact, the PVR would have been $2,440. We plan to implement TCA to the chamber stores by year-end to complete our rollout across all platforms. And finally, in the fourth quarter, our total front-end yield per vehicle was $4,897, up $259 sequentially. Now moving to parts and service, our same-store parts and service gross profit was up 2% year-over-year. When looking at our customer pay and warranty performance, customer pay gross profit was up 3% with warranty gross profit higher by 6%. We lapped tough double-digit comps in both customer pay and warranty, which in 2024 were up 13% and up 26%, respectively. For the quarter, we generated a gross profit margin of 58.1%, an expansion of 13 basis points. On an all-store basis, this was a record fourth quarter for our parts and service business as total revenue grew 12% to $658 million. We remain optimistic about the trends we see supporting the long tail of parts and service operations. The average age of the car on the road combined with the increasing complexity of technology and vehicles positions us to reap the benefits of this large addressable market. We believe we're well-positioned to unlock meaningful efficiencies as we navigate in our journey to becoming the most guest-centric automotive retailer, enabled by the hard work of our team members and continued investment in technology. Thank you. And with that, I will now hand the call over to Michael to discuss our financial performance. Michael? Michael Welch: Thank you, Dan, and good morning to our team members, analysts, investors, and other participants on the call. For our financial performance in the fourth quarter, adjusted net income was $109 million. Adjusted EPS was $6.67 for the quarter. In addition, the noncash deferral headwind due to TCA this quarter was $0.31 per share. Our adjusted EPS would have been $6.98 without the deferral impact. Adjusted net income for the fourth quarter 2025 excludes net of tax, noncash asset impairments of $87 million, net gain on divestitures of $26 million, $5 million related to the Techeon implementation expenses, $3 million related to the noncash fixed asset write-offs, and $1 million professional fees related to the acquisition of Herb Chambers Automotive Group. We divested four stores in the quarter, which generated an estimated annualized revenue of $150 million. Adjusted SG&A as a percentage of gross profit on a same-store basis came in at 4.1%. We feel confident in our ability to manage overall cost over the next few quarters as we progress the Techeon implementation across our stores and navigate normalizing new vehicle unit profitability. The adjusted tax rate for the quarter was 25.8%. We estimate the full year 2026 effective tax rate to be approximately 25.5%. TCA generated $12 million of pretax income in the fourth quarter. The negative noncash deferral impact for the quarter was $8 million. Our updated TCA slide in our presentation reflects the rollout to Chambers during 2026, the disposal of our held-for-sale assets, revised SAR estimates based on external forecasts. Now moving back to our results, we generated $651 million of adjusted operating cash flow during 2025. Excluding real estate purchases, we spent $186 million in capital expenditures this year. The assets we sold and haven't held for sale allow us to avoid some low-return CapEx, deploy cash for more strategic capital decisions. We anticipate approximately $250 million in CapEx spend for both 2026 and 2027. Adjusted free cash flow was $465 million for the year. We ended the year with $927 million of liquidity, comprised of floor plan offset accounts, availability on both our used line and revolving credit facility, and cash excluding the cash Total Care Auto. Our transaction-adjusted net leverage ratio was 3.2 times at the end of the year. Our results were better than expected from a leverage standpoint, which we believe gives us room to continue with our path of discipline, strategic capital decisioning. And finally, before I finish our prepared remarks, on behalf of everyone, I want to thank our team members for their hard work in 2025. We look forward to 2026. With that, this concludes our prepared remarks. We will now turn the call over to the operator to take questions. Operator? Operator: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. Pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Jeff Licht with Stephens Inc. Jeffrey Lick: Good morning, everyone. Thanks for taking the question. This is made for David and Daniel. You know, kinda pack a few questions into one. I guess if, you know, if you look at 2025 as your base year, obviously, it was, like, three or four years inside of that year. You know, as you now look at 2026 lapping tariffs, lapping the EV credit, you got lease returns. Potentially, maybe there's you know, you guys have highlighted some more GPU normalization. If you can just kinda give us a little road map to, you know, how you see things playing out and maybe if you could give some granularity in terms of the first half and the second half, just kind of the qualitative path of travel, you know, what we should look for as the year progresses? David Hult: Thanks, Jeff. This is David. I'll start. And Dan can jump in if he wants. I think we're forecasting to go slightly backwards in STAR. But STAR is an overall number that includes, you know, fleet and wholesale. And I think it's gonna vary by brands. We have a lot of Stellantis stores that were, you know, a percentage of our business that were challenging for us in 2025. All brands are cyclical, and we believe Stellantis will come back. So hopefully, that'll turn into a tailwind for us in 2026. You know, we have over 50 stores now in the Northeast. January has been ridiculously tough with weather. So it's been a challenge starting off the year. And we've even had challenging weather in the Southeast as well. I would say the first half will probably be a little bit more of a struggle, and the second half should start to free up a little bit. I don't know that the tariffs have fully settled across all brands. There's still movement on pricing, and it's yet to be known what incentives will look like in the future. We're optimistic about our parts and service business and where that's headed. We've had a lot of distractions in '25 between, you know, the acquisition and rolling out Techeon. Now having a third of the company on Techeon and the rest of the company being rolled out by the fall, we think that's gonna really bode well for us. Not only from a cost perspective but an efficiency perspective going into '27. We will have some headwind in '26, paying for both DMS's. And as you can imagine, when you transition a store into a new DMS, other than the excessive cost for a period of time, is the transition getting everyone comfortable to software and efficient on it. So I think all this blocking and tackling and the heavy lifting we're doing is gonna pay dividends going into the future. For us, we probably got, you know, five, six, seven months of bumpiness in distraction of going through all of it. But we know the outcome will be very beneficial for Asbury Automotive Group, Inc. Jeffrey Lick: Yeah. Then maybe just a quick idea. You. Go ahead. Go ahead, Jeff. Sorry. No. Go ahead. No. I was just gonna add to David's comments on the when you think about from a used car standpoint, what we're expecting in the second half with lease earnings coming in. You can see the results of our renewed strategy and execution by the team. So we are very confident that it is working. And that has paved the way for a lack of a better term. It went down and puts up inventory coming in that we can pull that lever and execute accordingly while still remaining disciplined. To maximizing the gross profit per unit. Jeffrey Lick: And then just a quick follow-up, I mean, because your GPUs are still, you know, north of that. 2,500 to 3,000 kinda settling range you've talked about. I guess, where do you see, you know, let's say, you get to the middle of that range, twenty-seven fifty. Where does that come from? How does that decline in GPU manifest itself? Is that in more inventory you'll finally get in 3,000,000 units on the ground? Is that because Toyota gives a little back? I'm just curious, you know, what because you guys have been pretty steadfast to that 2,500 to 3,000 mark. I'm just curious where do you see that further adjustment to come. David Hult: It's a great question, Jeff. You know, I think as long as the inventory stays somewhat balanced the way they are, we kinda look at our brand mix. In the way the incentives have been tracking. With the divestitures we've had, and the several that are coming, you know, our percentage of luxury goes up. You know, from 32 to probably about 36%. Which benefits us overall. You know, I would say if the SAR was gonna stretch and the inventories were gonna grow, that puts the most pressure on margins. But where most OEMs are predicting a flat or a little bit backwards year, we don't anticipate sitting on a high day supply. Now the winter months, you tend to sit on a high day supply because you're coming off a busy fourth quarter, and things slow down. But that should normalize over the next quarter or two. I think we're conservative in our approach. When we give estimates of 25 to 3,000 based upon our brand mix. But it's also difficult to predict the future. I think the biggest thing that's gonna govern the volume this year is what we've all been talking about. The high cost of sale. You know, for new, we're over $52,000 in the quarter. And, you know, that's a stretch. So when people are stretching into purchasing, it tends to put pressure on margins as well try and consummate the deal. And I don't know if you have anything you wanna add. Dan Clara: No. To add. Thanks. Jeffrey Lick: Well, thank you for taking my question, and best of luck in 2026. David Hult: Thank you, Jeff. Operator: Our next question is from Rajat Gupta with JPMorgan. Rajat Gupta: Hey. Thanks for taking the question. Yeah. You know, I just wanted to follow-up on parts and service. You know, the customer pay growth was a little weaker than we would have expected. I understand the warranty comps. I know you mentioned, like, it had a tough comp, but I also felt '24 had some easy comparison '23 because of the DMS transition. So I'm curious if the customer paid number is satisfactory to you. I mean, is there more opportunity there? Any sense you can give us around the outlook for '26? I have a quick follow-up. Thanks. Dan Clara: Yeah. Good morning, Rajat. This is Dan. No. We're not satisfied with the customer pay growth. We just as it is with used cars, have a renewed strategy in fixed operations. That we feel very confident in executing. There when you look at the age of the car on the road, and then you look at all the technology enhancement that is coming with the new product, we know and we're ready to take advantage of that part of the market. So our forecast remains the same as it's been in the mid-single digits in customer pay like we have been talking about over the last few quarters. David Hult: Rajat, this is David. I would add in previous quarters, and I think it's the case for our peers, but I'm not confident, you know, the growth in parts and service has been more top-heavy on dollars than actual cars coming through the service driver repair orders. Right. And I made the comment in my remarks. The traffic counts were okay and normal for us. And based upon that, we should have been higher on the dollars. We saw fewer dollars being spent per the consumer. So it wasn't so much the traffic that took a hit as much as it did the consumers were willing to spend. And as you can see, because I think we have it in our IR deck, you know, when we talk about, you know, how much we're generating per ticket, you know, combustible engine is over $550. You know, these numbers keep going up, which is great. But it also puts a limit a little bit on customers. But I was shocked to see the pullback in October, November with the dollars being spent. It rebounded in December, and January starting off, the dollars are pretty good again. So I can't explain what happened in October and November. The biggest headwind we have in January is the traffic because of all the weather. Rajat Gupta: Got it. Any preview, you know, on the renewed strategy for parking services that you can give us? Going forward? David Hult: You know what? I would tell you, Rajat, the biggest thing is there's a massive difference between our current DMS and Techeon. And there's a learning curve there. And, you know, our original stores that went on a year ago are performing better than most of our stores in our company because of the efficiencies and benefits of the software. But when these stores transition to the new software and, you know, now we're up to over 40 stores, it takes them a few months. We actually become less efficient for the first couple of months as they're trying to get used to the software and work out the kinks. So we'll finish the Techeon rollout late in the fall. I look at twenty-seven as a really efficient, productive year for us that you'll notice in both our production with Techeon, but our cost control with Techeon as well. Rajat Gupta: Understood. Understood. That's helpful. And maybe just follow-up question, you know, maybe for Mike around the leverage. Good to see the progress there. I believe we do have a few more divestitures in the pipeline that you're looking to execute. You know, any update on that? And, you know, how soon can you get below three times? Is it earlier than '26? You know, any timeline around that would be helpful. And then just related to that, how should we think about, you know, free cash flow deployment, priorities as well? '26. Thanks. Michael Welch: Yeah. So from a, you know, talked about the nine divestitures that we have out there that will close in the first quarter. And that will free up some cash to get our leverage down. So more. So we think, you know, kind of, summer will be below three times. The only caveat to that would be, you know, with where our share price is, we think there's some to, you know, deploy some cash for share buybacks. So our goal is still to get below three times by the end of the year. And if we can do that and buy some shares back along the way, we'll kind of balance that as we go. Throughout the year. But if we just took the cash from the disposals, and the free cash flow and put that toward the leverage, we'd be able to get there by the summer of this year. Rajat Gupta: Understood. Great. Thanks for all the color, good luck, and, you know, best of luck. David, Dan. David Hult: Thanks. Thank you, Rajat. Operator: Next question is from Glenn Chin with Seaport Research Partners. Glenn Chin: Good morning. Thanks, folks. Can you just clarify for us the path forward for Techeon? How many more stores do you have to transition? It sounds like it'll be done by fall of this year. And then to what extent you will incur these double expenses for running two DMSs simultaneously. Dan Clara: Good morning, Glenn. This is Dan. So we have 125 more stores to roll out. We have eight more going out being rolled out this weekend and then another eight following the following week. But, you know, like David stated, will be done by the third quarter of this year. As far as the expense, I'll let Michael give clarity on that. Michael Welch: Yeah. So once we, you know, roll out a store, you have to kinda, you know, you can't cancel it right away. You have to kinda roll it out, make sure everything's working, all the data comes across, and then we can go cancel the other products. So there's a couple of months of duplicated cost. And then when we roll it out, so the first half of this year, you'll see kind of a hit on SG&A for this duplicated cost plus the implementation fees. By the time we get to kinda midyear, we'll roll over and the savings from Techeon will more than offset the duplicated cost. So it's, you know, I'll call it a front-half hit to SG&A and then a back-half benefit of the SG&A. Then to David's point, we get to twenty-seven. The efficiency that we're gonna see from it, you'll start seeing those as well. So it's, you know, that's kind of paces. Duplicate cost first half, of savings from the software in the second half, and then those will come in during 2027. Glenn Chin: Okay. But, Michael, to clarify it, looks like you adjusted it out for that the dual expense. You adjusted it out this quarter. I guess we only adjust out the we only adjust out the implementation cost, the cost of having to pay to do the implementations. And then also in third and '25, because of the SOX requirements from internal controls, around the Techeon software, we had a pretty heavy lift on just, you know, call it auditors and all those types of, you know, IT folks. Third parties to help us get over the hump with the initial year of SOX compliance on Techeon. So those Techeon costs are heavy, heavy SOX control. And then the implementation cost. We have not been adjusting out the dupe, you know, duplicated cost of the software. Glenn Chin: Okay. So it sounds like we should expect it to hit even adjusted numbers in the first half. And can you quantify for us how much that might be? Michael Welch: We have not quantified that number, but we can we'll work on that for the first quarter to give you guys an insight in the first quarter. It wasn't that material for the fourth quarter because we didn't roll out a ton of stores. We only rolled them out at the very December. But in the first quarter, we'll kinda give you how much that, you know, how much of an impact that was. Glenn Chin: Okay. Yeah. That would be helpful. Thank you. Okay. And, David, will you be on future earnings calls? David Hult: You know, I think I'll be on the next earnings call, and that'll probably be it for me. Glenn Chin: Okay. Very good. Well, hope you're doing well there. David Hult: I appreciate it. Thank you. Glenn Chin: Alright. That's it for me. Thank you. Operator: As a reminder, if you'd like to ask a question, please press 1 on your telephone. Our next question is from John Babcock with Barclays. John Babcock: Thanks for taking my question. I do want to ask, I know it's still early in the Techeon rollout here, but with some of the first stores that were put on the system, are you starting to see benefits or is it still too early to tell? Yep. Dan Clara: Good morning, John. This is Dan. Yeah. We had the first four stores where we rolled it out, they were here in Atlanta. And we are seeing the benefits. From an efficiency standpoint, a productivity standpoint, from a guest experience standpoint, and then, you know, you can also see the flexibility that it gives us because it is a cloud-based DMS when you're talking about enhancing technology and AI conjunction with our internal development team, you get rid of all the bolt-ons, and it's a lot easier to enhance the technology to improve the guest experience and efficiencies across the store. Yes, we are John one? I'm sorry, Dan. John, one thing I would add. You know, every store we roll out, technicians don't like change. They hate the new software. It's a lot of key changes. And it's difficult. But if you went back to the original four stores, they would tell you they wouldn't work at a store that didn't have Techeon. So it makes the employees more productive, increases the transparency between departments, and it also increases the transparency with consumers, which you can visually share with them. So there's a lot of benefits. There's cost savings for sure, but there's productivity benefits as well. You know, human behavior takes a little while to change and get used to new software, a new language, for lack of a better term. But the early adopting stores that we have are really running efficiently well on it. Costs are lower. Productivity is up. Which is everything we anticipated. John Babcock: Okay. Thanks. And then just next question. I was wondering if you could talk about how, you know, just broadly how the demand environment feels right now, both for new and used, if there's any discrepancy between the two. Just generally wanna get a sense for what you're hearing from the dealership. Dan Clara: Yep. John, I'll start and David can add if he wants to. I'll tell you, you know, for January, January was good until we got hit by the weather. And so that, you know, that pullback that we saw in October, November was not there the first few weeks in January. But after the weather hit us, it impacted us pretty big because, you know, that storm came in through Texas and they basically just follow our path of where we have stored all the way to the Northeast. John Babcock: Okay. Thanks for the color. That's all I have. Dan Clara: Thank you. Operator: Our next question is from Ryan Sigdahl with Craig. Matthew Rob: Hey, great. Thanks. This is Matthew Rob on for Ryan. Just quick on TCA, it looks like the SAAR assumptions were changed very slightly in 'twenty-six and 'twenty-seven, and the noncash deferral was, you know, raised a little bit in, you know, through 2029. Just what drove that change and, just talk about where TCA stands today. Any color there would be great. Michael Welch: Yeah. So on that one, we just looked at the, you know, third-party kind of different, you know, your guys' assessments and those other third-party providers out there for their SAR projections. And, you know, most of the people were coming up, you know, fifteen eight, kind of sixteen two. And we originally had that forecast there based on those third parties at fifteen seven. So we just bumped it a little bit to fifteen nine to reflect kind of the additional color out there from the third parties. And also that, you know, that's what we use to kind of base our budget off of, for 26 is that fifteen nine number. So small adjustment there just as kind of saw our projections, came up a little bit during the fourth quarter. And the TCA, you know, we talked about it earlier in our comments. Our last platform to roll out is Herb Chambers. We're gonna roll them out on Techeon, and then following the Techeon rollout, we'll roll them out on TCA. So sometime this, you know, late summer probably. And that will complete the rollout to all the stores. And then, you know, we'll be done with the kind of TCA rollout side of it. Matthew Rob: Understood. Thank you very much. Operator: Our next question is from Daniela Heigen with Morgan Stanley. Daniela Heigen: So kind of on that point of adjusting SAAR forecast, we also saw the use. You you've made a comment about supply remains tight. How are what kind of assumptions are you baking in on affordability, what the consumer is facing this year, consumer credit availability, and how does that flow through into used? We definitely saw stronger used margin and then a bit weaker on the volume side. So how does that play out into '26 in your view? Dan Clara: Yeah. Daniela, look. Good morning. This is Dan. You know, we continue to stick to our strategy of not chasing volume and maximizing gross profit. There are several items that we have been executing on really limiting the number of acquisitions through the auction. And improving the number of cars that we take through the trades or that we purchase directly from our guests. And that is working well. That's where you see how we're maximizing the PVRs. And the impact that it had in the fourth quarter. There you know, the average cost of our used car being over $30,000 is definitely something that we're focused to bring down because we know that the lower the cost of sale, the faster that inventory turns. As we and we believe that the opportunity to do that is gonna be in the second half of the year as lease turn-ins start to come in. We have better availability of inventory flowing and then we can really pull the lever. If the availability of inventory is there, we can pull the lever of going after the volume while still maintaining our strict discipline on the gross profit per unit. Daniela Heigen: Got it. Thank you. And then second is just on your EV outlook for the year. Obviously, a big deceleration following the removal of the tax credits. Do you believe inventory levels here are sufficiently right-sized, or is there more room for that to play out? Dan Clara: I will tell you that overall company-wide, I would like I would say our EVs inventory is right-sized. There, we have pockets, specifically Colorado, where there was a high demand for EVs that we have a little bit more inventory than I would like to. But overall, it's been right-sized. And, you know, in the '24, our EV sales were, like, 5% of the total sales, and in the '25, it was about 2%. So I would expect that to continue as we go into '26. Daniela Heigen: Thank you. Thank you. Thank you. Operator: There are no further questions at this time. I would like to turn the floor back over to David Hult for any closing comments. David Hult: Thank you. We appreciate everyone joining our fourth quarter earnings call. We look forward to speaking with you after the first quarter. Have a great day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Akira Shimada: Thank you for participating today. I am Shimada, President of NTT, Inc. I will now explain the financial results for the 9 months ended December 31, 2025. The consolidated financial results for Q3 FY 2025 show increased revenue and profit year-on-year. Operating revenue reached new record high levels in Q3. Although operating revenue was impacted negatively by approximately JPY 55 billion due to foreign exchange as a result of expansion of enterprise business across group companies and increase in revenue by transferring data centers for REIT, operating revenue increased by JPY 371.3 billion year-on-year to JPY 10,421 billion. Regarding EBITDA, while there were cost investments at DOCOMO to reinforce its customer base and to implement measures to improve mobile network quality due to increased profits from the expansion of enterprise business at the group companies and transferring data centers for REIT, EBITDA increased by JPY 104.8 billion year-on-year to JPY 2,657.3 billion, and operating profit increased by JPY 57.9 billion year-on-year to JPY 1,457.1 billion. Profit driven by a rise in operating profit and other factors increased by JPY 75.4 billion year-on-year to JPY 926.1 billion. As for operating revenue and operating profit by segment, in the Integrated ICT business segment, Consumer Communications business declined due to factors, including reduced mobile communication service revenue. However, growth in smart life business centered on finance services and enterprise business led to an increase in operating revenue year-on-year. Despite profit growth in smart life business and enterprise business, because of cost to reinforce the customer base and improved network quality, operating profit declined year-on-year. As a result of measures to reinforce customer base, sales capability is steadily improving and MNP was positive during Q3. In the Global Solutions business segment, despite an approximately JPY 55 billion negative impact from foreign exchange rates, driven by business growth domestically and internationally and transferring data centers for a REIT, operating revenue and operating profit increased year-on-year. In the Regional Communications business segment, although there was a decline in legacy business revenue due to factors such as growth in enterprise business and the fiber optic business revenue, operating revenue and operating profit increased year-on-year. Net adds in fiber optic service increased year-on-year due to strengthened sales of 10 giga plan and comprehensive bundled service for condominiums. In Others, such as Real Estate, Energy, et cetera, due to expansion in office, commercial and residential businesses within NTT Urban Solutions, operating revenue increased year-on-year. Next, I will explain the full year financial results forecast. In order to reflect the revised forecast of DOCOMO and NTT DATA Group, we have revised downward the consolidated forecast for NTT this fiscal year. Details will be explained later by each company. Regarding DOCOMO, amid intensifying and prolonged competition requiring greater-than-expected investment to reinforce its customer base, it is necessary to make sure to continue implementing key measures for future growth, such as measures to reinforce customer base and improve network quality. As a result, operating profit has been revised downward by JPY 83 billion. Particularly with respect to DATA GROUP, reflecting the realized profits of gain on the transfer of data centers for REIT based on market environment exchange rate fluctuation, the operating profit was revised downward to JPY 26 billion. Particularly at DOCOMO, intensified competitive environment is expected to continue in addition to the achievement of the results by strengthening of customer base and improvement of mobile network quality, we endeavor to recover performance by accelerating efforts through growth in smart life business, focusing on finance and enterprise business and cost reduction through fundamental review on organization and business processes. The summary of fiscal year 2025 financial result forecast by company is shown on the slide. Next, I would like to go over 4 topics. First, let me talk about the mass production of photonics-electronic convergence devices. The switches using photonics electronics convergence devices through collaboration with supply chain partners, including Broadcom and Accton Technology will begin commercial provision within FY 2026. Furthermore, for the mass production of photonics-electronics convergence devices, innovative device is continuously preparing to increase production volume per line through automation of assembly, mounting and inspection processes to expand production lines in response to demand. Through these efforts, up to 30,000 units production per month will be feasible, and we would like to proactively cater to the demands of hyperscalers and cloud operators. Next is social implementation of AI, integrating digital and physical domain. Till now, NTT has been promoting introductory support to respond extensively to globally major LLM in addition to the development and provision of genuinely Japan-made LLM tsuzumi. The order amount for our AI business for FY 2023 Q3 was JPY 147.8 billion for the entire group, far exceeding the pace of achieving annual target of JPY 150 billion. Currently, initiatives at Toyota Motors, Mujin and Trial Holdings are making progress. And while we continue to collaborate with the leading companies of each industry domestically and overseas, we will accelerate the social implementation of AI that integrates digital and physical domains. Next, I will talk about exhibition at MWC Barcelona 2026. At MWC Barcelona 2026 to be held in Barcelona in March, photonics unlocks an intelligent power optimized future is our key message. After 7 years, we will jointly exhibit as NTT Group. I will deliver a keynote speech on March 4 and speak about our efforts to reduce power consumption through optical technology centered on IOWN, such as photonics-electronics convergence devices and optical quantum computers. Please come to the event. On the progress under medium-term management strategy, our efforts since November is shown on the slide. This concludes my presentation. Thank you for your attention. Operator: First, we will accept questions from people in this room. [Operator Instructions] Are there any questions? The person -- the left in the back as seen from my side. Unknown Analyst: [ Nippon Kanakia ], [indiscernible] is my name. My first question is, fiscal year-end DOCOMO 3G is going to end. And so there's this milestone. And before this milestone, are there any comments? And on a related note, DOCOMO, operating profit and full year guidance, there are to be revised downward. And in the current fiscal year, customer base reinforcement is to be accelerated. And towards the next fiscal year, do you think this trend will continue, this accelerated trend will continue? These are the 2 questions I have. Akira Shimada: Thank you for the questions. First of all, fiscal year-end, there is the 3G milestone. And towards this, vis-a-vis 3G customers, we are making sure that we recommend the 4G or 5G to them. And in addition, handset device discounts are also offered. We are making sure these measures are steadily taken. But ultimately, about 2 million subscriptions, I think, will end up remaining and most are IoT-related subscriptions are likely to remain. And therefore, to actual users, we would like to explain in detail, respond meticulously so that they can migrate as much as possible to 5G. And DOCOMO, their most important mission now is to maintain and expand the customer base and quality improvement has to be made further. These are the 2 main challenges of DOCOMO. And this fiscal year, they are making utmost effort in this regard. And next fiscal year, this effort is to continue. And 35% has to be met by all means, I may have mentioned. And the message was not to reduce share to below 35%. That was the message I wanted to get across, to make it easy to understand. But maintaining DOCOMO's current share is important for the future, whether it be finance service or entertainment in order to offer value-added services. This kind of customer base should not be deteriorated any further. And we have to be able to offer value-added service to a variety of customers as much as possible. And for that purpose, we have to expand our customer base. This concludes my response. Operator: Next question, please. The person at the left. Yasuhiro Kobayashi: From Yomiuri Shimbun. My name is Kobayashi. I have 2 questions. The first one is on IOWN. Photonics-electronics convergence devices, mass production will be commercialized. And what is the scale of sales? That is what I would like to know. And with AI, the order amount will be JPY 148.7 billion. But in terms of net sales, how will that translate to be? Akira Shimada: Starting from the photonics-electronics convergence device, at this point in time, we cannot state net sales. That is because the price negotiation is ongoing at the moment. If I state figures, you will be able to arrive at the unit price. So I would like to refrain from responding to that question. AI, JPY 148.7 billion -- JPY 147.8 billion. Some of them are early processes or some of the orders are in the order of JPY 10 billion, and the period will be slightly longer. So in principle, within 6 months or so, they will be booked as sales, but some of them would require a few years. Next fiscal year, we are anticipating the half sales from there. So we are already entering into the fiscal year and some of them are order placed in the first quarter. Operator: Next question, the person in the middle, wearing blue shirt -- navy jacket, please. Unknown Analyst: Nikkan Kogyo Shimbun, [ Shimada ] is my name. I have 2 questions. First, downward revision of guidance. I take a look at the reason for vision and DOCOMO's intensifying and the prolonged competition environment as well as network improvement -- the network quality improvement that is incurring cost. I want to know a bit detail about the reason. Sales promotion, much more than expected. There's more cost incurred for sales provision. Why is that? It was network quality improvement, base station construction cost is increasing much more than expected. I want to know in more detail the reason for the revision. Akira Shimada: First, quality improvement. It's mainly investment. Of course, to a certain extent, there is cost incurred. But rather, we have a plan and about JPY 50 billion per year, there's increase in investment. And that is how we will respond, mainly speaking. And cost is increasing because of the sales promotion cost. And the point is residual value is set when handsets are offered to customers. But when it comes to customer percentage or customer rate, there are more customers than expected that return their handsets, and we had to provision for that. And there's that. And in the case of DOCOMO, I think details will be explained by DOCOMO. And sales promotion is being conducted by competitors as well. And under such circumstance in Q3, the 3 months as well as in January, they are facing difficulty and they have to respond to the extent possible, and that is incurring cost. Unknown Analyst: And the second question, wage hike, spring wage negotiations have started towards a wage hike. And under such circumstances, wage hike, Mr. Shimada, what is your thinking about the wage hike and the price pass-through cost reduction? How are you intending to secure a source of funds for wage increase? Akira Shimada: Basically, 12 years in a row, we have been conducting a wage hike already. So it's important that we continue this wage hike. However, when it comes to the level of wage hike, we have to negotiate with the unions, and it depends on the outcome of negotiation. It's true that cost, there's various kind of cost increasing and labor cost is increasing as well. And the services that we offer, conducting a price hike might have to be necessary. But as I mentioned, particularly in mobile, intensified competition continues. In that sense, in various ways, we have to try to reduce cost and increase efficiency, and we have to introduce AI. By taking these various measures, we have to absorb increasing cost. That is what we have to do for the time being. And if possible with the understanding of customers, if we can increase unit price in various ways, that will be desirable. Operator: Then to my right, the person in the second row. Unknown Analyst: [ Koyashima ] from Kyodo News. I have 2 questions. The first question is about Rapidus. There's additional investment, and I would like to confirm the fact. And what is the expectation to Rapidus? And the second one is TEPCO, they are requesting for external partners. And data center and AI, there are some areas you excel, but do you have the intention to participate? Or do you have interest? Akira Shimada: Starting from Rapidus investment, I would like to refrain from making comment. Please ask the question to Rapidus. But on the other hand, with Rapidus, we have much expectation. Photonics-electronics convergence device, as you saw in the materials, at around PEC-3, we should be able to work together. And together with the President Koike, we have been speaking and Rapidus has a front-end process and the back-end process, and they want to have the full initiative. So in the back-end process, something like a PEC-3 will be embedded so that the product value will be enhanced. So we would like to participate in that effort. And about TEPCO, we do not know the details at all. So we would like to refrain from making comment. My apologies for that. Operator: Next question. The person behind the previous person. Unknown Analyst: NHK, [ Toma ] is my name. About DOCOMO, DOCOMO has a finance service. They're trying to strengthen finance business. And Mr. Shimada, in your interview and so forth, you talked about the concept of setting up a holding company. And what is the progress of this concept, the aim, timing, et cetera? At this point in time, what is the status? Akira Shimada: Thank you for the question. Holding company or holding company and operating company for finance service, I've wanted to set up this kind of company, and I've said that in various occasions. And if possible and if the environment allows, from around April of this year, we want to set up this company. And of course, our M&A -- well, DOCOMO SMTB, Sumishin Bank, and Monex and DOCOMO Finance. And these M&A partners will belong to the holding company and there's d CARD, d-Barai , d PAYMENT and a company that can handle all kinds of finance services that we want to set up. And for one thing, FSA, we dialogue with FSA and finance-related governance matters would have to be clarified, and that's one purpose. And MIC, Ministry of Internal Affairs and Communication have been our regulatory authority, but finance business will be within the realm of JFSA. So we have to be able to respond sufficiently to JFSA-related matters. And if things proceed as scheduled around the summer, we do want to change this kind of a structure. Unknown Analyst: By the way, DOCOMO, as you explained, there's the competitive environment and there are cost-related matters and finance-related business, bringing them together. And by so doing, do you think the company -- the group can recover and grow further? Akira Shimada: First, we have to reinforce customer base. And in order to do that, finance business is important as well as entertainment as well as new venue business, as I mentioned in my explanation, and we want to offer these kinds of services as value-added service to the customers. And of course, for that, we have to be able to collaborate well. And details, if you ask Mr. Maeda, he may not be available to respond in detail, but at some kind of a timing, we do want to create an opportunity so that we can explain about DOCOMO is intending to do. At a certain timing, I think we'll be able to explain in detail. Operator: We would like to entertain one more question from the floor. The person at the front row, please. Unknown Attendee: Free writer, [ Sano ]. I have one question. The other day, NEC from the announced withdrawal from the existing base station business, and you made the investment in 2020, and you have been trying to expand to now. And I understand that the business would continue, but NET (sic) [ NEC ] is going to downsize this business. And what is the perception of NTT as a shareholder of the company? Akira Shimada: Well, NEC on the existing base stations, I have been speaking with President Morita, and he will continue to do that. And what is used for the services such as the equipment and the software of NEC, we do not have any concern over that. But on the other hand, from that perspective, in 5G, domestic vendors are not so competitive, which is unfortunate. So in the next plan or for the new service deployment, domestic vendors to produce good products so that it will be desirable for us to use again. So we would like to look forward to that. So specifically, are you considering to have any actions -- specific actions we do not have from our side. Operator: We will now respond to questions from reporters participating online. [Operator Instructions] Are there any questions? No questions? Since there are no questions from people participating online, we would like to ask any -- if there are any questions among the people in the room, the person in the right-hand side, please. Unknown Analyst: Toyo Keizai, [ Chaima ] is my name. Downward revision of guidance in relation to that, once again, I want to know that I think a substantial factor is concerning DOCOMO. And compared with the initial guidance, you made efforts for sales promotion, but other companies were making effort in sales promotion as well. As a result, the competition intensified and things are not going as planned. Well, what specifically was different -- is different compared with the initial guidance? And bearing that in mind, next fiscal year by segment, including Integrated ICT segment and DOCOMO, what is your current prospect as much as you can share with us? Akira Shimada: What prospect? Unknown Analyst: Performance forecast for each segment. Akira Shimada: First, sales promotion -- concerning sales promotion, actually, Q2, DOCOMO lost in terms of MNP competition, 0.5, we stopped that service. And as a result, there was a decrease in volume. And after that, we should not intensify competition too much. That is what we have to agree upon with our competitors, but still, our competition is not slowing down, moderating, not moderating. And last year, from the second half of the year, we made a lot of effort towards sales promotion. And this year, we thought the competition will settle down. That was what I was expecting. But in reality, competition rather is intensifying further, not moderating, which means we had to respond sufficiently in this kind of situation, and we should not be defeated, and that is why this current situation is continuing. And we've all spent a lot of cost, all main players in the industry. So next fiscal year onwards, what is the situation likely to be? It's very difficult to forecast. But if there is a competition, we have to win. So we have to continue our effort. If there is competition, we have to continue our effort. And by segment, DOCOMO segment, is that what you want to know? Microphone was not on. Next fiscal year, we have to prepare our next fiscal year's plan. It's not fully prepared. And DOCOMO, at least this year will be the bottom for DOCOMO. However, quality improvement about 20% growth every year and number of chats is increasing because of increased video usage. We have to respond to these needs so that we can ensure customer satisfaction. So we do have to continue our effort to improve communication quality. And NTT East and West, enterprise business and the [ smart life ] business of NTT West and so forth, they are recording solid performance and stable performance, and we think we can stably continue these businesses. End of next fiscal year, or this year or next month or so, fixed telephone, we would like to explain. I think there will be an opportunity for us to explain about what to do with our fixed phone business. And NTT DATA Group, they are enjoying organic growth. And globally, in order to grow further, what should be done. And NTT DATA's midterm plan is to be reviewed. When we announce our financial results for this fiscal year, we have to think about what to do with our midterm plan, and we want to be able to use NTT DATA so that we can enjoy synergy for the group as a whole. So that is what we are considering to do going forward. Does that answer your question? Operator: Moving on to the next question. The person at the front row. Unknown Analyst: [ Kita Watch ], my name is [ Sekiguchi ]. On DOCOMO's business, this is related to downward revision. What is the view on capital expenditure, especially next fiscal year? To what extent are you going to tolerate the increase of investment? Today, when I look at the materials from DOCOMO, the capital expenditure is going to increase by JPY 32.7 billion. And now how do you evaluate JPY 56.5 billion? You mentioned that the performance is now bottoming out as an expression. But this capital expenditure, how do you evaluate? And after next fiscal year, how are you going to increase or decrease? Can you share your view? Akira Shimada: It may be better to ask the question to President Maeda. The increase of base stations, capital expenditure will continue. And as I mentioned, quality will be secured. That is important. But on the other hand, this year, venue-related investment is quite significant. So smart life investment will not be so high next year. Basically, large venues have been established quite significantly this year. So totally, we're expecting to see the drop according to our understanding. Operator: Next question, the person in the second row from the front. Yuka Nakao: Kyodo News, Nakao is my name. In the presentation material, AI, social implementation. Social implementation of AI, I have a question about this topic. And in each industry, you want to collaborate with leading companies to implement AI. And continuation from this, what areas do you expect after this, any future prospect? And do you want to work on transportation and retail industries and so forth? And in relation to that, AI, there are various use cases and social implementation is likely to proceed more and more. On the other hand, some companies seem to be taking a wait-and-see mood and how much money should they spend and what part should they increase efficiency in? There are some companies who have not been able to make this decision, and that is what I actually feel. And President Shimada, what is your perspective on this? And in order to accelerate social implementation of AI in the NTT Group, is there anything that NTT will work on as -- in the group as a whole? Akira Shimada: What we explained today is for digital and physical, connecting digital and the physical domain and physical domain has written this Toyota, Mujin and Trial. LLM, not the LM foundation model, but rather the quantitative model -- numerical model. Numerical model related to AI would have to be combined and not just foundational model because factories should not make any mistake in their manufacturing. So LLM is a language model. So mistakes do tend to occur. However, what's written here, everything that's written here should not make any mistakes. If there are mistakes, there will be accidents and incidents. We have to be able to create a model that does not make any mistakes. And for that, we need both technologies, and that's why we decided to share this example. And globally -- and before globally, in Japan, there's tsuzumi. And there are about 2,000 inquiries for tsuzumi from customers and mainly speaking, local governments, finance and medical and health industries because there's data that cannot be made open, cannot be made into Open AI. These are the entities that are inquiring and showing interest in tsuzumi. Private and sovereign related aspects, we think are likely to increase going forward. In that sense, in Europe, NTT DATA in Europe, there's Mistral. There's a lot of demand there. And in that sense, sovereign related AI, we think we'll see an increase in demand. And what's selling most is agile Open AI in our case as well. But rather, we want to be multifaceted and open. And the AI that can be applied by customers, we want to offer consulting on and support implementation. That is what's desirable for us. Depending upon how customers use AI, there are different kinds of features of AI that can be used. And I think various kinds of evolution will take place in the future. But in particular, private-related demand, I think, will increase in particular. Operator: The person who asked the questions earlier may raise questions as well. We would like to take 1 to 2 more questions. To my right. Unknown Analyst: [ Nikin ] of [ Financial or Trade Magazine ]. And with respect to tsuzumi domestically -- domestic LLM. And you mentioned about the increase of private and there may be increase in finance, but with 3 mega banks rather than domestic companies, they may be using large-scale AI from overseas. But the regional banks who do not want to employ cost, are you planning to stress small and midsized financial institutions, including regional banks? Do you have any thoughts? Akira Shimada: I would assume that the financial institutions and as to where the AI will be provided, the choices will be different. Large financial institutions with LLM with large parameters, some will be introducing them or it may be more closed area where they would like to cater to their needs. So the real large LLM will be used in certain locations and a relatively smaller scale in the closed data environment, there may be both opportunities. So rather than scale, it's how it's going to be used that would determine the choice. We do have inquiries after the local government, financial institution is next. So we have the inquiries, and we are receiving quite extensively. There are many sections. And by section, I believe the inquiries are being made. Does that answer your question? Operator: The person in the back with a dark colored jacket, please. Unknown Analyst: This is [ Taksuki ] from [indiscernible]. Sorry for the second time. And first about the interest rate environment. On a year-on-year basis, interest-bearing debt in order to expand businesses increase in interest-bearing debt and the CapEx in the case of a company, I think will be costly. As from these 2 perspectives, interest rate hike, how will that impact your company's business? That's my first question. And my second question is the depreciation of the Japanese yen and the foreign exchange rate, how will your group be affected by the foreign exchange rate? NTT DATA, data center REIT because of Japanese yen depreciation, there might be more business coming in, or from both positive and negative perspective, how will you be impacted by depreciation of the Japanese yen? If you could please comment on these points. Akira Shimada: What do you personally think and what I think as a company happen to be different. My personal perspective is different from company's perspective. Interest rate in Japan, how should I say, gradually is increasing. And I think that's taken for granted. As a person with common sense, I expect that to happen. But of course, I'm responsible for the company's business. And from that perspective, the lower the interest rate, the better. However, on the other hand, data center business, thanks to people's cooperation, there's a lot of return. So even if we bear interest rate, there's a growth potential, we'll be able to absorb that. So we're not so worried there. And depreciation of the Japanese yen or foreign exchange rate impact ends up being positive, which is helpful for us. But the foreign exchange rate, minimum foreign rate -- exchange rate volatility is the best. And the dollar and Japanese yen and dollar and euro relationship, the relationship among various currencies is becoming more complicated. And when it comes to currency or foreign exchange rate, it's best to maintain a stable situation without so much fluctuation. Operator: Then we would like to take one last question. Does anyone have any questions? The person over there. Unknown Analyst: Nikkei xTECH, my name is [ Morioka ]. NTT DATA Group is now wholly owned subsidiary, and you spoke about the synergy. But currently, I believe it is under review. But compared to the initial stage, are you expecting to see more synergy? Is there anything that you can share with us? Akira Shimada: Yes. Thank you for the question. As I have been mentioning initially, synergy is something that we need to anticipate. But more than that, DATA's growth will be even more important. This is both organic and inorganic. Within NTT Group, SI business accounts for roughly 40% and substantively rather than the synergy inorganic would have even greater effect. Midterm plan is something that we need to review and DATA's midterm strategy will be considered as a large positioning, of course, including synergy. But rather than synergy, non-synergy will be greater. This is as I have been mentioning from the outset. Thank you. Operator: It is now time to close the NTT, Inc. press conference. Next, there will be NTT DOCOMO Group's press conference. If you could please wait a while. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
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