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Operator: Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Fourth Quarter Fiscal Year End Earnings Conference Call for the period ending November 30, 2025. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for one quarter on the company's website levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co. Aida Orphan: Thank you for joining us on the call today to discuss the results for our fourth quarter and fiscal year end. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our investors.levistrauss.com. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and information provided is on continuing operations. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to allow others to have their questions addressed. And now I'd like to turn over the call to Michelle. Michelle Gass: Thank you, and welcome, everyone, to today's call. The fourth quarter punctuated a strong year defined by progress against our strategy, accelerating brand momentum, and solid financial performance. Over the past two years, we've taken bold steps on our journey to become a DTC-first head-to-toe denim lifestyle retailer. We've made deliberate strategic choices to maximize the potential of the Levi's brand, narrow our focus by exiting non-core businesses, and vigorously pursue our highest return growth opportunities. We are becoming a more consumer-focused DTC-centric lifestyle company, which has led to faster growth and higher profitability. These efforts led to strong full-year financial results. In 2025, we delivered organic net revenue growth of 7%, which was broad-based across all facets of our business. Here are a few key highlights for the year. As a reminder, all numbers Harmit and I will reference are on an organic basis. First, the Levi's brand grew 7%. Levi's strengthened its standing as the number one denim brand in the world and today holds more market share than the next two global competitors combined. Second, we took a big step forward in our evolution to becoming a true lifestyle apparel brand by bringing to market our most robust head-to-toe product pipeline to date. This drove growth across channels and meaningfully increased our total addressable market. Third, we accelerated our DTC transformation, growing 11%, which now comprises approximately half of our total business. Importantly, we saw significant DTC margin expansion in 2025, as we delivered high single-digit comp growth for the year and a more efficient operating structure in both stores and e-commerce. Fourth, our wholesale channel continued to deliver more stable growth, ending the year up 4%, fueled by our expanded lifestyle assortment as well as new distribution. Fifth, our growth in women's continued to accelerate, up 11% for the year, with both tops and bottoms delivering double-digit growth in addition to 5% growth in men's. And while we drove significant top-line growth, we also delivered our highest ever gross margin as well as adjusted EBIT margin expansion. Now turning to details of the fourth quarter. Total company revenues increased 5% on top of 8% growth last year. And this momentum continued through the holidays, with 7% growth during the November holiday season, reflecting strength across both DTC and wholesale channels. This marked our highest revenue for the holiday period in at least a decade. First, I will walk you through the progress made against our brand-led strategy, which centers around how we're amplifying the power of the Levi's brand through an innovative and fresh product pipeline and culturally relevant marketing. The Levi's brand grew 4%, driven by strength in men's and even in Q4, higher growth in women's. Growth in men's and women's continues to be driven by both our core as well as the newness we've introduced throughout our assortment. A testament to the strength of the brand, in 2025, we cemented our number one position in men's, women's, and in our key youth demographic of 18 to 30-year-olds in the US. These share gains are supported by strong brand heat, reflected by higher social media engagement and meaningful gains in brand equity versus last year. In Q4, we continue to fuel our global brand momentum while strengthening our relevance in local markets. We unveiled a number of unique collaborations. Examples of these include a premium collection with FarBor and a limited edition footwear launch with Nike and Japanese streetwear icon, Nego. We celebrated our final chapter of the reimagined campaign with Beyonce, and launched our global campaign targeted at men featuring Shabuzy, and Maddie Mathison. And we also reinforced our long-standing link to music culture by celebrating a full decade as an official sponsor of Corona Capital, Mexico's largest music festival. Putting the brand front and center in our second largest market. Moving to product. Our evolution into denim lifestyle is resonating, and the Levi's brand is gaining even more share of the closet as our tops business continues to accelerate. The tops reset we initiated a few years ago, bringing in new internal talent, new vendors, and enhanced capabilities is paying off today. In Q4, tops grew double digits, driving nearly half of our revenue growth and meaningfully higher AURs versus last year. Strength was broad-based, reflecting growth across men's and women's which was driven by strong demand in our elevated assortment of sweaters, wovens, and outerwear. Tops will continue to be instrumental to our denim lifestyle strategy. And while we're pleased about our progress to date, we are just getting started as a destination for the tops category. Within our bottoms business, we are showcasing our most diversified portfolio yet with everything from our core icon to our innovative fashion fits and non-denim bottoms, all delivering growth. While skinny and straight fits remain popular, loose and baggy styles continue to accelerate. New styles like the 578 baggy for him, and our expanding Barrel family for her are fueling momentum as we own more of the denim market in both his and her closet. In Q4, we successfully completed the global rollout of our blue tab collection, which represents the most premium expression of our brand. While we are still in the early stages, the strong consumer response to this collection gives us conviction in the opportunity in the premium segment of the market, which is sizable and largely underpenetrated by the Levi's brand. In 2026, we will further expand the assortment and roll it out more broadly across our DTC business as well as select premium wholesale accounts. Looking to 2026, we enter the year with a robust product pipeline and a brand that's more culturally relevant than ever. For the first time in more than twenty years, Levi's will debut its newest ad during the Super Bowl which will be hosted at Levi's Stadium, marking the launch of our new global campaign that will run through 2026. With this kickoff and more major global moments to come, including several World Cup Games To Be Held At Levi's Stadium this summer, we are energized by the runway ahead and confident in our ability to keep driving the Levi's brand forward. Now shifting to our next strategy to be DTC first. In Q4, our global direct-to-consumer business delivered another quarter of double-digit growth, up 10%, and posted its fifteenth consecutive quarter of positive comps. We generated another quarter of high single-digit comp growth, reflecting positive performance across all store KPIs, including traffic, conversion, and UPT. In addition to AUR growth across every segment. In Q4, we opened 47 net new system stores, including mainline locations in Japan, India, Thailand, and Korea, as we continue to expand our DTC presence in Asia. Over the past year, we have transformed our retail operations both in stores and online, improving the consumer experience and store productivity. We've enhanced our in-store lifestyle merchandising, highlighting our broader assortment of head-to-toe looks. We've improved our assortment planning and life cycle management resulting in lower promotions and higher full-price selling. And we're rolling out a new global selling model for our store team which will deliver operational efficiencies and improved consumer engagement. We are still in the early stages of what we believe is an opportunity to continue to improve our DTC margins, which will be a key driver of our overall company margins. Our efforts to build a strong digital foundation have enabled us to accelerate our e-commerce business. And in Q4, we delivered another quarter of very strong e-commerce growth up 22%. We are leveraging AI to make online shopping easier and more inspiring for our fans. We recently launched Outfitting, an AI-powered feature in the Levi's app that creates style looks using our full assortment, purchasing behavior, and product imagery. This year, we'll evolve outfitting with even more consumer-centric customization, and we'll launch a new consumer-facing AI stylist chatbot that enables personalized recommendations through conversation. We are also continuing to scale the use of AI and advance analytics across the organization as we accelerate our shift to a best-in-class direct-to-consumer retailer. For example, we recently announced our plans to develop and deploy an integrated AgenTeq AI platform to simplify and automate task-driven work throughout the organization, driving efficiency, productivity, and enabling growth. Built in partnership with Microsoft and as a frontier firm in the industry, we're currently testing this technology and plan to roll it out to employees this year. These initiatives are rewiring the company for a bold future, creating meaningful opportunities to enhance consumer experiences while unlocking additional operational efficiencies. While DTC continues to drive outsized growth, wholesale continues to be an important channel for us to amplify the brand and reach our consumers where they choose to shop. Our global wholesale business was flat for the quarter and ended the year up 4%. The channel has stabilized over the past year as our efforts to elevate the brand and broaden the assortment gain traction. Now turning to our third strategy, powering the portfolio. In Q4, our international business grew 8% led by an acceleration in Europe and solid growth in Latin America. International comprises nearly 60% of total sales. And given the strength of the brand and our expansion into lifestyle, we see an immense opportunity for continued profitable growth outside the US. Beyond Yoga was up 45% in Q4, fueled by the positive response to our Seek Beyond campaign launched in Q3, and product expansion into new categories across active lifestyle. DTC performed particularly well and we opened four new stores in the quarter. Beyond Yoga ended the year up 17%. And as we look to 2026, the brand will continue to expand its retail presence in new markets, and launch the next iteration of our broadened lifestyle assortment. Looking ahead, I am more confident than ever in our future potential. While we continue to navigate a dynamic global environment, we do so from a position of strength with an iconic brand, deep connection with our fans, and the agility to adapt and grow. Our strategies are working. And we have the right capabilities and team in place to continue to drive momentum in the year ahead. We'll keep building our denim lifestyle leadership by bringing fans fresh new product across every category while continuing to celebrate the iconic styles that have shaped generations. And we'll continue to keep Levi's at the center of culture through a focus on sports, music, and youth, showing up powerfully on the world's biggest stages and sparking excitement that deepens our cultural relevance globally. All of this is supported by our continued commitment to drive operational excellence and to strengthen our execution grounded in a focus on discipline, accountability, and performance. I'd like to thank our incredible, talented, and passionate team for driving our transformation into the world's denim lifestyle leader and delivering outstanding service to our fans every day. Together, we're building a stronger foundation for sustainable, long-term value creation. And with that, I will turn it over to Harmit to review our performance in the fourth quarter, the year, and expectations for 2026. Harmit? Harmit Singh: Thank you, Michelle. 2025 was a strong year with continued consistent profitable growth for our company. I'm pleased that our growth has accelerated over the last three years and we have established ourselves as a consistent mid-single-digit growth company which we expect to continue in 2026. We've also made progress each year on expanding margins both gross and operating, while driving higher returns on invested capital ending the year at approximately 16%. Our 2025 financial results reflect the strength of our business and demonstrate that we have the right building blocks in place to drive long-term sustainable growth. Our focus on denim lifestyle has enabled us to accelerate growth by expanding our total addressable market with our broadened assortment of non-denim bottoms, tops, dresses, and skirts which contributed to almost a third of our growth in 2025. Our disciplined approach to converting growth into profitability improved adjusted EBIT margin by 70 basis points in 2025. And we achieved this while navigating higher tariffs and investing in remapping our distribution network as we build the roadmap towards becoming a $10 billion DTC-first company. In 2026, we will continue to grow adjusted EBIT margins through our relentless focus on driving higher revenue flow through while making the right investments for our long-term growth. Including growing our store base, AI capabilities, and marketing. In addition, we're making meaningful progress on mitigating tariff impacts on our P&L through targeted pricing actions, higher full-price selling, lower product cost, and prudent management of our cost base. Now let me walk you through the specifics of our fourth-quarter performance. Organic net revenues grew 5% and were up 13% on a two-year stack. Our outperformance was driven by better-than-expected results across channels and geographies. As we have seen throughout the year, both AURs and units contributed to our growth this quarter. We expect both price and unit growth to drive the top line in 2026 and beyond. Gross margin for the quarter was 60.8% of net revenues, contracting 100 basis points relative to last year, in line with our expectations, primarily due to the impacts of tariffs which were partially offset by pricing actions and higher full-price selling. In the first quarter, we implemented additional pricing actions to further mitigate tariffs and while it's early, we are not seeing any impact on consumer demand thus far. Adjusted SG&A dollars grew 2.6% due to the sales upside driving higher selling and incentive expenses, higher costs associated with the transition of our US distribution network, and unfavorable foreign exchange. A brief update on our distribution network transformation in the US. While we're making progress, the transition to the new third-party distribution center has taken longer than we expected. We've been working to fulfill our high demand, by continuing to operate our own distribution center which has led to higher transitory distribution costs, which we expect to continue to incur through '26. We successfully executed a distribution transition from owned and operated to a hybrid model in Europe last year, enabling us to fulfill our strong demand as evidenced by the double-digit revenue growth in the quarter, while improving our profitability in the region. This gives us confidence that we will successfully complete the transition in the US this year. Moving down to the EBIT line, adjusted EBIT margin contracted 180 basis points to 12.1% related to the impact of lapping the fifty-third week and tariffs. This was slightly lower than our expectations due to the three reasons I mentioned before within SG&A. That is unfavorable effects, higher distribution cost, and incentive compensation. Fourth quarter adjusted diluted EPS was 41¢ higher than expectation. This includes a 3¢ headwind from a higher tax rate. We ended the year with reported inventory dollars up 9% to prior year and units up 2%. The year-over-year dollar increase was primarily driven by tariffs. We continue to believe our inventory, quantity, and quality are well positioned globally and expect inventory levels ending fiscal '26 to be below revenue growth. Turning to dividend and share repurchases. In quarter four, we returned $55 million to shareholders and for the full year, we returned $363 million up 26% versus prior year. This included a 7% increase in the dividend versus last year. And the $150 million share buyback in '25 was the highest annual buyback since the IPO. And today, we're announcing a $200 million ASAP program which will be completed within three months but no later than six months, reflecting our confidence in our future and continued efforts to drive shareholder value. Now let's review the key highlights by segment for the quarter. The Americas net revenues were up 2%. Our US DTC business grew 6% driven by strength in both brick and mortar and e-commerce. US wholesale was down, due to capacity constraints in our new 3PL as well as strong growth from a key digital wholesale customer in the prior year. Our LATAM business was up 8%, fueled by growth across most markets. And continued strength in DTC. Operating margins, which were up for the year, contracted 460 basis points in the quarter primarily due to the lapping of the fifty-third week and the impact of the tariffs. Europe net revenues accelerated up 10% in Q4, led by double-digit growth in our largest European markets, the UK and Germany. We delivered strong holiday performance and growth across all categories, including men's, women's, tops, and bottoms. Gross margin expansion and SG&A leverage resulted in operating margin growing 330 basis points versus prior year. Europe's operating margin for the full year grew 180 basis points. Asia net revenues grew 4% year over year, fueled by strong DTC performance. Key markets, including Japan and Turkey, delivered double-digit growth this quarter as a head-to-toe lifestyle offerings continue to resonate with consumers and drive growth. Operating margin expanded 140 basis points versus prior year, driven by gross margin strength. For the full year, Asia grew 7% and operating margin expanded 60 basis points. Now let's turn to outlook for fiscal '26 and Q1. We are pleased with our Q4 results and with our trends in the first quarter, including a successful holiday period. Looking to '26, we expect organic net revenue growth of four to 5% with one point favorability from foreign exchange resulting in reported net revenue growth of five to 6%. By segment, we expect the Americas to grow low single digits, Europe mid-single digits, and Asia mid to high single digits. By channel, we expect DTC to grow high single digit fueled by positive comp sales, opening 50 to 60 net new system dose and continued growth in e-commerce. Global wholesale is expected to be flat to slightly up given plans to rationalize our wholesale footprint particularly a few nonstrategic accounts in the US, in support of our brand elevation strategy. Gross margin is expected to be flat to prior year. This includes an approximate 150 basis points gross impact from tariffs which we plan to offset with pricing actions, higher food price selling, product cost reduction, driven by lower cotton rates, and vendor negotiations. SQ rationalization and favorable mix. FX is expected to be a 20 basis point headwind to gross margin. While these mitigation factors will begin to flow through the P&L early in the year, we anticipate the pace of benefit realization will accelerate as we progress through 2026 with a more meaningful contribution emerging in the later part of the year. The fundamental drivers of our gross margin expansion, which are mix higher full price selling, continued product cost reduction, remain intact. Positioning us well for resume full year expansion in 2027. We expect our fully adjusted SG&A rate to improve by approximately 40 to 60 basis points as the organization is increasingly focused on driving operating leverage. This is driven by cost actions to mitigate tariffs, expansion of our global talent hubs, limited headcount increases as we drive productivity, and efficiencies by expanding AI usage and easing costs from running parallel distribution centers in the second half of the year. For the year, we expect marketing spend to be approximately 7% of total revenues flat to $20.25. As a result, adjusted EBIT margin is expected to expand 40 to 60 basis points in the range of 11.8 to 12%. Given our mid-single-digit growth, and our focus on growing gross profit dollars ahead, of SG&A dollars we do expect to leverage for the full year. We expect the full year tax rate to be around twenty-three percent two points higher than twenty-five. And interest expense is expected to be approximately $12 million a quarter. Full year adjusted diluted EPS is expected to grow and be in the range of $1.40 to $1.46. This includes a 4¢ headwind from a higher tax rate and a 20¢ drag from the higher gross impact from tariffs which we are fully mitigating. CapEx should be approximately $230 million, 3.5% to 4% of revenues. Primarily to support store openings, fleet improvements, and our digital investment. Before I discuss our Q1 guidance, I wanted to give some color on the cadence of the P&L for the year. We expect consistent mid-single-digit revenue growth throughout the year with Q2 slightly lower due to seasonality. We expect gross margin to improve in the second half as we realize the benefit of pricing and lap the impact of tariffs. On a full-year basis, as previously mentioned, we expect marketing spend to be 7% of total revenue. However, this spend will be Q1 weighted given the timing of a global marketing campaign which kicks off in February with the Super Bowl. Because of this, we expect Q1 spend to be approximately a 160 basis points than Q1 twenty-five and lower in the remaining three quarters of the year. As a result of the Q1 marketing phasing, operating margin is expected to contract versus prior year in Q1 'twenty-six, and then expand as gross margin expansion and operating cost leverage take hold driving full-year growth. Now turning to the 2026. We expect organic net revenue growth of 4% to 5% consistent with our full-year forecast. And a three-point FX tailwind resulting in seven to 8% reported net revenue. On a two-year basis, this is an acceleration from Q4 twenty-five. And demonstrates that we are maintaining momentum. Gross margin is expected to be slightly down versus Q1 twenty-five, primarily due to the continued impacts of tariffs. As noted earlier, we have already implemented pricing actions earlier this month and additional pricing actions will occur in February. Adjusted EBIT margin is expected to be down 140 basis points versus Q1 twenty-five to 12% primarily driven by the timing of the marketing campaign. While the production costs and expense in the first quarter we expect to benefit from the campaign through the course of the year. Excluding A&P timing, adjusted EBIT margin leverages and in Q1, we expect adjusted diluted EPS in Q1. be between 35 to 38¢. This includes a 7¢ drag for from A&P. In closing. 2025 was another solid year for us while accelerating top line and bottom line, evidencing the success of our strategies and our transformation to a denim lifestyle DTC first company. We entered '26 with strong momentum. And a maniacal focus on expanding operating margin. With a robust product pipeline, growing TAM, and clear plans to mitigate tariffs along with a talented and experienced management team will look forward to another year of consistent growth and margin expansion. Beyond '26, we are confident about what's ahead. Iconic brand, global reach, and relentless focus in growth and cost management will continue to create lasting shareholder value well beyond 2026. And with that, Latif, let's open up the line for Q&A. Operator: Thank you. The floor is now open for questions. Please press star then the numbers 11 on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open, Laurent. Laurent Vasilescu: Thank you. Good afternoon. Thank you for taking my question. I'd love to ask about gross margins. Harmit, you've historically beaten your initial gross margin guide. Are you taking the same conservative stance as in prior years with this guide of flat gross margins? How should we I think you talked about sequential improvement on the gross margin for the year, but can you maybe just put a finer point how do we think about the first quarter gross margin? I think expectations were a little bit higher for 4Q. And can you maybe just unpack a little bit more the drivers on Cotton Transit and the offset on tariffs for the bridge for the year. Thank you very much, Harmit. Harmit Singh: Thanks, Laurent. I was it's a gross margin question for you is right on the money. But let's start with a little bit of history. Gross margin, you know, we have established a track record of consistent gross margin expansion as you said. Our algorithm talks about expanding gross margin regularly. Every year. Last year, '25 we grew gross margins a 110 basis points. And over the past three years, it's grown about a 400 basis points. And I'll talk a little bit about the structural drivers, which are intact. Talking about '26, our guidance is at this time, flat to prior. What we have done nicely is offset the full impact of tariffs. You know, as the year progresses. So tariffs, as I mentioned in my prepared remarks, impacts gross margins adversely by about a 150 basis points. And we have an FX headwind of about 20. We're fully offsetting this with higher pricing, you know, most of it's been implemented. We have we're not seeing any initial demand reaction to it. So the last thing is pretty good. More full-price selling, which is something that we've been focusing now for about twelve to eighteen months. Especially as a product, you know, newness is resonating well with the consumer. And then lower product cost. Which is a combination of lower you know, better and lower cotton, as well as queues the negotiation with the vendors as we rationalize you know, reduce unproductive you know, assortment, etcetera, etcetera. So the only thing I would say is the structural benefits, which is growing you know, more aggressively things like women's, is higher gross margin than men's. DTC, which is high gross margin in wholesale. And international, which is high gross margin than US. That's intact. So as we think about twenty-six, I think the way we flow this is first quarter will be slightly down than a year ago. Because the pricing gets effectuated and improves and accelerates in terms of year-over-year performance as the year progresses, and we start lapping tariffs. And as we think about '27, Laurent, you know, our view is, you know, this is we don't guide '27 right now, but our view is the structural aspects that we're focused on growing which is through mix, which is DTC, women's, and international will resume the acceleration of gross margin in the years to come. So that's how we're thinking of gross margins you know, and I hope that answers your quest. Laurent Vasilescu: It does. Thank you very much, and best of luck. Operator: Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Your line is open, Matthew. Matthew Boss: Thanks, and congrats on another nice quarter. Harmit Singh: Thanks, Matt. So Michelle, how does your mid-single-digit organic outlook for this year size up to the denim category? Maybe where do you see opportunity to increasingly move to offense this year? And then Harmit, on that topic, you elaborate on the acceleration to 7% organic growth in November and December? Think that's on top of 8% growth a year ago, so a mid-teens two-year stack. Just could you speak to the strength that you're seeing? And have you seen any softening in top-line momentum post-holiday? Michelle Gass: Okay. Great. Matt, I'll yeah. I'll start with your first one. We feel really good heading into 2026. I mean, I'd say it's clear that our strategies are working, and just as '25 was a strong year, plus 7% organic growth, we're expecting 2026, as you said, mid-single-digit. Four to five organic, five to six on a reported set basis. You know, highlights from my standpoint are number one, you know, I'd say that we are in the best shape that we've been in decades. Both operationally and financially. '25 is certainly a good proof point of that. Our strategies of being brand-led, DTC first, empowering the portfolio are clearly working, and they're driving broad-based growth across channels, categories, genders. And I think what's really exciting is we're making this big transformation, as you know, from a denim bottoms business to a true head-to-toe denim lifestyle company. So when you think about four to 5% mid-single-digit growth ahead, you know, we do expect Matt to outperform the category. I mean, the category, and as you're talking just denim, it is accelerating globally. And as a leader, we are fueling that growth. You know, on that note, in the US, which is also growing we have cemented our position as the number one share for men's women, and youth. And it's the first time that we can remember that all three of these targets have grown share and are number one. So it gives us tremendous confidence that strategies aren't changing. We're leaning in and we're executing. And the last point I would make is you know, just as we plan to continue to fuel the denim category, we've expanded our total addressable market. Right? We're no longer just in denim bottoms and in fact, as Harmit mentioned earlier, about a third of our growth this past year was driven by categories outside of denim bottoms. So speaking to top, which had a really fantastic year of double-digit, we expect that tailwind to continue. Non-denim, again, it's growing fast. We expect that to continue. And then, of course, we think about the women's business, women's had a great year, up 11%. But that head-to-toe dressing from, yes, being relevant in fashion and loose, baggy, all the icons, but then also in skirts and dresses. Tops. So there's a lot of runway as we look into 2026 and beyond. Harmit Singh: And your second question, Matt, I think, you know, holiday was strong for us. It centered around two strategies. One is DTC. So as you become a DTC-first company, as a team, we're really focused on making sure we win in holiday. We made sure you know, there's newness on the flow, we made sure the product that, you know, is you know, being innovative was both with our wholesale customers as well as in our stores and on e-commerce platform. Then the team's really executed really well. So that's, fact number one. Fact number two is just building on the standpoint that Michelle talked about. That's centered around the denim lifestyle. You know, focus. The myth I would like to bust you know, is that we are we're just not only denim bottoms. We are more than denim bottoms. I mean, this is more of a head-to-toe lifestyle denim-focused company. So think about the outerwear. Our teams shout out to our product teams and merchants, product team led by Karen Hellman and lead merchants. We sold a lot of sweaters. You know, more than we have sold in a long time. You know, we sold a lot of chinos. So I can go and just talk about the different products that were introduced in holiday that really helped. So that's what gives us the confidence that we can grow Q1 and a two-year stack at 14%. You talked about November and December at 15, but, you know, for the quarter, you know, that gives us the confidence. And sustaining the 7% organic growth with you know, four or five organic growth in 2026. Matthew Boss: It's a great color. Best of luck. Thank you. Harmit Singh: Thank you. Operator: Our next question comes from the line of Jay Sole of UBS. Your line is open, Jay. Jay Sole: Thank you. You know, Michelle, in the prepared remarks, you made a comment that you believe that the direct-to-consumer channel margins can move higher. Can you just dive into that a little bit and tell us what are the drivers and where do you think the margin can go from where they are today? Michelle Gass: Yeah. Absolutely. Thanks, Jay, for the question. We believe that there's a lot of upside in DTC from a revenue standpoint and margin. You know, as I commented earlier, 15 quarters of positive comp growth. So first of all, margin growth will come from leverage, you know, call it sales productivity. As we continue to drive higher volumes, we'll clearly leverage off of the fixed costs in our store, which includes, you know, your real estate, your fixed labor, just a lot of, you know, a lot of those, like I said, fixed costs. Secondly, I would say is, you know, we are really focused on retail excellence. That had a big impact in expanding our store margins this past year, and that will continue. So we're stepping up our operations capabilities. That includes things like enhanced lifestyle merchandising. So when the consumer is coming in, they're not just buying a pair of bottoms, they're also buying the top. So driving UPTs, driving average ticket price, etc. Improved assortment planning and life management. You know, we talk about rewiring this company to be a retailer and that's happening. We put new systems in place. We're in the midst of rolling out a new planning allocation system that's gonna benefit sell-through. Keeping us in stock. So and I would say historically, you know, that wasn't a core strength growing up as a wholesale company. That wasn't a core strength of ours. It has to be now. And you see it in the numbers to date. You'll see it going forward. And then lastly, would say, again, operating with a retail merchant mindset, is the selling model, and we have a new global selling model that's rolling out worldwide. So, you know, our expectation, the margin expansion that we saw this past year, we expect that to continue. We feel really good. Jay Sole: Got it. Okay. Thank you so much. Michelle Gass: Thanks, Jay. Operator: Thank you. Our next question comes from the line of Bob Durbel of BTIG. Please go ahead, Bob. Bob Durbel: Hi. Good afternoon. Congratulations on a nice quarter. I guess, was wondering if you could focus in on Europe a little bit more. Either country trends or the blue tab business have a big impact and those results over there? Looks pretty good. Thanks. Harmit Singh: Thanks, Bob. So first, a big shout out to the Europe team. You know, they had a phenomenal year. They were up in the mid-single digit. The strength in Europe for the quarter was up 10%. End of the year really strong. And entering '26 with momentum. The strength was you know, evident. I talked about UK and Germany, my remarks being up double digit. But you think about the channels, both channels are up wholesale actually led the way with 13% growth. Growth and you look at the other markets, Bob, most markets grew in Europe again, very strong holiday. The team in Europe does a great job executing against the strategies. You know, women's was up 10. Men's was up nine. As an example. And then e-commerce was up, you know, in a big time. So overall, really strong results. It translated you know, driving growth is one thing, but it's important as the growth translates to profitability, and it translated with operating margins up 380 basis points. So let's think forward. 26 with you know, we are signaling Europe growth mid-single digit. And you think of the prebook, which is the first sign of you know, how the wholesale customer will shop. Our prebook is up mid-single digit. So I think that's just, you know, just thinking about Europe for '26 and, you know, what drove 25. Bob Durbel: Great. Thank you. Michelle Gass: Thanks, Bob. Okay. And on BluTab, do you wanna take a question? No. Happy to talk. So Blue tab is clearly a global opportunity for us. So yes, in Europe, but across the globe. And we're really excited about this because we think this presents a new business for us. The premium category is largely untapped for us. It's sizable. It's growing, and we're significantly underpenetrated. So early signs for BluTab are very positive. We just rolled it out early early in 2025, and it is the pinnacle expression of our brand. Very elevated, you know, commanding price points for bottoms for $200 to $350. Truckers, $250 to $400 the list goes on. And we're early in the early stages, we're testing, we're learning, we're scaling, but it is showing that the consumer is responding and that we have permission to play in this elevated premium market. And, you know, we have we've also had green shoots through the collaborations that we've done for a long time, which have commanded those really elevated price points. But now we're really going to lean in. It isn't going to be you know, these in and out collaborations. We see it as an ongoing business, that not only will represent a commercial opportunity, but it's a great halo to the entire line. So I think more to come, but you know, we're bullish on really getting into this premium category. Bob Durbel: Good luck. Thank you, Michelle. Michelle Gass: Thanks, Bob. Operator: Thank you. Next question comes from the line of Oliver Chen of TD Cohen. Please go ahead, Oliver. Gabriela Gar: Hi. This is Gabriela Gar on for Oliver. Thanks for taking our question. We think to hear a little bit more about any improvements that you're seeing within supply chain and progress that you're making on shortening go to market within your products I know you mentioned AI being an efficiency driver within the corporate setting, but would love to hear any additional color on supply chain. Thank you. Michelle Gass: Why don't why don't Harmit and I both take this one? Let me talk about kind of end-to-end chain as it relates to product development. And I think Harmit can speak to our distribution transformation. So, as you know, we've been on this journey as we pivot to become a DTC retailer to shorten our timelines, drive global consistency, etcetera, and we're making good progress. We've taken a few months out of our end-to-end lead time, so we've shortened that. From, you know, what was sixteen, seventeen months down to fourteen months. We're now focused on creating different tracks of products. So for example, in tops, we're going after shorter cycle times, looking at vendors who are closer to the point of distribution, etcetera. We have a new head of supply chain, Chris Caliari, who comes with deep experience in vertical retail and has a very, you know, very strong strategy to go after those opportunities. So that's point number one. Point number two, a key enabler to that is driving greater global consistency. So what used to be we've always developed our products here in San Francisco, but it was more kind of a bottoms-up approach. Now what we've seen is really more of a top I'll say tops down, but having a globally directed line. For perspective, back in like twenty-three early twenty-four, our globally directed line was about 20%, we're now 50%. On our way to 70%. And with that, it clearly drives a lot of efficiency. So over time you'll see that show up in, you know, an inventory turn and sell-through and productivity, and also it allows us to really get behind those big bets from a marketing standpoint and leverage our resources. So the second and then the third piece somewhat related is we continue to be really focused on reducing our SKU count. And we are we are still ranging in the reduction of about 20%, 25%. Again, all of these things will help enable margin accretion over time. Harmit Singh: Yeah. And on the Gabriela, to the question on distribution, just by context, you know, two years ago, we began remapping both US and distribution network. To a more hybrid automated omnichannel model largely done with the intent to support our long-term growth. And ensure we meet growing consumer demand. Europe, as I mentioned in my script, is fully transitioned, and we're seeing clear top line and bottom line opportunities. In the US, the ramp-up has taken a little longer than we expected. And so we supplemented this by ensuring that one of our own facilities stayed open a little longer, as well as increase the manual operation because to be honest, the demand outstripped our expectations given the wonderful product that we have and, you know, we have introduced in the marketplace. We brought in distribution experts into our organization. Helping us complete the transformation. We're working with our third-party leading logistic partners, you know, and so we're confident of completing this by the end of the year. And as you saw from the Europe numbers, you know, when it is complete, it does make a big difference to top line and bottom line. Gabriela Gar: Thank you. Thank you, both. Operator: Thank you. Rick Patel of Raymond James. Your question, please, Rick. Rick Patel: Thank you. Good afternoon, and congrats on wrapping up a strong year. Related to the new DC. So we wanted to double click on the delays you provide additional color there? And what gives you confidence it will come online in the back half? And then as we think about the SG&A impact, what's the right way to think about the impact that DC will have as we think about the transitory cost in the first half versus what should be a sizable opportunity to drive leverage from efficiency in the back half? Harmit Singh: Yeah, sure. Thanks for asking the What gives us confidence is a couple of things. One, we've got a great team on our side and a great team with our third-party logistic partners. Working together to try and solve it and do it in a way that we are able to meet consumer demand while setting ourselves for the long term. So that's fact number one. Fact number two is you know, I mean, this is a daily, if not a weekly, discussion. And Michelle and I and the top teams, you know, management teams on the other side are directly in conversation. And the other only proof point I would have there is we've seen it happen in Europe. There's no reason why it shouldn't happen. In the US. So that's addressing your question to the question on SG&A. Know, our focus on SG&A has risen to an all-time high within the company. I think you can ask the entire management team in the company, they'll say, this is a group that really wants to drive more leverage. And the best way to explain this Rick, is to say, let's convert a higher percentage of our growth, our gross profit dollars into EBIT dollar. You know, what gives us confidence in 2026 is a few things. One, you know, a higher volume, four to 5% organic or five to 6% reported. Should leverage. Second is, I think, Jay, you asked the question about DTC product. Productivity. You know, again, a mid to bust, higher DTC doesn't mean lower EBIT margin. So you think about last year, our DTC margins were up 300 basis points. So EBIT margins were up. We've got plans to grow DTC margins even in 2020. In 2026. The other thing is have limited headcount increases. And the way we're doing it so that we manage growth with resources is really leverage the user AI and we've got global talent hub. Which is centered around the world across all functions. Where we're leveraging talent. And that should help us you know, offset some of the cost increases. And your question about distribution cost we feel the parallel running of the DC that pressure eases by the first half of the year. So you start seeing some of the benefit in the second half of the year, and you see that in the P&L. And overall, our SG&A rate as a percentage of revenue, which we have always said will be around 50%, we think in '26 will be lower than that. Rick Patel: Very helpful. Thank you. Harmit Singh: Thanks. Operator: Thank you. Our next question comes from the line of Tracy Kogan of Citi. Your question, Tracy. Paul Lejuez: Hey. It's actually Paul Lejuez from Citi. Hey, Paul. You mentioned you mentioned several rounds of price increases I was wondering if you could just talk about where those are happening and the magnitude and maybe tie that into your assumptions for growth by geography in F twenty-six as you think about the breakdown between price versus units in each of the three geographies you mentioned? Michelle Gass: Sure. Paul, I'll take that one. So, yeah, as we talked about earlier, we are taking, call it, thoughtful, targeted pricing actions. As part of our tariff mitigation. And that's largely happening in the US, although as ordinary course of business, we do take pricing around the world as we mitigate things like inflation and the like. But, you know, our focus for the most part was here in the US. I will say we have not seen any consumer or customer reaction to date, which I think is a testament to the strength of the business and the momentum we have and the consumer responding to our product or marketing efforts. And I would say that we have pricing power given how strong the brand is right now, the market share gain, so, you know, where it's appropriate, especially in our higher higher tiered and newness innovation, we're leveraging that pricing power. While at the same time taking more modest pricing and being very diligent on, call it, those tier three lower priced entry-level prices. So the teams, you know, we have more data and more sophisticated models than we've ever had leveraging AI as a matter of fact. Informed by market analyses, demand elasticity, and, like I said, being very targeted on how we took that pricing. We took some last year fairly modestly. We have more and that was mostly from a to to the to our customers. Now from a consumer-facing standpoint, we do have pricing going in. Both in DTC and in wholesale in February. We'll be staying really close, but again, we have confidence as we head into 2026. And to your point on AUR versus units, we're expecting like we saw this last year, we're expecting both to grow in the coming year. Paul Lejuez: And so is there is there any difference by geography in terms of the AUR versus units? Would imagine with with the US, price increases or don't. Harmit Singh: We don't necessarily guide at that level by geography, but the fact that we're expanding TAM and we're really focused on driving higher units per transaction. Which means that know, we are saying, you come in to buy a denim bottom or non-denim bottom there is now a great top available for you. That should drive units. Around the world. Paul Lejuez: Thanks, guys. Good luck. Harmit Singh: Thanks, guys. Operator: Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs. Your line is open, Brooke. Brooke Roach: Good afternoon, and thank you for taking my question. Harmit, Michelle, I was hoping we could drill down a little bit deeper into your growth assumptions for the Americas business in 2026. It sounds like you have some strong momentum in DTC. You're taking a little bit of price. You sound pretty positive on units. But the growth would suggest that things are a little bit more challenged there. I think you mentioned that US wholesale is going to go through a bit of a rationalization this year. Can you help us understand what what's happening there? And where the opportunity for upside is in your Americas business this year? Thank you. Harmit Singh: Sure. So, Brooke, overall, the US grew the you know, in '25 by 4%. DTC, you know, was the standout. You know, growing 6%. But wholesale also grew you know, in the year. I think in the quarter, the, you know, US was flat. That is largely driven by, you know, as I mentioned in the call, two factors. One was we were lapping you know, a high sale in '24 from a large digital customer that was just timing. And the capacity constraints on the DC. And if you if you, you know, exclude that, or you, you know, adjust for the impact of that, in the quarter, US and US wholesale would would have been uploaded mid-single digits. So US has had a great year. To your question about next year, you know, our expectation is the US grows low to mid-single digit. Wholesale globally, our view is, you know, flat to slightly up. That's largely driven by the rationalization of some nonstrategic accounts in the US. I mean, you know, as we you know, focus on elevating the brand, and, you know, taking this business to the next level. Our view on wholesale is that it's an important channel for us, in fact, key channel allows us to reach a lot of fans. And, you know, the broader assortment that Michelle referred to in her prepared remarks. Etcetera, as a resonate with the consumer and DTC, we're able to take to wholesale. And I think that should drive growth over time. Operator: Thank you. Our next question comes from the line of Tom Nikic of Needham. Your line is open, Tom. Tom Nikic: Hi. Hey, everyone. Thanks, John. Want to follow-up on Brooke's question there. Recognizing that there's the headwinds from some of the wholesale rationalization in the US, I'm just wondering what the business looks like in your strategic wholesale accounts in the US, how have sell-through rates been, you know, how how how will the order book shaking shaking out, you know, etcetera, just, you know, what what does it look like among the strategic accounts in the US? Michelle Gass: You bet. Tom, I'll take that one. Thanks for the question. First, I think it's important to reiterate that we believe in the wholesale channel. You know, this is really an and story versus an or. Yes, DTC, we expect to continue to outperform, but over the long term, we expect wholesale to be slightly positive over time. You know, we've guided about flat for next year, and I think we're guiding that despite the fact. That we are rationalizing in some nonstrategic accounts, things like, I would say, the grocery channel that we're we show up in today in the US. So I think it's a good thing for the brand and again we're driving to flat even despite some of these account decisions. As it relates to our core strategics, I think the partnership are really strong. These accounts are embracing denim lifestyle. Tops, men's and women's, I mean really Levi's getting into the top category. In wholesale in a meaningful way is a new step forward for us. Women's accounts have really embraced our women's strategy and you'll see that in key accounts where they've expanded the footprint. In some cases, we've expanded doors. And then this head-to-toe denim lifestyle getting into new categories like skirts, dresses, etc. So we really do see it as a compliment, and I think one of the really great things is that in DTC, we can launch products first and they get to see the results and then we can take them to wholesale. And we've seen that model play out. One of our big hits of the year was the Cinch Baggy and that took off both in DTC and in wholesale. As we look ahead, you know, around the world, for example, you know, we had positive growth in Europe even in the quarter. We the the order books are positive for next year. Latin America, again, for the quarter. So net net, I think it's a really good story as we've expanded our addressable market to expand these categories. And let's not forget, even in Q4, from a total business standpoint, grew market share in men's, women's, that youth target. I'll wrap it up by saying, you know, we're bullish across all channels and there's so much opportunity for Levi's in our core denim bottoms business and head-to-toe lifestyle. Tom Nikic: Great to hear. Thanks very much, Michelle, and best of luck this year. Michelle Gass: Thank you. Harmit Singh: Thanks. Thanks, everyone, for joining the call, and we look forward to talking to you next quarter. Operator: Thank you. This concludes today's conference call. Please disconnect your lines at this time. Have a great day.
Operator: Good day and thank you for standing by. Welcome to the First Quarter 2026 FICO Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand it over to your first speaker today, Dave Singleton. Please go ahead. Dave Singleton: Good afternoon and thank you for attending FICO's first quarter earnings call. I'm Dave Singleton, Vice President of Investor Relations. I'm joined today by our CEO, Will Lansing; and our CFO, Steve Weber. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter to facilitate an understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the company's website at fico.com or on the SEC's website at sec.gov. A replay of this webcast will be available through January 28, 2027. We have refreshed our quarterly investor presentation with additional content, which is available in the Investor Relations section of our website. We will refer to this presentation during today's earnings announcement. I will now turn the call over to our CEO, Will Lansing. William Lansing: Thanks, Dave, and thank you, everyone, for joining us for our first quarter earnings call. We had another strong quarter and are reiterating our fiscal 2026 guidance. We reported Q1 revenues of $512 million, up 16% over last year, as you can see on Page 5 of our investor presentation. For the quarter, we reported $158 million in GAAP net income in the quarter, up 4% and GAAP earnings of $6.61 per share, up 8% from the prior year. We reported $176 million in non-GAAP net income, up 22% and non-GAAP earnings of $7.33 per share, up 27% from the prior year. We delivered free cash flow of $165 million in our first quarter. Over the last 4 quarters, we delivered $718 million in free cash flow, an increase of 7% year-over-year. We continue to return capital to our shareholders through buybacks by repurchasing 95,000 shares in Q1 at an average price of $1,707 per share. At the segment level, on Page 6, you can see our first quarter Scores segment revenues were $305 million. That's up 29% versus the prior year. While B2B Scores were the key driver of growth, we also saw continued growth in B2C Scores. In our Software segment, we delivered $207 million in Q1 revenues. That's up 2% over last year. Results included 37% platform revenue growth and a 13% decline in non-platform revenue. Steve will provide additional revenue details later in the call. We had another strong execution quarter in our Scores business, which we highlight on Page 8. The FICO Mortgage Direct Licensing Program allows resellers the ability to streamline Score access, enhance price transparency and provide cost savings to lenders through reduced breakage fees. This quarter, we announced the addition of 4 new strategic reseller participants to the FICO Mortgage Direct Licensing Program, Xactus, Cotality, Ascend Companies and CIC Credit. Additionally, we signed a DLP agreement to add another participant, MeridianLink, a key platform provider to the mortgage industry. We'll be releasing a press release on that soon. With strong demand from lenders, FICO is actively working alongside participants to support testing. One large reseller is close to completing production integration testing. Another large reseller has completed that testing and is now testing system integration downstream. While we expect to go live soon with multiple partners, we also continue to work on finalizing agreements with additional reseller participants. The direct license program currently supports classic FICO. While the conforming market is anticipating the general availability of FICO Score 10T, we expect FICO Score 10T to be available for Direct Licensing in both conforming and nonconforming in the first half of calendar '26. A high-level overview of the Direct License Program and FICO Score 10T can be found on Page 9 and 10 of our presentation. FICO Score 10T is a meaningful step forward in credit risk assessment. FICO Score 10T offers significant improvements in predictive accuracy, combined with a focus on fairness and model stability, offering tremendous benefits for lenders, investors and borrowers compared to other alternatives on the market. In the last year, we have nearly doubled the number of lenders in our FICO Score 10T Adopter Program. These lenders account for more than $377 billion in annual originations and more than $1.6 trillion in eligible servicing volume, most making multiyear commitments to use the FICO Score for mortgage decisions in both the conforming and nonconforming markets. This quarter, we also announced a strategic partnership with Plaid to deliver the next generation of UltraFICO Score. This score combines the proven reliability of the FICO Score with real-time cash flow data from Plaid to provide lenders with a single enhanced credit score that delivers superior consumer risk assessment without operational complexity. The enhanced UltraFICO Score solution is credit bureau agnostic and will leverage cash flow data, historical and current information about the money flowing into and out of a consumer's transaction accounts, that's checking, savings, money market, accessed through Plaid's open finance network of consumer permission data. Plaid powers nearly 1 million secure financial connections each day and has helped more than half of Americans with a bank account securely move more of their financial life online. We see growing demand for this score, which will launch for distribution with Plaid in the first half of calendar 2026. Within the quarter, we continued to expand adoption of FICO Score Mortgage Simulator by partnering with SharperLending Solutions, Credit Interlink and Ascend Partners. Including Xactus and MeridianLink announced in fiscal 2025, 5 resellers have adopted the Simulator, and we're expecting another large reseller to sign shortly. The FICO Score mortgage simulator is the only simulation tool available to mortgage professionals that use the FICO Score algorithm. It enables mortgage professionals to run credit event scenarios by applying mock changes in an applicant's credit report data to simulate potential changes to the applicant's FICO Score. The FICO Score Mortgage Simulator supports simulations on all 3 credit bureaus and models potential changes to several FICO Score versions used in mortgage lending. Mortgage professionals can leverage valuable insight from the simulator to help drive smarter decisions that can present more loan options and favorable interest rates for customers. In our software business, we're thrilled to be recognized by Gartner as a leader in the January 2026 Gartner Magic Quadrant for Decision Intelligence Platforms. We are positioned the highest for our ability to execute. We believe this recognition is a landmark moment for FICO. Further, we feel it reflects our commitments to empowering customers and delivering lasting impact worldwide. As a market leader in Decision Intelligence, FICO enables businesses to make real-time decisions at scale. The core of our strategy is to empower customers with always-on, real-time customer insights that deliver connected decisions and continuous learning throughout the entire customer life cycle. Our innovations will be on display at FICO World 2026, which is going to happen May 19 through 22 in Orlando, Florida. FICO World brings together customers and partners from around the world, allowing participants to collaborate on how FICO platform makes real-time decisions at scale to optimize interactions with consumers. At FICO, we're obsessed with powering consumer connections and delivering always-on personalized experiences to drive outsized business outcomes. At FICO World '26, you can network with the world's leading experts to learn how you can power your organization, apply best practices in advanced platform decisioning and drive financial inclusion. I'm going to now hand it over to Steve to provide further financial details. Steven Weber: Thanks, and good afternoon, everyone. As Will mentioned, our Scores segment revenues for the quarter were $305 million, up 29% from the prior year. As shown on Page 13 of our presentation, B2B revenues were up 36%, primarily attributable to higher mortgage origination Scores unit price and an increase of volume in mortgage originations. Our B2C revenues were up 5% versus the prior year, driven mainly by our indirect channel partners. First quarter mortgage originations revenues were up 60% versus the prior year. Mortgage originations revenues accounted for 51% of B2B revenue and 42% of total Scores revenue. Auto originations revenues were up 21%, while credit card, personal loan and other originations revenues were up 10% versus the prior year. For your reference, Page 14 of our presentation provides 5-quarter trending on all of our Scores metrics. Turning to our software segment. Our software ACV bookings for the quarter were a record of $38 million, as shown on Page 15 of the presentation. This quarter included an above-average sized international multi-use case platform deal. On a trailing 12-month basis, ACV bookings reached $119 million this quarter, an increase of 36% from the same period last year. Our strong bookings in recent quarters gives us increased confidence that our ARR growth will continue to accelerate in FY '26. Our total software ARR, as shown on Page 16, was $766 million, a 5% increase over the prior year. Platform ARR was $303 million, representing 40% of our total Q1 '26 ARR. Platform ARR grew 33% versus the prior year, while non-platform declined 8% to $463 million this quarter. Platform ARR was driven by both new customer wins as well as expanded use cases and volumes from existing customers. We also migrated our non-platform LiquidCredit solution to the platform. Excluding that LiquidCredit migration, our platform ARR growth was in the high 20% range. The non-platform year-over-year ARR decline was driven primarily by migrations, the end of life of a legacy authentication suite solution and some usage declines. In our CCS business, ARR growth was relatively flat. Our dollar-based net retention rate in the quarter was 103%, platform NRR was 122%, while our non-platform NRR was 91%. Platform NRR was driven by a combination of new use cases and increased usage of existing use cases. We now have over 150 customers on FICO platform with more than half leveraging FICO platform for multiple use cases. First quarter software segment revenues detailed on Page 17 were $207 million, up 2% from the prior year. Within the segment, our SaaS revenues grew 12%, driven by FICO Platform. Our on-premises revenues declined 12%, primarily driven by lower point-in-time revenues. Year-over-year, our platform revenues grew 37% and our non-platform revenues declined 13%. As a reminder, our FY '26 revenue guidance reflects an expectation of lower point-in-time revenues throughout FY '26 due to fewer non-platform license renewal opportunities compared to the prior year. From a regional lens, 88% of total company revenues this quarter were derived from our Americas region, which is a combination of our North America and Latin America regions. Our EMEA region generated 8% of revenues and the Asia Pacific region delivered 4%. Operating expenses for the quarter, as shown on Page 18, were $278 million this quarter versus $279 million in the prior quarter, which included $10.9 million in restructuring charges. Excluding restructuring, expenses grew 4% quarter-over-quarter, driven primarily by personnel expenses. We expect operating expense dollars to continue to trend upward modestly throughout the fiscal year. Our non-GAAP operating margin, as shown on Page 19, was 54% for the quarter compared with 50% in the same quarter last year, which means we delivered year-over-year non-GAAP operating margin expansion of 432 basis points. The effective tax rate for the quarter was 17.5%. The operating tax rate was 25.7%. The primary difference between operating tax rate and net effective tax rate for the quarter is $15.7 million in excess tax benefit recognized upon the settlement or exercise of employee stock awards. We continue to expect a full year net effective tax rate of 24% and an operating tax rate of 25%. At the end of the quarter, we had $218 million in cash and marketable investments. Our total debt at quarter end was $3.2 billion with a weighted average interest rate of 5.22%. As of December 31, 2025, 87% of our debt was held in senior notes with no term loans. We had $415 million balance on our revolving line of credit, which is repayable at any time. As Will highlighted, we continue to return capital to our shareholders through buybacks, as shown on Page 20. In Q1, we repurchased 95,000 shares for a total cost of $163 million, and we continue to view share repurchases as an attractive use of cash. And with that, I'll turn it back to Will for his closing comments. William Lansing: Thanks, Steve. We had a great start to the year and are well positioned to exceed our fiscal year guidance. As in prior years, we will revisit our guidance on our Q2 earnings call. In our software business, we're seeing growth in bookings and ARR, reflecting the value of our innovation in the market. Since FICO World 2025, we achieved general availability of FICO Marketplace and FICO Focused Foundation Model. Our next-generation FICO platform and Enterprise Fraud Solution on FICO platform will soon be generally available. I'm excited to see our innovation realized in the market and delighting our customers. In our Scores business, our innovations are driving increased engagement from market participants. There's continued participant adoption of our FICO Mortgage Direct Licensing Program. Outside of conforming mortgages, there's continued adoption for FICO Score 10T. We see adoption of FICO Score Mortgage Simulator throughout the mortgage industry. The FICO Score continues to be the trusted industry standard used by 90% of top U.S. lenders as the standard measure of consumer credit risk in the U.S. With that, let me turn this over to Dave to open up the Q&A session. Dave Singleton: Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines. Operator: [Operator Instructions] Our first question will come from the line of Manav Patnaik from Barclays. Manav Patnaik: I just wanted to touch on the 10T. Again, that slide you had was really helpful. But right before earnings, you had this press release with LoanPASS and the data sharing and the back testing and stuff that can be done. I was just hoping you could help us appreciate the significance of that and any sense of timing around when 10T officially gets approved and used, et cetera? Steven Weber: Yes. Thanks, Manav. I think we're continuing to see a lot of adoption on the nonconforming side and on the conforming side with the agencies, they're still doing a lot of testing. We don't really have a time line. They haven't published any kind of a time line yet. So at this point, we really don't know when it will be generally available. Manav Patnaik: Okay. Got it. And then maybe just on the performance model adoption. I was just wondering if you could give us any early signs or based on your discussions, how you think that's going? Is that going to be available through the credit bureau channel as well? William Lansing: The performance model right now is planned for the Direct License Program, and it's going well. We have a lot of interest, and we're busy working towards bringing the direct channel live. Manav Patnaik: Okay. Fair enough. Maybe just -- sorry, if I can squeeze one more in, Steve. Just it was a good quarter. You maintained the guide. I know that's practice, but maybe you could just help us appreciate why there was no raise to the guide this time. Steven Weber: Yes. Thanks, Manav. It's a good question. We're pretty confident we're going to be able to beat our guidance. I know we talked about it was pretty conservative last quarter. At this point, we're only 3 months in. There's just a lot of questions out in the macro environment. I mean, with the Fed today, it's just -- frankly, we don't probably know what numbers we would move to. So I think by next quarter, we'll have a much better idea of what the world looks like and what overall volumes are going to look like. So I think that was our thinking behind that. Operator: Our next question will come from the line of Jason Haas from Wells Fargo. Jason Haas: I'm curious if you had any sense of what the time line looks like for the release of the LLPA grids and if you had any insight as to what those might look like? William Lansing: Well, the short answer to that is no. I don't think anyone knows what the time line for the LLPA grids looks like. And as we've discussed in the past, there are tremendous challenges with figuring out how to make those work because of the gaming and adverse selection issues. And so no one knows what the time line really looks like. Certainly, we don't. But I think that we have some significant problems that have to be overcome before they can be released. Jason Haas: Got it. That's very helpful. And then as a follow-up, we've heard, I guess, 2 concerns around -- from lenders regarding FICO Direct and the performance model. One is that for FICO Direct, there's a concern that the resellers, I guess, could improperly calculate the Scores and aren't taking, I guess, legal responsibility for it. So I think there's been some hesitancy from lenders. So I was curious if you could address that. And then on the performance model, I believe some lenders are concerned about how the regulators might view passing on that performance fee to the end consumer. So curious if you could comment on those 2 hang-ups that may be out there. William Lansing: Yes. I think that there -- that's a misplaced, misguided concern. The Scores calculated by the resellers in the Direct License Program will be the same Scores that are calculated by the bureaus today. It's the same algorithm and the same technology to do it. Same data is being used. And so I think that the -- any kind of concern about miscalculation or differences in Scores is misplaced. That said, I can tell you that we are in the midst of making sure that all the testing gives everyone every confidence that, that's not an issue. And then in terms of the regulators, they also are looking at it to get comfortable with that, and that's proceeding at pace. Operator: Our next question will come from the line of Ashish Sabadra from RBC. Ashish Sabadra: It's good to see that momentum in the Direct License Program with 5 resellers signed. You talked about them being in advanced stages of implementation. I was just wondering if you had some time lines around when they would go live. And then at least when we've done checks with brokers, they are not aware of the performance model as yet. So when do we start to see that get communicated to the mortgage brokers and the industry in general, much more -- yes, much better communicated. William Lansing: On time line, I wish I could help you. I wish that we knew what the time line was. But this is the mortgage market, and we don't do anything without having everything extremely buttoned up. And so we are working through all the integration testing and all the downstream impacts. And you can be assured that when it does go live, it will go live without a hiccup. But we're well on our way. I just can't give you -- I can't give you a time line. Ashish Sabadra: No, that's completely understandable. William Lansing: Well, so the performance model -- first of all, the performance model is optional, okay? No one's being forced to take the performance model. So anyone who doesn't like it, doesn't have to use it. They can just pay per score per unit as they always have. So we introduced the performance model as an option to provide more flexibility for some originators, for some lenders who prefer that approach. And so people who don't like it, it's a little hard to understand what the problem is, they don't have to use it. They can just go with a per unit price. Ashish Sabadra: That's helpful color. Maybe if I can just clarify that your revenue model is agnostic irrespective of whether the customers adopt performance or per score model. Is that right? Steven Weber: It relatively agnostic. William Lansing: Well, nothing is ever truly agnostic, but it's set up to basically be relatively agnostic. Operator: Next question will come from the line of Surinder Thind from Jefferies. Surinder Thind: I'm going to switch over to the software business. Some interesting improvements there to think about. Can you maybe talk about the target of the 500 named accounts globally? You broke that into 350 in financial services and 150 outside. So how does this kind of compare to your prior strategy under the Gen 1 platform? And how aggressively do you think you can reach those customers? And how much of this is a push to specifically go outside and expand beyond the financial institutions at this point? Are we kind of entering this Phase 2 approach with the Gen 2 platform? William Lansing: I think we're in the beginning of that Phase 2. Look, we are very heavy in financial services, have been historically. We'll continue to be, let's be realistic about this. That said, the platform is very much designed to be horizontal and is highly appealing to other verticals. And so we're getting a lot of traction in telco and in other verticals. Further, we're really committed to our partner program and going -- taking our IP to market through systems integrators and other providers. And I think that's going to be the way we wind up expanding to other verticals. Our marketplace is designed to be able to do that. Our next-gen platform is designed to be able to do that. And so we're still very interested in broadening our reach, but our direct selling efforts are still primarily focused on financial services. Surinder Thind: Got it. And just quickly, how many named accounts do you have right now in financial services? Dave Singleton: No, we don't disclose it. William Lansing: We don't. Okay. Sorry. But I mean, it's an arbitrary number. We can name any we want [Technical Difficulty] what number would you like it to be? Surinder Thind: Sure. It was just an attempt to kind of better understand the new customers you haven't approached yet. It was just ballpark, but that's... William Lansing: Understood. Look, I think there's -- I think the general answer to that is there's several hundred to go. Surinder Thind: Got it. Okay. That's helpful. And then as a follow-up here, if we back out kind of the international multiyear deal here, still solid growth in the ARR, but there's also a divergence. You guys did list the reasons why between platform ARR growth and non-platform. But is the idea that we're beginning to also see customers that ultimately want to move from non-platform to platform. And so we should begin to see a sustained discrepancy in the ARR numbers? Steven Weber: Yes. I mean, gradually, over time, we're looking to migrate everyone, right? It's a lot more efficient to be on the platform, and we've said that for a long time. So there'll be a lot of efficiencies to be gained from that. We haven't done a lot of that in the past, but we're getting to the point now where we can. So you're going to see more and more of that. But you're also seeing just a lot more sales. I mean even the big deal we had this quarter had very little ARR impact this quarter, but it will have a much bigger impact next quarter. So if you look at the rolling trend of ACV bookings, it's grown dramatically. And we think there's still a lot more of that to come this year, and that's going to drive more ARR growth. So we've got a lot of land activity happening, and we've got a lot more expand. So the -- if you look at the platform, the net retention rate goes up. They find new use cases; they expand into other areas. So there's just a lot of different areas we can grow in that business. William Lansing: This is a classic software business problem. We, as a provider, would love to have everybody on a single code base. It would be really nice and easy to run it that way. And yet we have more legacy code that's still highly profitable. We have customers who are really committed to using it and want to continue to use it. And so we wind up in this position where we have to make proactive decisions about what legacy solutions we're going to continue to support and which ones we're going to force migration on. And the biggest factor in thinking that through is can we provide full features and functionality of the legacy solution on the new platform before we force a change through an end-of-life initiative. And so far, we've been pretty successful with that. I mean we -- our classic business, our historical legacy business runs just fine and is profitable. And as the new platform, the next-gen platform has the features and functionality that frankly, is superior to what you find in the legacy solutions, we're going to see voluntary migration. We'll see some forced migration and then we'll see some end of life. Operator: Our next question will come from the line of Jeff Meuler from Baird. Jeffrey Meuler: So everyone is obviously awaiting the LLPAs, the market and investors. I just -- any education process or caveats you'd volunteer to kind of like help investors interpret how to compare the LLPAs under Vantage to FICO. I'm thinking things like for the same consumer, what's the delta between FICO and Vantage on average or anything like that? And then just -- I know it's a finger in the air assumption to say that the grids may be at parity. But just remind us, if the grids do appear to be at parity, what do you view as the key barriers to potential switching? William Lansing: I think it's unlikely that grids will be a parity, but let's hold that one and just talk a little bit about your first -- the first part of your question, which is differences in the score. Our research suggests that the FICO Score and the VantageScore are more than 20 points different 30% of the time in both directions. It's not consistently in one direction, which means that it's very, very hard to just substitute one score for another, a VantageScore for a FICO Score. You really have to have a completely independent separate system to run a score that just has different odds to score ratio for every 3-digit number. And so I think -- and I think that's one of the big challenges with developing the LLPA grids. How are you going to reconcile all that? And then you kind of go beyond that to assuming you had separate LLPA grids, and you somehow figured out how to do that. You still have all the gaming problems that go with that and the adverse selection problems that go with that. Those have to be resolved. And then finally, you have whatever objections the securitization market might have to whatever penalties they might impose on Vantage scored paper versus FICO scored paper. So there's -- I think there are significant problems to be overcome. Jeffrey Meuler: Got it. And then just to reconcile something, I thought that you said in your prepared remarks that 10T was going to be available for both the conforming and nonconforming market in the first half of calendar '26. And then in answering one of the earlier questions, I think Steve said you're not sure when 10T is going to be available. William Lansing: No. So one is a guess and one, it is true that we're not sure. So the FICO 10T data is with the GSEs, is with the FHFA, and we can't give you a time line, but we're confident it will eventually be released. Steven Weber: Well... Dave Singleton: Jeff, those are 2 different comments just to clarify. The nonconforming and conforming is around having FICO 10T available on the Direct Licensing Program. And the comment Steve talked about was having FICO 10T available for the data for the market. Does that make sense, what I said? Jeffrey Meuler: Yes. Operator: Our next question comes from the line of Faiza Alwy from Deutsche Bank. Faiza Alwy: So sorry to beat a dead horse here, but I guess just to clarify, do we need like an LLPA grid for 10T? Or do you think the conforming market could accept the 10T without that grid being out? William Lansing: That's a great question, whether there'd be adjustment to the grid. 10T is obviously much, much closer to FICO Classic than Vantage is. But my guess is when 10T is made available that there'll be adjustment to the grid for that. Faiza Alwy: Okay. And just a quick follow-up. Do you think the timing -- I understand all of the issues that you've talked about, but are you expecting that the 10T and Vantage grids would come out at the same time and like the acceptability is good or the implementation is going to be around the same time? Or do you think it could happen in stages? William Lansing: Certainly, the industry would like them to come out at the same time. There's a lot of efficiency in that. And you probably saw the letter sent to the director at the FHFA this past week from 35 economists and think tanks and industry groups who all believe that it's critical that if and when any change is made away from FICO Classic that it would be done simultaneously to both FICO 10T and Vantage. So the industry has a preference for that. What the FHFA will ultimately do, no one knows. So we'll have to see. To the earlier point about FICO 10T and LLPA grids for FICO 10T, I would point out that FICO 10T is architecturally very similar to FICO Classic. It's built on the same kinds of attributes weighted in a similar way. That's very different from Vantage. Vantage has a different architecture and weights the factors differently. And so in terms of compatibility and closeness, FICO 10T is much, much closer to FICO Classic. Dave Singleton: And don't confuse that with predictability where FICO 10T is significantly more predictive than FICO Classic. Faiza Alwy: Understood. That's very helpful. And then I wanted to ask about your mortgage revenue growth, we saw a nice acceleration this quarter relative to what we've been seeing. And I'm just curious, is that -- are you just benefiting from maybe higher refi activity? I know you don't disclose volumes, but just directionally, like was its volume growth that was higher... William Lansing: It's all of the above. It's price -- it's all of the above. So there's some price there. There's some value there. There's some refi volume there. So all those are factors. Operator: Our next question will come from the line of Kyle Peterson from Needham. Kyle Peterson: I wanted to start out on the platform business. Obviously, a nice quarter there. I know some of that was the migration. I'm guessing some of that was the large deal. But just wanted to see, are we at a point where 30% plus ARR growth on the platform side should be sustainable again? Or I guess like how should we think about that in light of the really nice bounce back this quarter? William Lansing: Well, so Kyle, we don't make promises, but we had 40% growth in platform for 16 quarters, then we were down a couple of quarters just under 20% range. Now here we are at 30%. It does move around. The total ARR is definitely going to go up. And so -- but -- so that's the short answer to your question is ARR will go up. I think current levels are sustainable. That's not a crazy thing to think. We've got a lot of appetite for our new platform. Steven Weber: And the total ARR is going to be driven by the platform because more and more, we're seeing acceleration in platform growth. And frankly, the platform ARR is a bigger portion of the overall number now. So as that grows faster, it helps the overall number as well. So we see continued sustained significant growth in ARR for the rest of the year, which is kind of what we've been talking about for a few quarters, and now you're starting to see it. Kyle Peterson: Okay. Okay. That is helpful and good to hear. And then switching over to the card business. The origination revenue on the credit cards seems to be climbing in the right direction here in the last few quarters, which is good to see. Just -- I know it's still early, but have you guys seen any disruption or changes in activity? I know there's been some chatter around a potential 10% cap on card APR. So I guess anything you guys are seeing there? Or is it still too early to tell in terms of when you guys are delivered the usage reports? Steven Weber: We haven't seen anything. We haven't seen any changes in activity. There's been a lot of pre-qual activity in the card space and decent originations. We haven't seen any changes. Operator: Our next question will come from the line of George Tong from Goldman Sachs. Unknown Analyst: This is Sami on for George. In your discussions with the FHFA and GSEs, do you get the sense that a move from tri-merge and bi-merge is gaining traction? We saw the MBA came out with a single score proposition and also the regulators' focus has recently shifted to the bureaus. So I just wanted to get your views on it. William Lansing: Yes, there's certainly a lot of talk about it these days. The bureau position, I don't generally give the bureau position, but I think it's fair to say that the bureaus believe that tri-merge makes a lot more sense because the bureau files are not identical to one another. And if you chose 2 out of 3 files, some consumers on the margin are going to be underserved. And I think that's a fair point. That's just a fair point. Said against that, tri-merge does give the bureaus a monopoly, and that's not a great thing. So that would be an offset. I think the real challenge -- here's the real challenge with moving to bi-merge. It's the same problem that we have with lender choice. When you get to choose between 2 credit Scores or when you get to choose your favorite 2 out of 3 credit bureaus, you're going to have gaming, you're going to have adverse selection. You're going to have all of these -- all these problems occur. And there's a cost to be paid for that. That cost ultimately gets paid by Fannie and Freddie and potentially the U.S. taxpayer. And so that is the biggest problem that has to be overcome. And frankly, I don't know what kind of a solution there is to that. It's structural. Unknown Analyst: Okay. And on software, can you talk about where you are in the investment cycle? How far along are you in the platform build-out? And when should we expect the investments to normalize? William Lansing: We continue to invest in our software business. We're really bullish on it. It's growing really nicely. We do anticipate margin expansion because our new platform is built for scaling profitably. And so the improvements to profitability of our software business will come more from additional volume and additional customers on the new platform versus reduced R&D spending, which, of course, is a lever and someday it will go down. Operator: Our next question will come from the line of Alexander Hess from JPMorgan. Alexander EM Hess: Just maybe to start with the Scores business and volumes there. I saw a call out in the new slide deck, which is, by the way, excellent that you guys saw positive volumes in all 3 of your underwriting lines. Can you maybe speak to sort of volume trends in the industry overall? Are they improving? And then when you sort of turn the lens inward, how much of the improvement that you've seen to the degree that there is any, is really industry-wide versus FICO innovation led? Steven Weber: Yes, that's a good question. I mean I think it's hard to call a trend at this point. There's just a lot of uncertainty in the marketplace, again, which is one of the reasons why we've chosen not to update our guidance today. I don't think anybody really knows what's going to happen in mortgage. I think if rates continue to trend downward, we'll probably see more volumes there. Card, we already talked about there's some potential noise in that market. We'll see how real that is. But we've seen decent volumes, decent volumes throughout. I mean, not like crazy growth, but not declines either. So at least some margin, or some volume increases across the board. So that's encouraging, and we'll see if that continues. In terms of how much of that is driven by our innovation, maybe a little bit. In some cases, there are some different things that we're providing that provide some additional volumes. But most of this is the macro environment and what's happening in the auto lending industry or the mortgage or the card industry. Alexander EM Hess: Pivoting to software, you did see a nice pickup in ACV bookings. Obviously, platform NRR growth is strong. Can you maybe provide a comment on what platform features, functions, use cases are really driving that recent momentum, that would potential... William Lansing: Yes. And I'm not sure there is any particular use cases to be frank. So just a little bit of history here. We -- for many, many years, for 10s, for decades, FICO is an application software company focused on solutions to half a dozen critical bank problems having to do with the life cycle, right, risk-oriented solutions. When we move to the platform, we opened up a pretty vast set of solutions, potential solutions for banks that adopt the platform. It's no longer just decisioning around originations and customer management and fraud. So just a much, much wider set. That said, customers are coming to the platform for the basics. They come for originations. They come for customer management. We're seeing those use cases as primary use cases. But what's interesting is, particularly on the expand side, if you think about land and expand, they put in the platform and then they come up with all kinds of innovations on things they should be decisioning around that they have never done before. And so there's a lot of that. But I think it's fair to say that they come to the platform for the same kinds of risk management solutions they bought in the past. Alexander EM Hess: Maybe I can squeeze a third in. Just on the predictive power of FICO 10T, obviously, you guys have the white paper out that showed a pretty compelling predictive lift in those key cohorts. Can you -- but that was on sort of the basis of defaults, delinquencies. Can you maybe pivot that conversation to prepayments? And do you have a view on will 10T be more predictive on prepayments than rival Scores? William Lansing: I think so. And I think it's important to note that credit default rates and prepayments are related. They're sides of the same coin in some ways. So for example, I've heard people say, well, credit -- improving credit default rates doesn't really matter in the conforming market because Fannie and Freddie stand behind it. And so who cares about the credit default rates. Well, when you have a credit default, it is functionally the same as a prepayment risk for those who hold the paper. So I think 10T is going to help on both those sides. Operator: Our next question will come from the line of Ryan Griffin from BMO Capital Markets. Ryan Griffin: Just had a software question. I think you said 75 of your largest customers are using multiple use cases now. I was just wondering how that has trended over the past year or so and what's driving the land and expand momentum? William Lansing: I'm not sure I follow the question. Steven Weber: It's the land and expand. So essentially, yes, I mean, what's driving is that a lot of people bought in just to see how it would work, right? They needed to be shown that it would work. And once they get it installed, the next use case is a lot easier than the first use case. So they find more ways to use it, and they're pleased with the way it's working. So it's -- the expand piece is, I shouldn't say easy, but it's a lot easier than the land because once it's in and it's working, they look for more ways to use it. William Lansing: The expand is running at roughly the same rate as land. They're kind of neck and neck on growth rate. The expand piece really has 2 kinds -- there's 2 styles, right? One is expansion of the use cases that they started with and the second is bringing on new use cases. And our revenue goes up in both situations. Ryan Griffin: Great. And then just one more question on the volume side. I think we've all read some headlines about lenders struggling with their cost base this year. I was just wondering if you're seeing any of this from your perspective and any changes in the lender behavior that you can call out relating to your business? William Lansing: We really haven't. I mean you know how critical FICO Scores are in the system, and we really have not seen any changes. Operator: Our next question will come from the line of Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just wanted to ask one question on the software business. I mean the trends on the bookings side have been pretty positive. But you also had mentioned that the next-gen platform and I think the enterprise fraud solution are, I guess, not yet generally available, but are they helping to drive some of the bookings growth right now, pending the general availability at all? William Lansing: Not yet, not yet. All the growth you're seeing is predates the enterprise solution. Operator: Our next question will come from the line of Owen Lau from Clear Street. Owen Lau: I do want to go back to President Trump's 10% credit card interest rate cap policy question. If it is implemented, how would it potentially impact FICO? Do you think consumers will go to other form of loans, which will still need to use FICO score for underwriting? And also, could you please kind of like help us size the credit card exposure? William Lansing: In terms of will consumers look for alternate credit if the card providers provide fewer cards to deeply subprime. Your guess is good as mine, but I would assume so. And I'm not sure... Dave Singleton: The second question was the size of our credit card originations revenue, but we don't provide that. William Lansing: We don't break that out, no. Who knows whether this actually ever happens. But if it does, I think it puts that much more pressure on lenders to understand those subprime credits really, really well. And my guess is that they would be doing extra work involving FICO Scores and credit data to understand what happens on the margin. Steven Weber: And if it went to some other type of personal lending or something else that would not apply, then obviously use FICO Scores in that area. William Lansing: Does it involve a shift to BNPL or -- I mean, obviously, we'd be beneficiaries in all those scenarios. Owen Lau: Got it. That's helpful. And then going back to software, I noticed that, I mean, you mentioned that there was an above-average size multi-use case platform deal in the first quarter. Is it really a one-off deal that we shouldn't expect this to recur, or FICO platform begins to gain recognition and traction, and more similar deals could come more frequently in the future? William Lansing: It is the latter. There's no question that the deal size is going up, the frequency of it and the amounts. Steven Weber: Yes. And I would just add to that, we think the FY '26 ACV bookings are going to be significantly higher than FY '25. So we've got a lot of deals that we've already signed. We got a lot of deals in the pipeline. There's a lot of momentum here, and we're seeing it even more in bigger deals. Operator: Our next question will come from the line of Craig Huber from Huber Research Partners. Craig Huber: My first question, you made a comment earlier on that you're well positioned to well exceed guidance for fiscal 2026. Can you just talk about that a little bit further? What in your mind were you overly conservative on specifically if you're willing to talk about that? And maybe also touch on how things are going in the reseller market, mortgage market ready for these new 2 pricing plans, reseller in particular. Is that meaningfully ahead or behind or on schedule of what you originally were thinking when you first rolled this out? William Lansing: So to take those in reverse order, the Direct License Program with the resellers is on track, roughly as expected. And frankly, whether it comes a little sooner or a little later, does not have a big revenue impact on us. It's really pretty close. As we said earlier, we're not completely agnostic, but it's pretty close. It's not enough to drive a change in guidance, for example. And then as to what might have us change our guidance, it's -- presumably it would be volume. I mean the price is extremely well understood. And it's -- we publish it and it's -- that price is here for the year. And so it's really much more around volume and what happens with interest rates and that no one knows. And so we'll -- that's why we want another quarter to see how it plays out. Steven Weber: Yes. I think there's just -- like I said, there's a lot of uncertainty in the marketplace. And I think 3 months from now, we're going to have a much better idea. If we were to take a guess now, we would probably -- you'd probably still think we were being too conservative. So at this point, in 3 months, we're going to know a lot more. We'll have one more quarter under our belts, and we'll have a much better idea of how it is. We really don't want to get into the situation where we're continually updating our guidance every quarter. We have annual guidance. We try to stick to that until it's pretty clear we can move to some more meaningful estimation of what it looks like, and that's what we're doing here. Craig Huber: And then my last question, if I could. Can you just talk about pricing for calendar '26 for auto and then credit card and personal loans? I mean, is auto going to be up north of 10% again this year, for example? Steven Weber: We don't disclose the specifics of it. It's a lot more complicated in auto and card because there's different price points depending on different tiers or different types of markets. So it's a lot more complicated than that, and we don't get into the detail of that basically for competitive reasons. Operator: Your next question will come from the line of Kevin McVeigh from UBS. Kevin McVeigh: I think you mentioned in the slide deck that there was some incremental headcount investment in FICO and then increased marketing. Maybe help us understand, was that related to the reseller adoption? Or what drove those investments? William Lansing: We are investing in go-to-market across the board, both in -- on the software side and on the Scores side. And after, I would say, many years of conservatism and growing headcount and direct sales and partner sales, we've been fairly aggressive this year in expanding that headcount. So I would say that's -- it's on both sides, software as well as Scores. Kevin McVeigh: Great. And then just in terms of goalposts for the resellers actually going live, do you have any sense -- would you expect the big 5 to go live simultaneously or one sequential? Any sense of just timing on that? William Lansing: My guess is that it will not be a big bang with all of them going live at the same time. It will probably be staggered, but close in time. I mean all of the resellers we've signed with are well underway. And I think for their own benefit, they'll want to be able to offer the Direct License Program as quickly as possible. So I would expect a convergence on time line there, but I couldn't say that it's all going to happen simultaneously. Operator: And our next question will come from the line of Rayna Kumar from Oppenheimer. Rayna Kumar: Congrats on the 5 resellers. I just want some more color on that. How much of the total resellers market would you say the 5 represent just to like establish some size on these wins? William Lansing: How much of the market do those resellers represent? Rayna Kumar: Yes. William Lansing: Somewhere in the 70%, 80% range. Rayna Kumar: Got it. Okay. And just as a follow-up, on your last earnings call, you discussed some operational hurdles in having resellers move to the direct model. Can you just talk about how you're addressing some of those hurdles? William Lansing: We really don't have any operational hurdles. It's moving very smoothly. We're working our way through the details, and we're highly confident that the program will be live in the relatively near future. Operator: I'm not showing any further questions in the queue. I'd like to turn the call back over to Dave for any closing remarks. Dave Singleton: No, that's everything. We're good. Great quarter. Thank you. William Lansing: Thanks all. Operator: Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning, ladies and gentlemen. Welcome to CGI's First Quarter Fiscal 2026 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder. Kevin Linder: Thank you, Julie, and good morning. With me to discuss CGI's first quarter fiscal 2026 results are Francois Boulanger, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, January 28, 2026. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those that are expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. Now I'll turn the call over to Steve to review our Q1 financials, and then Francois will comment on our business and market outlook. Steve? Steve Perron: Thank you, Kevin, and good day, everyone. In our first quarter of fiscal 2026, we demonstrated discipline in the management of our operations while continuing to make the necessary investment guided by our AI strategy. In the quarter, we delivered $4.1 billion of revenue, up 7.7% year-over-year or up 3.4% when excluding the impact of foreign exchange. Growth was driven by our recent business acquisitions and continued demand for our APAC delivery center, with this segment reporting growth of 5.8%, mainly through delivery of managed services. In our U.K. and Australia segment with our acquisition of BJSS, growth was 31%. This acquisition is transformative to our U.K. operation, adding significant scale, and we can now showcase the breadth of CGI's end-to-end services to our new clients. In our Western and Southern Europe segment, growth was 9%, led by our acquisition of Apside, which includes engineering services. As we indicated last quarter, our U.S. operations were impacted by the federal shutdown in the quarter. The timing and related impacts were in line with what we communicated last quarter. While a sequential improvement is expected in the next quarter, our U.S. Federal segment is still operating in a very dynamic environment. Bookings in the quarter were $4.5 billion for a book-to-bill ratio of 110% led by U.S. commercial and state government at 169%; Finland, Poland and Baltics at 124%, and Scandinavia, Northwest and Central East Europe at 113%. Bookings continue to be led by our managed services at a 117% book-to-bill. SI&C book-to-bill was 100%, last reached in our first quarter of fiscal 2025. With the U.S. federal shutdown, we had previously called out that our bookings would be impacted in the quarter. This was indeed the case and excluding U.S. Federal, our teams delivered a combined book-to-bill of 118%. On a trailing 12-month basis, book-to-bill was 110% with North America at 122% and Europe at 101%. On the same basis, Managed Services had a book-to-bill ratio of 122% and the SI&C book-to-bill ratio was 96%. Our contracted backlog reached $31.3 billion or 1.9x revenue. Turning to profitability. Adjusted EBIT in the quarter was $655 million, up 7.1% year-over-year for a margin of 16.1%, down 10 basis points. In the quarter, our results were impacted by the U.S. federal shutdown and an $8 million onetime impact of past service costs related to statutory employee benefits in India due to a change of regulation. Including acquisition and related integration costs of $26 million, earnings before income taxes were $600 million for a margin of 14.7%. Our effective tax rate in the quarter was 26.3%, 40 basis points higher than last year, mainly explained by the statutory tax increase in France. We expect our tax rate for future quarters to be in the range of 26% to 27%. Adjusted net earnings were $461 million for a margin of 11.3%. On the same basis, diluted EPS was $2.12, an accretion of 8% when compared to Q1 last year. Net earnings were $442 million for a margin of 10.8% and diluted EPS was $2.03, an accretion of 6% when compared to Q1 last year. Turning to cash. We generated a strong $872 million in our cash from operations, representing 21.4% of total revenue due to the strength of our collection efforts. DSO was 37 days in the quarter, an 8-day improvement sequentially and a 1-day improvement when compared to the prior year. As a reminder, in general, our first quarter has the lowest DSO due mainly to higher levels of client prepayments or annual IT maintenance fees. In Q1, we continue to deploy our capital and invested $87 million back into the business, including strategic investment in advanced AI, $106 million on business acquisitions, $577 million to buy back our stock, and in addition, we returned $37 million to our shareholders under our dividend program. Yesterday, our Board of Directors approved the renewal of our NCIB program until February 2027 authorizing us to repurchase for cancellation up to 19 million shares over the next 12 months. At current share price levels, we expect to remain very active in our repurchase program. In addition, our Board of Directors approved a quarterly cash dividend of $0.17 per share. This dividend is payable on March 20, 2026 to shareholders of records as of the close of business on February 18, 2026. With $2.4 billion in capital resources readily available and a net debt leverage ratio of 1, CGI has a balance sheet strength and capacity to deliver on our profitable growth strategy. CGI's capital allocation priorities have remained consistent, focused on investing back in the business, pursuing accretive acquisition and share buybacks. Now I will turn the call over to Francois to further discuss insights on the quarter, the progress on our AI strategy and the outlook for our business and markets. Francois? François Boulanger: Thank you, Steve, and good morning, everyone. We started the year with positive momentum that deepen our position as one of the few firms with a local presence, global scale, capabilities and commitment to be a partner of choice for our clients, an employer of choice for our people, and an investment of choice for you, our shareholders. In Q1, we delivered year-over-year revenue growth, strong profitability and record high cash of $872 million. This further expands our capacity to fuel our Build and Buy profitable growth strategy, in line with our capital allocation priorities. The trust clients have in CGI as a partner for delivering on their priorities, including for advanced AI is evident in our results. This extends to bookings, which reached nearly $4.5 billion in the quarter, up by more than $300 million year-over-year. Plus over half of bookings were comprised of new awards and add-ons, which typically expand our delivery scope with clients. In addition, our win rate on renewals was over 95%, demonstrating the confidence clients have in CGI's ability to continuously innovate. On a trailing 12-month basis, total bookings were up 12%, reaching a high of nearly $18 billion. This was led by managed services, up 16% compared to the previous year. Systems integration and consulting bookings were also up on a sequential quarter year-over-year and trailing 12-month basis. Compared to this time last year, the Q1 SI&C wins were up by more than $360 million. From an industry perspective, all commercial segments closed a quarter with a book-to-bill above 100%, led by manufacturing, retail and distribution, which was up more than $530 million or 65% year-over-year. Representative awards in the quarter included a European-based global manufacturer, initiated a new strategic partnership with CGI to modernize critical IT services, including the integration of advanced AI solutions into their operations. A leading global luxury group in France, renewed its relationship with CGI to deliver SAP services in support of their retail and manufacturing operations. CGI will also expand the integration of AI to our IT to optimize service quality and productivity in IT management. The Swedish Board of agriculture expanded its relationship with CGI through a multiyear framework agreement, supporting the agency's digital transformation and expansion of trusted AI capabilities across systems development and operations. Highmark, a U.S. health insurer renewed and expanded its partnership with CGI to accelerate innovation in claims payment accuracy and integrity. Through the engagement, CGI will deliver a range of AI-enabled services through our ProperPay IP, which helps identify potential risk earlier, improves efficiency and reduces billing errors at scale. As shared last quarter, government sector bookings were impacted by the Q1 U.S. government shutdown. On a trailing 12-month basis, our government wins were 104% or 113% when excluding our U.S. Federal segment. Globally, the pipeline of government sector opportunities continues to increase, up 30% compared to this time last year, as agencies continue to prioritize modernization, cybersecurity and cost efficiency. Now I will summarize our progress against CGI AI strategy. Starting with embedding AI into our end-to-end services. In Q1, the rollout of our AI-enabled software delivery life cycle is improving engineering speed and quality with strong adoption of AI development assistance and advanced tooling. We are reinforcing trust and compliance through CGI's responsible use of technology framework, embedding AI risk governance directly into cells and delivery life cycles. In terms of client adoption, we continue to see an evolution from experimentation to enterprise integration. The transition is not a fast or a direct one, our success depends on strong foundation for data quality, platform modernization and governance, all of it -- all of which are strength for our team. Recent examples of AI projects include launching an Agentic AI strategy for our Canadian financial institution to guide their outcome-oriented AI adoption, delivering AI-driven application reverse engineering for U.S. federal agency to support faster monetization decisions, applying deep learning AI for a U.K. health care provider to improve IVF embryo selection and patient outcomes, implementing AI Ops at a Canadian retailer to help improve IT reliability, efficiency and cost optimization, and deploying an AI-enabled developer assistant for our U.S. utility to simplify system integrations and accelerate customer billing implementations. Recognition of CGI as a AI to ROI client partner continues to be recognized by leading industry analyst firms. For example, in Q1, CGI was positioned as a leader in the IDC MarketScape for worldwide AI services for state and local government. Moving to how we are leading with AI integrated platforms and alliances, 65% of CGI's IT solutions incorporate AI-enabled intelligent automation. Our industry-leading solutions are relied on the enabled mission-critical business operations, delivering direct value to clients every day. Our technology alliance partner program also continues to expand introducing new channels to market and growing our relationships with the hyperscalers and AI-native firms. We recently announced a multiyear agreement with Google Cloud to help clients accelerate Agentic AI outcomes with Gemini enterprise and a global go-to-market alliance with open AI to help clients deploy advanced AI capabilities securely, responsibly and at enterprise scale. Turning to how we are uniting talent and AI technologies. While our CGI partners are naturally using AI as part of their everyday work, approximately 40% of our consultants have expertise in advanced AI and data, more than double the number since this time last year. Given this, AI-related training continues to dominate the learning and development courses, our experts are completing through our CGI academia platform. Our learning and hiring investments also contributed to CGI earning new alliance certifications and partner tier status. Over the past quarter, this included progress with AWS, Snowflake, ServiceNow and UiPath, all of which expand our capabilities and create new business development opportunities in advanced AI, cloud and data. Lastly, we also progressed CGI's internal AI adoption. Through the new engagements with Google Cloud and Open AI, we are expanding our current use of these platforms by equipping an additional tens of thousands of consultants and experts. We also launched our internal AI exchange platform with widespread engagement as our teams contribute and reuse proven code assets and best practices, delivery processes and playbooks. CGI's AI exchange is designed to help us scale and industrialize AI delivery globally while maintaining quality, speed and cost effectiveness. As we reflect on the past 50 years in business and more importantly, our future, I will now outline CGI's value creation strategy for our 3 stakeholders and namely you, our shareholders. Our value creation strategy is built on 4 streams: systems, integration and consulting, including the services related to IP, managed services, including our IP solutions, accretive acquisitions and share buyback and dividend programs. By design, these streams are complementary and countercyclical to external market dynamics in order to foster continuous revenue growth and EPS accretion for the benefit of our shareholders. This positions CGI to deliver results even as the global business environment remains complex and uneven. Starting with our first value stream, SI&C. In stronger economic markets, client priorities tend to expand to innovation, experimentation and growth. As clients spend on more discretionary initiatives, our SI&C capabilities support them in business evolution, integrating core systems, and creating and scaling new platforms and applications, regularly including consulting on our IP solutions. Today, we are seeing early indication of an uptick in demand in the market as the pipeline of new opportunities is strong, including for AI advisory and AI integration services related to CGI IP and alliance platforms. In fact, our pipeline of SI&C opportunities in advanced stages is up by more than 40% year-over-year. Additionally, in Q1, SI&C revenue grew 9.8% year-over-year in constant currency. As Steve mentioned, the ASI and sea bookings in the quarter reached 100% of revenue. Turning now to our second stream, CGI's managed services, which fully embed advanced AI as a standard practice, making them especially attractive for clients. When they are market uncertainties, clients typically want to reduce spending to increase their financial flexibility with the goal to reinvest in digitization. This is why we see demand rise for CGI's managed services which allow clients to benefit from longer-term, outcome-based partnerships with clear cost structures and commitments for productivity improvements and innovation. CGI's global delivery capabilities also play a critical role in our managed services, including our global capability center expertise, which was recently recognized by Everest Group through our managed services, including those delivered with our IP solutions, we become a core extension of the client teams. This drives longer-term recurring revenue with higher margins for CGI. From a revenue perspective, over the past 12 months, our Managed Services business increased more than $600 million or 8% compared to the previous year. In Q1, Managed Services bookings were up on both a year-over-year and trailing 12-month basis. Notably, since Q1 last year, 40% of our managed services wins were new business. And the pipeline of new opportunities reflects this uptick increasing by more than 20% over this quarter last year. Regarding our third stream, CGI's business -- CGI's buy strategy. Given the ongoing strength of CGI's balance sheet and current market conditions, we continue to pursue accretive acquisitions at pace. In the quarter, we closed 2 mergers. In Europe, we completed the merger with a division of Comarch, which expands our presence in Poland and the Baltic states and deepens our public sector expertise and IP portfolio across social security, health, agriculture and other mission areas. In North America, we expanded our Canadian footprint through the merger with Online Business Systems, an established IT consulting firm based in Winnipeg. Through this agreement, we enhanced our capabilities in AI, digital transformation, and cybersecurity with enterprise clients in Canada and the U.S. I would like to warmly welcome the more than 800 new consultants who have joined CGI from these mergers. Our pipeline of additional merger targets remain robust. We are committed to making sure that we acquire the right companies at the right time and at the right price, all 3 without exception. And the final stream, share buybacks and dividends provide additional value creation to our shareholders, especially now given that we believe CGI stock is undervalued. So we plan to remain very active in our share repurchase program, while these conditions persist. As we look ahead across the markets we serve, economic conditions and client priorities continue to vary by region and industry. These priorities are influenced by geopolitical uncertainty shifting regulatory requirements and the growing importance of IT systems to national resilience, sovereignty, competitiveness and everyday operations. At the same time, interest in AI remain high making it more, even more important for organization to separate the height from practical impact. In this environment, trust, deep industry knowledge and proximately to the client matter more than ever. To address their priorities successfully, clients need partners like CGI who have the end-to-end capabilities and industry expertise necessarily to modernize core systems, strengthen cybersecurity and sustainably integrate AI-led digital capabilities into their operations. In closing, while the environment is still uncertain, we are observing gradual improvement in some industries and geographies. As such, we anticipate continuing improvement for the rest of the year. CGI has been built to grow and last. For 50 years, we've been at the heart of continuous technology innovation and business transformation. Combining human ingenuity with the power of technology to help our clients achieve meaningful outcomes. As the pace of change accelerates, we remain focused on what matters most, helping our stakeholders succeed. Thank you for your continued interest and support. Let's go to the question now, Kevin. Kevin Linder: Thanks, Francois. Julie, we can now poll for questions. Operator: [Operator Instructions] Your first question comes from Richard Tse from National Bank Canada. Richard Tse: Yes. Thank you. With respect to acquisitions, does the volatility and uncertainty around AI, has that sort of changed the way you evaluate these transactions kind of given that sort of uncertain future? François Boulanger: No, not at all. Thanks, Richard, for the question. Now we continue to see anyway AI as an enabler for the future. So when it's time to look at acquisition and merger, we're still looking at how we can improve our footprint in our several metro markets, where we're lacking presence. And naturally looking also at the larger ones and the transformational one that can help CGI in the future. So it's not changing anything in our policy or politics or view of merger and acquisition. We are looking at relationships. We are looking at places where we can continue to grow. And so AI is actually an enabler and not something that is asking us to change our philosophy on M&A. Richard Tse: Okay. And just my second question has to do with the U.S. Federal government. Obviously, last quarter, we had that sort of a government shutdown. But as you step back, do you think that there's some things that are maybe happening in the background that structurally sort of resets that business? And I guess related to that, at what point and how quickly could you sort of restructure if needed if that was the case? François Boulanger: Again, we still think that Federal government is a very good client of ours. It's more than 30 years that we're dealing with the Federal government. So -- and they need IT to support their operations. So we still think it's a very good market. But sure, we are living in the geopolitical environment that is very dynamic. Yes, we finished -- we had a shutdown. Now we're talking perhaps another shutdown at the end of this week where we'll see. But that's short-term headwinds. We're still thinking on the long-term basis that it's a very good market for us. Operator: Your next question comes from Stephanie Price from CIBC. Stephanie Price: Maybe just following up on the U.S. Federal question. Just curious around margins. Obviously, you had messaged the margins were going to be a little bit weaker in the U.S. Federal, just given the shutdown. How should we think about margins in U.S. Federal going forward, just given, as you noted, it's a pretty dynamic environment here? Are you seeing any pricing pressure? What are you seeing out of the government in terms of pricing here? François Boulanger: Yes. For sure, the fact that the revenue and profit was down this quarter was also the fact that we -- our utilization rate went down with this shutdown, some -- we had some people that were not able to build. And so we had the cost and not the revenue. So with -- when the U.S. government did reopen, we were able to redeploy our people in the contract. And so that improved the utilization rate and thus improving their margins. So it's not necessarily cost pressure or rate pressure that we have in the federal was really related to the fact that with the shutdown and the fact that it's temporary, we wanted to keep our workforce. And so that was -- that's why it put a pressure on the utilization rate. Stephanie Price: Okay. So going forward, we should expect more in line with historical. And then in terms of SI&C, it was great to see that bookings were solved in the quarter, and you mentioned the pipeline for advanced stages was up. Can you talk a little bit about the regions and industries where you're seeing the improvement in SI&C? François Boulanger: Yes. Thanks for the question. For sure, we're seeing SI&C improvement a bit across every industry, and I'll start with an example on the financial sector, they need some advice, example in AI. So we are helping them to deploy some of these AI tools like I gave some example on that in my script. Same thing in manufacturing, they need consulting again to deploy these tools. So a lot of consulting. Business consulting is still soft, but everything related to CIO consulting and especially with these tools, we're seeing a lot of new demand. And I would say mostly in all industries. Operator: Your next question comes from Suthan Sukumar from Stifel Canada. Suthan Sukumar: For my first question, I wanted to touch on the sort of the industry theme around vendor consolidation. Can you speak a little bit around what clients -- your clients are doing today with their IT partners and roughly, what percentage of some of your new business and existing business expansion today is a function of continued vendor consolidation? François Boulanger: Yes, that's a great question. For sure, we're seeing a lot of that trend across the world. Clients realize that they need to reduce the number of partners and especially using a lot of freelancers in the market. So you'll have a lot of -- they'll deal with very small companies and so because of relationships sometimes with the buyers. So we won several of them, vendor consolidation. We won a big one that I think I announced last quarter, with a large bank in Europe that was actually a vendor consolidation. They went from hundreds of suppliers to 4, 5 suppliers, and we were one of the suppliers. And we're seeing that, especially in the very large companies and clients. Same thing happened in Germany with an automobile company where they had thousands of suppliers, and they wanted to reduce and we were one that gained some activities with this vendor consolidation. So we see that. We will continue to see that in the future. And the fact that we're very close to our clients. I think that's -- it's a tailwind or at least opportunities to us to win new business in our existing clients. Suthan Sukumar: That's helpful. For my second question, I just wanted to touch on sort of the broader theme of enterprise AI adoption. So you guys have recently announced new partnerships with OpenAI, Google Gemini on this front, as did some of your global peers also more recently. From where you sit today, where are we at in the enterprise AI adoption cycle? And is AI spending today, is it -- do you see it being more additive or still displacing existing IT spend budgets? And how resilient is sort of this AI related spending with respect to the macro? François Boulanger: What I would say to you, first of all, as for the tools by themselves. I think a lot of companies already deploy these tools. So all these tools are at least for the large companies, they deploy them. Now what they need to do is to realize the outcome with these tools. And that's where they need companies like us to help them to produce these outcome for them. So that's really where we are today. And that's why we have a lot of consulting with these clients because they don't know what to do to a certain point with these tools. And so that's where we are helping them. Another good example is a lot of these clients will have old solutions or all the applications that they didn't touch for the last 15, 20, 25 years because it's too complicated and it's too -- they don't want to touch it to break it. And now with tools like AI, it's -- they can see it in another way and having these tools helping to do the conversion or the refreshment of these application. So that's brand new demand and services that they were not existing in the past. People were saying, let's not touch that. And that's maintaining them, but let's forget about them. Now they're saying, well, perhaps we can reduce our run cost by changing these applications. And so that's brand new demand that we didn't see in the past. So I think that we will see that to continue. And finally, again, in managed services, that is still very relevant and people want to have savings on their run of application. I know AI is a tool to help, to achieve these savings. And we had the offshoring, but now we have offshoring and AI to help to create these savings for clients. So that's why we still think that, that will open doors to new demand in the managed services side. Operator: Your next question comes from Thanos Moschopoulos from BMO Capital Markets Canada. Thanos Moschopoulos: First of all, just given the very strong ROI that I presume clients can get from AI, if we just look at the most recent quarter, your trailing numbers and what's been holding back growth. Is it that the CIO understands the value of AI, but the CFO is constraining the budget? Is it that just more education was needed about what I can do for them and now you're starting to see more implementation. Just what's been the holdback in terms of clients putting [indiscernible] the metal on these AI initiatives? François Boulanger: I don't think it's necessarily our holdback. I think like I'm saying, I think people realize that it's a lot more complicated than people thought. And so that's one thing. The other thing also is data quality. It's nice to say that you have AI and you deployed AI, but AI will be as good as your data is good. And I think that's also, again, one of the challenge that a lot of these company has. And so they -- that's where the work needs to be done. And again, they're saying like the CFO seeing the cost coming in of these tools, coming in on a monthly basis, but they don't see necessarily the outcome. And that's where, again, the CIO wants showcase that. But to do that, they need to clean up the quality, clean up some of the quality of the data, clean up some of these applications. And that will take some time. So that's really, I think that's -- I would say, on that specific item. I think overall, the macro is still something that you see in the market. Still, we're restarting to talk about tariff, for example, in some places. So it's -- for sure, it's a concern in some places, especially when I'm talking to some clients in Europe, you still see some concern on that side and that's hurting a bit on the macro side. Thanos Moschopoulos: Great. And then just in terms of your own internal use of AI, when we look at your margins for this quarter, I mean, would you say that you start to capture some material margin improvement for AI? It’s just -- is it early days on that front? How should we think about kind of the benefits you're already capturing? François Boulanger: I'll start, and I'll ask Steve to continue. But for sure, we are seeing already some savings with AI. For sure, some of it, we are reinvesting in the business. But -- and also in the quarter, it was hidden to a certain point with the onetime cost in India, but you will see the margin picking up in the future. Perhaps you can talk a little bit about some of our sample. Steve Perron: Yes. Look, we are using it, obviously, internally and the team are using it well. It's bringing efficiency, obviously, but we are continuing to invest in it. We want further efficiency. We want further improvement. And -- but in terms of -- as mentioned, the global margin that we had in the quarter, we're pretty proud with some good improvement in many SBUs. Obviously, there was a onetime in India and also what we called out at the last quarter in federal. But if you look at Scandinavia, Northwest and Central East Europe, a clear improvement in terms of margin. You see also the benefit coming in terms of the margin from the integration of BJSS. And also in France, the margin has improved. So Western and Southern Europe also is a good improvement year-over-year. So quite good activities that has strengthened our margin, and it's quite good for the next future quarters. Operator: Your next question comes from Robert Young from Canaccord Canada. Robert Young: The comments on the government pipeline up 30%. I was hoping you could parse that out between U.S. Federal. You noted that bookings were impacted and the higher volatility. And then I guess on the other side of that, it looks as though governments around the world are looking for more sovereignty, more control over local technology perhaps. Maybe just talk about where those bookings growth -- or the pipeline growth is coming from? François Boulanger: Yes. Thanks, Robert. So yes, government, we are seeing good momentum across the world. I'll start with our home here in Canada, as you know, Canada wants to invest a lot in the defense side, for example. And so defense is including cybersecurity, for example, and so they all need IT to support them. They want to reduce costs on delivering services to their citizens. And again, they'll need to build a new system. And so we are seeing that good potential in the future, and we have some conversation with the client, with the government clients in Canada to understand when and how it will be deployed. Same thing in the rest of the world. We -- the rest of the world, as you know, they want to invest a lot on the defense side and we have already -- some of these defense ministers, ministry example, in Germany, in U.K., already the clients of ours. NATO is a client of ours. So we are seeing momentum and discussion there. So we see good opportunity on that side. Going back in the U.S., I would say, state and local, so everything related to the state and local government in the U.S. We are seeing good momentum. Some -- to a certain point, they are taking the place of the Federal government and some of these investments, so we are seeing also good momentum on that side. On the Federal government, for sure, we are seeing a pickup versus last year when we were talking about those -- and we were talking and we had the U.S., the shutdown. So we are seeing also opportunities in the pipeline on that side. Now that hopefully, we won't have another shutdown, we can see some of these RFP going out and be awarded in the next couple of months. Robert Young: So it sounds as though you're pretty confident that, that type of pipeline growth is indicative of sustainable top line growth in the future, both in the U.S., U.S. federal, but all around the globe, I guess? François Boulanger: I would say all around the globe, for sure. As for U.S. Federal, again, we just need to be -- it can be lumpiness a bit with everything that's happening there. But at the same time, state and local in the U.S. is going pretty well. Robert Young: Okay. And then the headcount number was flat quarter-over-quarter, up year-over-year. But I mean the revenue growth is still outpacing your headcount growth. And that's interesting because you highlighted the utilization headwinds in U.S. So just talking a little bit -- if you could talk through the revenue per employee growth and then also, if you could be clear on whether Comarch and OBSS are included in the head count number or -- so are we going to expect to see growth in the next quarter? François Boulanger: Yes. So Comarch and OBSS are in the headcount numbers since they were closed before end of the quarter. As for the revenue per headcount, for sure, it did grow again and will continue. You can expect this to continue to grow. Like I said in the past, most of our managed services are outcome-based. And so with the fact that we're using more and more AI in our delivery of managed services, I don't need necessarily the same head count number or same number of people to deliver the services. So you can still expect this headcount versus revenue or at least the revenue by headcount continue to grow because of the new technologies that we're deploying. Robert Young: Okay. Last quick question. Last quarter, you talked about outcome-based pricing, and you're talking a lot about outcome-based programs this quarter. One of your competitors was highlighting significant growth in fixed price contracts related to their proprietary platforms. And so I'm just curious if you're seeing that and how that might affect the model and margins going forward? And then I'll pass the line. François Boulanger: Yes. No, an outcome base can be fixed price also, especially when it's shorter duration if we're talking about a managed services of 2, 3 years, a lot of time, we can fix it even for that full 2, 3 years duration, for example. For sure, when it's longer, we need to take on account the volume and it's both sides. It's good for the client, and it's good for us because having linked to the volumes or the outcome is good on both sides. But yes, we'll have more also fixed price project. I think really the input-based model, that's really what's standing to reduce and will continue to reduce to be replaced by these fixed price and outcome based. Robert Young: Does that have an impact on margins? François Boulanger: I won't have -- because even I would say, a fixed price, we'll be able to improve our margin in the long term because -- and after that it's fixed, every way of reducing the cost would go directly in our margin improvement. Operator: Your next question comes from Kevin Krishnaratne from Scotiabank Canada. Kevin Krishnaratne: Nice to see the SI&C bookings strength there. You talked about the early indications of uptick in demand and you did talk about more on CIO consulting, less business consulting. I still think the trends look pretty good a little bit maybe different than what some of your peers are talking about recently. So I'm just wondering maybe if you can comment on unpack a little bit further into that, like what what's maybe unique about CGI in this segment relative to some of the peers that is leading to sort of some of those earlier signs that you're seeing relative to the broader industry? François Boulanger: Yes. I don't know for the other companies, but I'll say for us, our model and the fact our proximity model, I think that's really the differentiator with the competition. We are close to our clients. We are building a relationship with them. We know their business. We know their industry. So I think that's helping us to be there and our top of the mind of these clients when it's time to find the right expertise and the people to help them in their deployment of new technology, for example. So I think that's really going back to the model that we have that's helping us to win. Kevin Krishnaratne: Got it. Second question, just more on the theme of enterprise adoption of AI. Can you maybe talk about any differences you're seeing in this technology and the deployment of enterprise AI versus enterprise software and what that means from a CGI and other IT providers. For example, some of these AI use cases, they seem to come up on the bottom-up individual workers or teams might be different than how an ERP deployment starts from the top. So just any thoughts there now maybe talk about the entry point of AI into the enterprise versus prior cycles and how you see that, what that might mean for your business? François Boulanger: Yes, for sure. It's a tool that is deployed to everyone. So when it's deployed to everyone, everyone is playing for the tool. And so you'll have the business side that we'll take the tool, we'll will use it and try to invent something with it. Sometimes, let's say, it's good, sometimes it's less good. I think like anything else, you'll see some balance on that. I'll give you the analogy also with cloud. I think cloud -- when cloud went out, everybody said, it's way cheaper. It's way easier. Let's deploy it. And you saw that happening and to realize at a certain point in time, the saving we're not there anymore because it was not managed. It was -- everybody was able to buy a cloud computing and so at a certain point, it was even more costly than before. So I think that's the same thing here. If people are leaving it to only the employees and they can do what they want with it, I think it will just create more cost in the machine and we'll need to be careful about that. So I think that's why one way, it's good for innovation and all that. But in the other way, you need still to put some, I would say, processes to be sure that it's well managed. And that's where we can help clients with the definition. And that's what we're doing today. And a lot of these business consulting or the consulting side. is that we're helping them to put some processes so that this approach of bottom-up, like you're saying, is still -- it's not chaos and that we can -- the clients can manage it. Operator: Your next question comes from Surinder Thind from Jefferies USA. Surinder Thind: Francois, when we think about just the interest in understanding of how important AI is out there, why isn't there a bigger rush to improve the infrastructure, the data platform modernization efforts at this point in the cycle? Given that if you can get the back end fixed, then you can start to revise the benefits. It just seems like everybody is slow walking this and it's hard to figure out why. François Boulanger: I think because you're saying, yes, the back end can be easily done. But it's again, it's the data itself and the complexity of all that. You have in company so much data that they are managing and people, it's not all necessarily relevant data. And I think that's the hard part that they need to be sure that they're cleaning up that data to use the right one to put it in the machine to have the right outcomes and that's difficult. It's bringing a lot of complexity. And it's same thing for Agentic, right? Because we're talking about data for AI, but when it's time to put AI for processes and Agentic AI, now you're dealing with applications and Big companies are talking about thousands of applications. So it's not that easy to implement and so it's something that people need to deal with. The other thing also, it's everything related to cybersecurity. We have clients today and for good reasons when we're saying, we can put some AI in the delivery of the managed services. Some are ready, other ones are saying, I need to understand the impact on cybersecurity. I need to -- so it's a lot of different -- it's a new technology. Like any new technology, it's not that easy to implement an environment that were built in the last 20, 25 years. So I think it's a journey and that journey will continue. And that's why they need help from companies like ours. Surinder Thind: So I guess, as a point of clarification, I think the idea here is that we still need to do a lot of the core work before we even tackle the AI problems. And I guess that's really where my question is why isn't there maybe more core work being done, right, because we need to know that build these data platforms and so forth before we can even get to AI. And I think that's where it is. Is it that companies got burned after maybe the pandemic where there was a lot of investment, and they didn't realize the return on that investment. So they've gone to this mindset of, you know what, I'm going to slow walk this. I want my ROI calc to be an in-year ROI versus I'm going to make these big investments because we can see other parts of the infrastructure there is an incredible amount of investment being made. And there is this big rush to be the first to go out there and get some of this done, but it just doesn't seem to be happening at the corporate level. François Boulanger: I think when you're saying big investment, we're seeing a lot of big investment in the hyperscalers in this company to some point. I think, again, meaning a lot of clients, and all these clients, they invested in the tool itself, and they deploy these tools itself. But like you're saying, they don't necessarily see the returns. And so that's why they're coming back. And that's why we're saying, yes, we're seeing some deployment, a lot of experimentation in the past. Now we're seeing some deployment. But it's true that they are going a bit slower, just to be sure that finally, they will see a return on their investment because for now, they put a lot of money in the tools without necessarily to see the return for now. And so that's why it's a journey, and it will take some time. But people are I'll say, an example in the financial institutions, they are looking very -- and they are doing some very larger use cases in the banks, to see how they can have a return. In some places, they are seeing a return, but it won't happen in a month. That's for sure, Surinder. Surinder Thind: Understood. And then could you elaborate on the earlier comment in your prepared remarks around just expecting continued improvement over the rest of the year? Is the idea that things should get sequentially better? And is that on an organic constant currency basis? How should we think about that part of the journey as you kind of talked about this idea of things getting better? François Boulanger: Yes. That's actually what I was saying to some point. Yes, we are expecting to see some improvement quarter after quarter especially in places like in Europe. So we are expecting that for sure, the caveat I have now is the shutdown. I thought it was behind us. We'll see Friday, if we have another shutdown in the U.S. federal government and what can be the potential impact. But if I'm taking that out of the equation, yes, we are seeing some improvement, and we would see improvement on a sequential basis. Surinder Thind: Got it. And is the expectation then to get back to positive organic constant currency growth by the end of the fiscal year? Or how are you thinking about that? François Boulanger: The idea is to improve the growth -- overall growth on a constant currency basis, including the organic side of the equation. So that's the goal. That's what the team is working on. And we're seeing some positive movement on that side. Kevin Linder: Julie, we have time for one more question, please. Operator: And your last question for today comes from Jerome Dubreuil from Desjardins. Jerome Dubreuil: Another one that I want to push a bit more on the contrast that Kevin has highlighted between your comments on SI&C and -- or more discretionary with some of the peers. I'm wondering how reliable are the leading indicators in terms of the bookings and the pipeline for this recovery specifically since we haven't been hearing that from peers? And do you think that we've seen the trough in organic growth this quarter, notwithstanding the shutdown? François Boulanger: At least I won't talk for the other ones, but to us, for us, yes, we're seeing that we perhaps pretty hit the bottom this quarter and that we're expecting some gradual improvement in the future quarters again, and that's a caveat on the shutdown if we have another one. But that's the idea, and that's what we see, at least for now, is that we are seeing some improvement that would happen on a quarter-over-quarter basis. Steve Perron: And Jerome, the SI&C bookings, it's short-term bookings. So that's why when we see that it’s going back to 100% mark, it's quite -- is giving us confidence on the forecast for sure. Jerome Dubreuil: So what do you mean by this is that the higher bookings is not like offset by kind of longer-term contracts is what you mean, right? François Boulanger: We're saying that converting SI&C booking and revenue is going -- it's a lot faster and than manageable. Jerome Dubreuil: Yes, makes sense. And last one for me. I'm trying to assess maybe the evolution of the industry in this time of AI, are there areas in which you're winning deals where you used to lose or maybe losing deals where you used to win? And maybe what are the explanations that our clients giving on this? François Boulanger: I would not say that we're necessarily losing or more or less in one area than others than before. If you're saying before AI, if that's the ultimate question. So no I don't see it. Like I'm saying, the idea and what we need to be sure is that to stay competitive, example, in Managed Services that we need to embed, and continue to embed this new technology in our delivery to be sure that we are competitive. And that's what we're doing, and we'll continue to do. That's our strategy. And having -- naturally having the talent with the right tool. So that's why we continue to invest in these area. But like I'm saying, in some places, we're not -- for example, where we don't have call centers and find call centers and stuff like that. So -- but even that, it will create demand because in order to replace a call center by AI, it's a lot of investment, it's a lot of changes, and they only need companies like us to help them in these changes. So not necessarily I'm seeing a trend or losing in business in area that we were strong in, I don't see it. But for sure, we need to continue to be relevant and continue to invest, and that's what we will do. Operator: Ladies and gentlemen, this is all the time we had for today's question. I will now turn the call back over to Kevin Linder, for closing remarks. Kevin Linder: Thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1 (888) 660-6264 and using the passcode 35024. As well, a podcast of this call will be available for download within a few hours. All of questions can be directed to me at 1905-9738363. Thanks again, everyone, and look forward to speaking soon. Operator: This concludes today's conference call. You may now disconnect. Thank you. Have a great day, everyone.
Parmjot Bains: [Audio Gap] Grant, our CFO. We'll be referring to the 4C quarterly activity report and presentation we lodged this morning with the ASX. The presentation is a summary of the more detailed 4C quarterly activity report. After our remarks, we'll be answering questions. You can lodge questions throughout the presentation using the Investor Hub QA function. So let's begin with Slide 3 with a quick overview of the agenda for today's call. We'll start with a business overview, including key highlights and take you through the updates for the 3 business segments. I'll then hand over to McGregor Grant to present the financials. And to finish off, I'll cover the outlook for the balance of the financial year before commencing the Q&A session. Now turning to Slide 5, we will touch on the key highlights for Q2. We have made a lot of progress as a business to capture the value of SOZO and the new SOZO Pro in 3 large and growing market segments: breast cancer-related lymphedema; heart health; and wellness and weight management. While the rest of world sales were positive. And while U.S. BCRL sales for the quarter were disappointing, we remain very positive about the growth potential due to strong clinical demand, a strong sales team led by Scott Long, a growing emphasis on cancer survivorship and reimbursement now well in place. There are over 700 opportunities in our pipeline that we are focused on converting as well as growing with the extensive conference attendance and direct sales activities underway. In terms of the financials, McGregor will go through the metrics in detail later in the presentation. But clearly, there were some positives and some negatives. The sales metrics are well below where we would like to see them, but the quarter-on-quarter revenue has increased as did customer receipts. And importantly, we saw a significant reduction in operating cash flow, extending our runway. This will continue to be a strong focus for the business. We are very, very encouraged by the increase in reimbursement, now at 93% national coverage. Now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. Importantly, SOZO and BCRL are new service line opportunities, not a cost item. National coverage now sits at 93%, representing 323 million covered lives. This is another 5% increase on last quarter and gets us closer to our goal of 100% coverage for breast cancer survivors. In terms of sales, overall unit sales were up on the prior quarter, but U.S. sales were softer than anticipated. Rest of world sales were stronger and on the back of our Australian distributor ordering SOZOs as well as our new SOZO Pros in advance of our expansion into the Australian heart health market. In the U.S., we saw a continuation of what we experienced last quarter. Contracts approvals were being delayed due to budget pressures or constraints in hospitals, but the BCRL opportunities are there and real as evidenced by our opportunity depth and continued discussion and dialogue with clinicians. We remain confident in the BCRL market, supported by the market outlook that operating conditions for U.S. health care providers will stabilize in the coming year. With reimbursement at 93%, SOZO is a profitable service line, and we continue to reinforce this messaging with providers. We are accelerating activities in the growth segments of heart health and wellness and weight management. Over the last 12 months, we have made enormous progress. Our first heart health sales are now actively in progress, and wellness and the weight management team is in place and the go-to-market activities and sales are well underway. Today, we launched a new revamped ImpediMed website and Wellness microsite to support our growth in these areas. On other very positive news, we received FDA clearance this morning for our new bilateral lymphedema algorithm, enabling physicians to monitor the subset of patients who are at risk of bilateral lymphedema. On Monday this week, we also filed a new 510(k) for an expanded body composition offering that better targets that wellness and weight management market as well as cancer survivorship. Turning to Slide 6. The value proposition that the SOZO Digital Health platform provides is becoming more evident as we address now 3 of the fastest-growing healthcare needs across the world, cancer survivorship, GLP-1 therapy and heart failure. The SOZO Digital Health platform is a best-in-class platform, providing valuable patient information for clinicians. The company has made a significant investment over the years in SOZO Pro, and we have now launched this into the market. The in-built scales, the ability to measure patients up to 220 kilos and the removal of the cardiac implantable contraindications better helps us target the heart health and wellness and weight management opportunities that are significant. Clinicians find the device quick and easy to use and in larger hospitals, they continue to add their devices across new departments with different use cases. We're in a unique position. We have the only device of its type, a best device with multiple applications that stand apart from the competition in terms of multiple FDA clearances, accuracy, usability and applicability. We have a platform we can build off to attack these new growth segments with over 600 devices now across the U.S. healthcare system, including SOZOs in 18 of the top 25 U.S. hospitals and 27 master service agreements with major IDNs covering pricing, IT and BAA approvals, which are contract approvals with customers, making it much faster to deploy additional devices. Now let's turn to Slide 7, where we look at this value proposition across these 3 market segments. You're all very familiar with the BCRL value proposition. SOZO offers hospitals a revenue-generating early lymphedema detection program to improve breast cancer survivorship. This is FDA approved, guideline endorsing clinical validation. All of the hard work has been done. We are now executing these into sales. The cardiometabolic health area covers both heart health and wellness and weight management. In wellness and weight management segment, the value proposition is different. In this segment, SOZO is providing objective clinical data to allow clinicians to engage, inform and ultimately retain their customers. This is primarily an out-of-pocket market segment. For heart health, weight is not a reliable indicator of fluid status, particularly in a GLP-1 world where weight can and does change rapidly, both up and down as compliance decreases. SOZO provides a valuable noninvasive fluid and body composition insight to aid clinicians to guideline -- to optimize guideline-directed medical therapy, essentially helping physicians to catch increases in fluid, enabling them to adjust therapies and reduce the potential for readmission, a major drive of U.S. healthcare system costs. Now let's turn to Slide 8, and I'll give some more details about the BCRL operating environment and how we are positioning SOZO. Although we had a sluggish quarter for U.S. BCRL sales, we continue to believe that we are very well positioned, and there are several tailwinds that will drive long-term growth. Clinical demand does remain strong, and there continues to be a growing acceptance for the need for cancer survivorship programs. We have built a strong foundation across many of the top hospitals in the United States. We have guideline support, and we have seen a significant improvement in reimbursement over the last 6 months. And now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. As I noted, coverage sits at 93%, representing 323 million covered lives. Since the beginning of the financial year, we have had significant increases in the depth of coverage. States with over 90% coverage has increased fivefold from 7% to 39%. Last quarter, you met Scott Long. Scott has built a strong sales and clinical support team with considerable experience in breast cancer medical devices and has built out our BCRL pipeline with this team. All these factors combined to paint a very positive picture for BCRL. In the short-term, we have seen some headwinds. Hospital budgets are under pressure, wage inflation and the cost of imported products, along with the reduction in grants and funding for Medicaid insurance have impacted hospital budgets. However, we remain confident in BCRL and is supported by the market outlook that operating conditions for U.S. health care providers will stabilize. Importantly, we continue to reinforce the messaging to multiple stakeholders within hospital systems that this is a service line, which strengthens as reimbursement increases. The good news is we have a very strong story to deliver. We are launching SOZO Pro into lymphedema, where in addition, the scales better enable SOZO to fit with the established patient workflow where weight is taken at the start of the patient journey. In addition to improve customer experience and stickiness, we are improving the EHR interface to optimize clinical workflow, and we are also building out AI programs to improve customer responsiveness. Over to Slide 9. I want to touch base a bit on cancer survivorship. One of the areas that we see the potential to increase penetration is medical oncology. This also helps us build program depth, so both in the breast cancer surgeons as well as downstream into the medical oncologists. Although breast cancer care pathway starts with breast surgeons, medical oncologists usually have the long-term relationship with the patient and support survivorship. Cancer survivorship is experiencing a significant upward trend with 5-year survival rates for all cancers combined now reaching approximately 70%, up from 50% in the mid-1970s. Driven by early detection, advanced therapies in an aging population, the number of people living with a cancer diagnosis is at a historic high. This shift treats many cancers as chronic conditions requiring long-term management. Across the U.S., there are now 1,500 commission on cancer centers that require a cancer survivorship program for accreditation. Breast cancer is one of the largest cohorts of survivors with physical issues such as lymphedema, maintaining muscle mass and bone loss in addition to the emotional and social needs that need to be addressed over the long-term. SOZO fits in very well with survivorship, both in BCRL as well as in body composition changes that occur during treatment, tying in with a renewed focus on the positive effects of exercise during chemotherapy. We are actively expanding our messaging on body composition to treat both to breast surgeons as well as medical oncologists with over 3 abstracts accepted at ASBS, news that we found out this morning, which is fantastic. Following a detailed voice of customer survey with medical oncologists, we have refined our body composition offering to these clinicians. And on Monday, we filed a new 510(k) regulatory filing with the FDA to further support this. Now going to Slide 10. Heart health and wellness weight management opportunities are compelling and are a strong fit with SOZO Pro. Heart failure is a substantial opportunity as it poses a significant economic burden in the United States with costs projected to reach $70 billion by 2030. One of the primary guides to determine rapid changes in fluid level in patients, a sign of decompensation has been weight. However, cardiology patients are now indicated to be to use GLP-1s, which basically reduces weight and also potentially causes a rebound weight gain post discontinuation, making weight a less reliable surrogate marker for fluid and additional noninvasive data is needed. Feedback from U.S. cardiologists on SOZO Pro has been very positive. I've been impressed by the clinical utility of SOZO and its ability to monitor fluid levels as well as body composition. We have the first heart health sales in progress, and we are very positive about the potential and have established a lean, dedicated heart health team to build out this opportunity and validate the go-to-market pathway. Now moving to Slide 11, wellness and weight management. Our view on wellness and weight management opportunity only gets brighter as we spend more time with potential customers. In the U.S., there are over 30,000 sites of care have been identified across various market segments, including specialty medicine, exercise oncology and rehab, weight loss clinics, wellness clinics, IV clinics and sports medicine and research. The segments we'll be focusing on directly at the moment have an addressable market size of over $200 million. Wellness and weight management activities have commenced with the appointment of an experienced commercial lead managing a team of 3 dedicated body composition reps in the U.S. This team has already actively identified over 3,000 leads in this space, which they are validating and converting into direct sales. Feedback has been very positive from the first 3 conferences the team has attended with another 6 conferences planned for the second half of the year. With a strong pipeline in place, we're expecting sales to build over the calendar year. Over to Slide 12. We are tailoring our messaging for different market segments, particularly within this wellness and weight management space. This is an example targeted towards lifestyle medicine, which is a more clinical approach. On to Slide 13. We're excited to share that we have launched a new wellness microsite. This is a different look and feel of our wellness offering that's targeted towards the med spa space. As I noted, all of our new sites, including our new ImpediMed website and this wellness microsite have been launched today. Many thanks to our marketing team. We have done a lot of work in getting these ready to go. I'll now turn over the presentation to our CFO, McGregor Grant, to go through the financials. McGregor Grant: Thanks, Parmjot. We'll start on Slide 15. As mentioned last quarter, we expected a substantial improvement in cash outflow this quarter. The result was slightly better than we forecast at $2.9 million and well down on the $5.6 million reported in quarter 1. The improvement was driven by higher cash receipts that rebounded to $3.8 million, nonrecurrence of a one-off payment for long lead time electronic components and the expected receipt of the $1.2 million in relation to the R&D tax incentive. You will notice that staff costs of $5.3 million were slightly above the previous quarter's $4.9 million. This was largely a result of redundancy payments made during the quarter. Financial discipline continues to be a core goal of this business, and the company maintains an ongoing program of cost control as part of the target to reach cash flow breakeven. We continue to adjust our cost base as required. The strengthening Australian dollar relative to the U.S. dollar resulted in further unfavorable impacts on cash as well as affecting items such as ARR. The company's cash balance at 31st December was $18.9 million, equating to 6.5 quarters of operating cash flow. Moving on to Slide 16. TCV for the quarter reduced from $4.7 million to $4.1 million. The reduction was a result of fewer devices sold in the quarter and a smaller number of contracts due for renewal compared with the previous quarter. We continue to be very pleased with the quality of accounts initiated or renewed in the quarter, together with continued solid price increases on renewal, averaging 14% for the quarter. Contracts in place at 31st December 2025 are expected to generate core business annual recurring revenue or ARR of $14.4 million for the 12 months to 31st December 2026. That equates to a 15% year-on-year increase. The stronger Australian dollar reduced the increase in ARR as the FX effects applied to the whole balance. Moving on to Slide 17. Revenue for the quarter was a record at $3.9 million, up 18% year-on-year and 8% on the previous quarter. This was despite the U.S. revenue result being affected by the Australian dollar as we discussed. The strong increase in rest of world revenue, up 67% on quarter 1 was on the back of the company's Australian distributor ordering SOZOs as well as SOZO Pros for our expansion into the heart health market. As forecast, cash receipts from customers rebounded to $3.8 million, up 12% quarter-on-quarter. On to Slide 18. As Parmjot has already discussed the sales, as you can see, patient testing continues to trend upward, up 1% on the prior quarter with a 3-year compound growth rate of 15%. The Thanksgiving and Christmas holidays affects the testing volumes as it has in previous years. I'll now pass back to Parmjot to wrap up before we go to questions. Parmjot Bains: Thanks, McGregor. Over to Slide 20, the outlook for the rest of the financial year and some comments on the company. When we look back at the outlook statement for the first half, we've achieved most of the goals that we've set with a very small -- with a small but very focused team of 75 experts across our business. Sales for the quarter were behind our expectations, but we are confident of growing the business with over 700 validated opportunities in the pipeline that the team is actively working through. These opportunities will continue to grow with the upcoming conference attendance and direct sales team promotion. Improvements in reimbursement were excellent and many thanks to our market access lead who is remarkable. And we continue to focus on expanding coverage with a target of 100% reimbursement across breast cancer-related lymphedema. Heart health and wellness and weight management opportunities are exciting growth opportunities that are being executed with the data and product that we have today. Heart health already has a CPT code, which has extensive coverage. We will continue to validate and refine the offering and the go-to-market pathway with customer feedback as we move into these new market segments. And we do all of this while driving our financial discipline and constantly refining our cost base. Many thank you for your support. I'll open the webinar up now for questions. Unknown Attendee: [Operator Instructions] The first question comes from [ Shane Store ]. And it is, can you describe the clinical settings where the body composition aspect is to be commercialized first? We'd like to understand how this assessment is introduced in a typical GLP-1 patient care pathway, for example. Parmjot Bains: Absolutely. So the body composition, as I noted, has over -- opportunities have over 30,000 sites of care. SOZO is a prescription medical device. So we are targeting areas where there is clinical oversight for the product. In terms of where it's being used, it's basically being targeted towards lifestyle medicine is a key area, an example of that. A number of these hospital systems, many of which were already in have got extensive lifestyle medicine practices. Part of this GLP-1 is being prescribed quite extensive around the United States with over 13 million people having GLP-1s. The SOZO is used both in terms of helping support the baseline body composition for patients. So looking at their muscle mass and fat mass and their weight and then helping them track that and trend that as they go through treatment. And so we've got some great case studies and including on our new website, you can look at patient tracking of GLP-1 use, looking at their fat and muscle mass and then helping both create the patient understanding of their journey. It helps create stickiness for the customers, our customers in terms of clinicians where patients will come back in and get repeat measurements and can be monitored for their care. That -- the other area that we are actually extending the body composition space is really linked around cancer survivorship. And as I noted, we've done some extensive voice of customer research with medical oncologists. And really, they're interested in looking at the body composition outputs, particularly as these patients reduce muscle mass during chemotherapy care. And now exercise oncology is being validated as an outcome as a potential mechanism of helping address muscle mass loss, they are using body composition to help monitor patients kind of muscle mass in that. So the 3 abstracts that were accepted at the ASBS conference, which is coming up in end of April, early May, we've actually got use cases of clinicians that have been using the body composition aspect of our device to help support cancer survivorship. So kind of multiple areas. And right now, there's kind of multiple use cases. What we're really doing is focusing on which ones are resonating the most because we have got a very small team and then which ones we can kind of really focus and target in more depth. Unknown Attendee: The next question comes from [ Jeremy Thompson ]. It is the 2 first half results following the NCCN guidelines released in March 2023 represent a growth rate of approximately 25% year-on-year. Noting the reimbursement coverage progress over the last 2 years, is the revenue growth rate expected to increase above 25% current rate? Parmjot Bains: We have got -- we would hope so. We've got a very strong pipeline in place with over 700 opportunities identified and a new sales team. And so we are kind of confident that this will continue to grow the BCRL business in particular. We were also looking to see growth from those new indications of heart failure and that specific body composition targeting. Unknown Attendee: We have a few questions from [ Andrew Hewitt ]. First one is, if SOZO is a cost benefit to hospitals, why is budget constraints an issue? Parmjot Bains: Because when they first look at making the assessment, the hospitals will always look at what budget is allocated. So it is still there as an issue. And so what we are just making sure we do is reinforcing the message that it's a service line, so i.e., a revenue-generating opportunity towards hospitals. So we just need -- we are continuing to make sure we are very strong in that messaging. That increase of reimbursement up to 93% across many states with multiple states over 90%, it's going to be a really strong reinforcing point in this one. Unknown Attendee: A follow-up from Andrew. What do Australian hospitals see compared to U.S. in the value of SOZO as we have 500 machines servicing 30 million people compared to 300 million people in the U.S.? Parmjot Bains: Yes. I think Australia has actually benefited from a number of KOLs and clinicians led a lot by the alert system and Louise Koelmeyer at Macquarie University and Professor John Boyages, who have really established a very strong model of care in the prevention of breast cancer-related lymphedema. So there is a very strong established ecosystem in Australia that has rebuilt this and it has been a focus for a large number of years in Australia. Australia was really unique and now the U.S. is moving up towards that space. Australia basically was just kind of clinical practice and standard of care. The U.S., fortunately is now moving up to standard of care. But as I noted in previous quarter, we went up into the European market, and it's really not standard of care there. So that's why we're kind of focusing primarily on the U.S. market. And with the NCCN guidelines, NAPPC, healthcare reimbursement, it is now becoming standard of care, but it is just taking time. Unknown Attendee: I have noticed on social media, a biz measuring device that's available to the general market. It looks a little bit like a standard weight machine and you pull bar from the base that's attached to a core. I realize it's not FDA, but what are the competitors in both the medical and cosmetic side of the business? Parmjot Bains: Yes. So in terms of that body composition space, it is highly competitive. So we are not -- so there's a number of these devices. I suspect the one you're seeing maybe the human health one, which my husband also says he's being spammed with. So they are very cheap kind of $200 devices that are primarily targeted into the telehealth space or at home consumer space where patients are tracking body composition. They're not as accurate. We had feedback from clinicians that they're not a device that you put in the home. And so our target space in the weight management space is a device that supports the clinician to generate validated clinical data that enables them to help retain their customers and increase their revenue flow. In terms of that clinical setting, the kind of devices and we've mentioned before is the InBody, Seca, Tanita. So there are devices that are out there in that clinical space, the kind of large established devices that fit within that clinical workflow. I guess maybe just one final point, but our differentiating point within that clinic and it is resonating is the fact that we are the only device that's got that FDA clearance. We are a prescription medical device. That clearance and that accuracy is really resonating with these clinicians. Unknown Attendee: A question again from Andrew Hewitt, but also I'll roll [ Rod W's ] call into -- question into it as well. They're both asking about what the U.S. sales reps are doing in terms of if there's no sales eventuating. And Andrew mentioned that last call, I think it was Scott that suggested that 80 sales per quarter would be a pass. And so looking at this quarter, it suggest that it's significantly lower than that and a failure. And also that there was a number of units were close to sale but missed on the last quarter, if that's the case that the quarter would seem even poorer. Why the fall away? And is there a pent-up demand for the Pro version? And could this be a cause of the delay of purchase in the last quarter? Parmjot Bains: Yes. Okay. So lots of questions there. We have got a new sales team. So Scott has really built a new sales team and a very strong sales team that we do have confidence that they will get up to speed and they will get their sales through. There are a number of large kind of multisystem sales sitting in that pipeline. They have still -- we are chasing that final purchase order signature on a number of these sales. So -- and we acknowledge they were disappointing, right? It was an extraordinarily frustrating quarter, but we are confident and the sales team is confident that these numbers will come up. In terms of SOZO Pro, we haven't actually marketed that proactively previously. But in this last quarter, we have been looking at customers where that SOZO Pro may help get the sale across the line. And I'll give you some examples, particularly in smaller breast surgeon offices, we can use it to replace the scale with the limited space. Basically, SOZO Pro has a built-in weight scale. It can actually fit in kind of better with workflow. And so we are, quite frankly, leveraging every opportunity right now. The market has not been that aware of SOZO Pro, and we've done that on purpose just as we kind of get the SOZO moved out, but we are launching into the SOZO Pro, and it is now being offered into the customers. Unknown Attendee: A couple of device questions. How does SOZO compared to a DEXA scan? Parmjot Bains: Really interesting. Comparable. So we've kind of -- a lot of the data just shows that from a muscle mass perspective, it's comparable, and we are actually working on an output right now, which has got comparability from a bone mineral density perspective, but that's going to require a filing. So we're very confident in that. We're actually better than DEXA at fluid. DEXA does not measure fluid well, and that's really one of the areas that we can differentiate, and we're kind of working on some updating algorithms that actually improve our output with regards to fluid in that space. So kind of DEXA has been established as a bit of a gold standard. So we're confident against DEXA. We actually think in some areas, we're actually better than DEXA. So we see a vision where particularly in that body composition space, we can replace DEXA because we know DEXA causes kind of radiation exposure to patients, particularly those in the cancer space, you want to limit that. And that was one of the points that really resonated with medical oncologists as well. Unknown Attendee: Is it possible to link data from SOZO to patient Apple Health? And is it something that you could look at to create patient stickiness? Parmjot Bains: Yes. We are -- there's a number of -- I think telehealth is growing substantially and this kind of remote wearables and monitoring space. We are actually in discussion with potential partners, particularly around the body composition and heart failure space, both to kind of help manage that patient journey from the clinic into the home. So we are actually exploring a number of these opportunities with some direct and proactive discussions underway, which as we progress, we can bring forward to the market. Unknown Attendee: And a question from [ Grant Percy ]. Will CHF SOZO be placed in hospitals and the home? Parmjot Bains: Primarily hospital, clinical. So SOZO is just by the virtue of its size as SOZO Pro will actually be the device with the cardiac implantable removed, will be in primarily the hospital and the outpatient department as well as private cardiology clinic department. We are not -- we do not have an at-home device, but that's one of those opportunities that we're looking at that collaboration on. Like can we kind of do a follow-up pathway all the way into the home for patients for heart failure. But right now, the focus very much because we're just launching is hospitals. So within the heart failure wards at discharge and then a follow-up care within the outpatient department where we will track -- we can track patients' fluid status and hopefully prevent that decompensation and readmission as well as kind of ongoing private clinic follow-up. Unknown Attendee: That was the final question. There are no more questions. I'll hand back over to Dr. Bains for closing remarks. Parmjot Bains: Okay. Thank you. Thank you, everybody. So just to kind of -- I guess, many thanks often to the team at ImpediMed who has done a lot of work. So this morning, we launched a whole new website. We got an FDA clearance on bilateral. On Monday, we launched -- we submitted a new 510(k). We've got a heart failure -- sorry, a sales team that is out in the market. We've got 19 conferences coming up over the next quarter. There is a lot of work underway. And so we are working very hard on launching into these new spaces and making sure that SOZO gets to those patients that need it. So -- and many thanks to you all for listening. Thank you.
Simon Hinsley: Good morning, and welcome to ikeGPS quarterly update, where we have the CFO, Paul Cardosi, on the line. We'll have Glenn Milnes, the CEO, join shortly. [Operator Instructions] But Glenn is going to run us through most of the financials as a part of the quarterly first, and then we expect to Glenn to join shortly. Thanks very much, Paul. Paul Cardosi: Thanks, Simon, and good morning and good afternoon to everyone. Thank you for joining our third quarter performance update. We published our results earlier today. So hopefully, you've had a chance to look at the document. We're not presenting slides today. I was actually going to talk you through the handout that's been published on our website as well as the NZX and ASX. Overall, we've had a very strong third quarter, continuing on from the strength that you saw in the second quarter. At a very high level, our subscription revenues continue to grow at a 35% growth pace. You'll see that in some of the slides that we have. We're also seeing continued improvement in gross margins, which creates operating leverage for us as a business. And we do that with a healthy balance sheet that we're investing into new products, which are on track for release later in our calendar year. I'm going to jump to the financial part of the presentation. And it's the section that's titled Performance Summary. I'm going to start with what we call our exit run rate or annual recurring revenue trend. You can see that through the 9 months year-to-date, we finished at NZD 21.1 million, that's an increase 35%. It's actually 36% in constant currency. We had a little bit of an impact from the U.S. dollar, New Zealand exchange rate, that represents about a 39% 3-year annual -- compound annual growth rate. So, subscriptions is where the business is predominantly focused, and you can see that as we continue on that growth trend. One thing of note, we launched a product called IKE PoleForeman in literally 2 years ago, and that product exceeded $10 million of that exit run rate ARR. So really pleased to see the strength of PoleForeman in our numbers continue as we report today. If I go to the next chart, we look at subscription revenue. So this is our recognized subscription revenues, again, 9 months year-to-date. We finished year-to-date at $14.1 million. That's a 38% growth rate over the year-to-date period from the prior year. What's not on this slide is we actually did about $5.3 million in subscription revenue in the third -- our third quarter, which is actually a 43% year-over-year growth rate. So you can see from those 2 slides, subscription revenues continue to grow and the pace is picking up. In the third quarter, we added about $2 million of ARR. A lot of that comes from new logos. We continue to win engineering and utility new logos. We're also expanding significantly the portfolio into our existing customers. So that trend in that business model continues for us. If I go to the third slide, which is the seat license trend, the majority of our sales are sold on an annual per seat basis, an annual per user basis. Seats grew at 30% year-over-year. We're also seeing an increase in our average revenue per unit, and a lot of that has been helped by a recent release of our AI-based PolePilot that sells as part of our IKE Office Pro product line. So, seat growth continues well. The pricing continues well underlying those seats. So continued growth there. If I go to the next slide, it's our transaction or services business. And you can see that we had some weakness there in our services revenue. If you remember from prior calls, a lot of our services customers are broadband communication companies. The U.S. government had a reset on funding for some of those companies. So, a lot of the funding is there, but it's being delayed just through legislation changes, and we're seeing that in some of our service business. So, you can see that in our year-to-date numbers, we're down year-over-year, both on the number of Poles that we count in our transactions. as well as the services revenue. We have made moves to restructure the team that supports this business. We've offshored a lot of the work. So, we are seeing improved gross margins in services, which adds to operating leverage across the company. I'll jump next to the segment revenue. So, you can see the NZD 19.8 million of revenue that we're at year-to-date and how that is broken out. The recurring piece, which is our subscriptions and the reoccurring piece, which is the transaction revenue sits around 90% of our total revenue today. And you can see that for the year-to-date, we grew revenues around 7%. And year-over-year for the quarter, revenues were up around 11%. So continued growth across the revenue. But clearly, the mix is the subscription piece of the business. I'm going to -- before we get into questions or if Glenn joins, I'll just finish with the metrics chart and just make some comments on it. This is the last -- the table at the back. Gross margins continue to improve. You can see 79% versus 68%. The subscription mix helps that. The restructuring we've done in the transaction services business helps that. That creates leverage, leverage that we're using to invest in some new products as well as on our path to EBITDA positive. So that table gives you a sense of not just the overall margin of the business, but how the margins of our product lines stack up. You can also get a sense of our customer counts as well as revenue and margin by segment. So, I'm going to close there with just comments that it's a solid quarter. We see a similar early signs in our fourth quarter, which started in January, and we continue to book business, and we're off to a relatively strong start as we embark on the fourth quarter and the final quarter of our FY 2026. And with that, Simon, I'll hand it back to you. Simon Hinsley: Our first question is from James Lindsay at Forsyth Barr. James Lindsay: Congrats, Paul. And I just wonder if I could just ask a few questions. Firstly, just with regards to, I suppose, the more disappointing performance on the transactional side of things, if there's anything in there with regard to sort of when that could turn around? Paul Cardosi: It's a good question, James. From a macro standpoint, we are hearing that a lot of the companies that got funded had to reapply and are starting to see funding coming through. And also from a sales pipeline perspective, we're starting to get line of sight to some large projects. Timing is unsure at this point. We're thinking March, April time frame. But certainly, we're seeing more deal activity in our pipeline, I would say, in the last couple of months than we've seen maybe in the earlier parts of this year. So early signs that it could start to happen in first quarter. James Lindsay: Okay. And then obviously, the gross margin in that side -- that transactional side of the business has actually been relatively volatile. But for this quarter, it looked to be up a reasonable amount. Is there -- can you give us any sort of headway about why it is so volatile? Paul Cardosi: Part of the volatility is we took some onetime restructuring in the second quarter. So, you would have seen, I would say, relatively low margins tied to some restructuring that we did with the team. And then the third quarter was our first full quarter where the majority of the work in this business has been offshore. So, we had an offshore model for some of the work that we do in services, but the third quarter was really the first quarter that we saw a full quarter of work being done offshore. And it's not just lower cost, it's also more of a variable model in that we only incur costs when we incur the work. So, we have less fixed costs in that model as well. So, you're really seeing the effect of the offshore move that we've made. James Lindsay: Okay. And that's that Mexican team that you're talking about? Paul Cardosi: That's correct, yes. James Lindsay: Yes. Okay. Great. And just with regard, obviously, the balance sheet in a really strong position post the capital raise. And just with regard to the spend that's going on in R&D, can you talk about sort of the mix of what's going on in spend and sort of full year? Will that start to accelerate in the next quarter or so? Paul Cardosi: It will definitely start to accelerate. We've started to onboard some new employees tied to our PoleOS initiative. So, part of what we're driving, I think you know is a fairly significant platform strategy. And we started to onboard some resources engineers, both here in the U.S. and in New Zealand starting in January, and then we've got some additional hires coming in February. So, you'll see the spend tick up, but it's not reflected yet in our third quarter because the headcount came in -- is starting to come in this quarter. James Lindsay: And obviously, well done. I think it looks -- if I look at the numbers right, it might be your third best quarter ever as far as that 25 net customer growth. Just interested in the mix of that and what do you think has driven it? Is that sort of more PoleForeman? Or is it just in core product? Where is that mostly come in? Paul Cardosi: Two areas that I've seen in the third quarter, James. One is the ecosystem of companies that use PoleForeman continues to expand. So, think about a utility not just rolling out PoleForeman in more departments, but also the engineering firms that support those large utilities. So, we're seeing, I would say, kind of a flywheel effect on that in terms of both subsegments, the engineers and the utilities buying more PoleForeman. I would also say that we saw an uptick in Office Pro, IKE Office Pro in the third quarter. PolePilot has helped. We're starting to have customers take the new version with the AI-enabled PolePilot. And we're also seeing -- we run a hardware trade-in program where customers could trade in old hardware and trade up to newer hardware with IKE Office Pro licenses. And so, we're seeing a lot of the benefits from that on the IKE Office Pro side as well. James Lindsay: Right. And you mentioned just PolePilot. Maybe just while you're on that, as far as sort of the customer feedback on that and if there's been any sort of fight back on the increase in price that you're putting into customers for that product? Paul Cardosi: So far, we've had about 30 customers license it with no pushback on the price. And overall, the feedback has been super positive in terms of time savings they're seeing by being able to use that functionality. James Lindsay: And is there anything else in market that's sort of comparable to that? Paul Cardosi: Maybe a Glenn question, but certainly, we haven't seen anything crop up just yet now that we've launched PolePilot in the market. James Lindsay: And just the other thing I was going to ask about the customer base. I know that there's always a very big mix of size potentially there. And maybe when you're saying about the network effect, if it's sort of associated companies to the utilities, it's possible that the size of this, the 25 net new customers is maybe smaller than the average that you've got today. Would that be fair to say? Paul Cardosi: I would run an 80-20 on it, James, and say that 20% of those net new give us, I would say, material size of deal, meaning high 5-figure, high 6-figure kind of ACV, annual contract value deal size. And then the other 80% quantity is maybe smaller -- more of the smaller engineering firms that maybe take a smaller amount of licenses and then expand over time. James Lindsay: Great. And then last one for me. It might be more of a Glenn question as well. Thanks again for the heads up on that sort of 9 months for that Module 1. How long do you think that sort of pilot testing? Have you got any indication about how long pilot testing would take before sort of a market introduction? Paul Cardosi: I know that basing on what we did with PolePilot and the Module 1 is, I would say, it's an adjacency to what PoleForeman does, but it's a different subsegment. I would say that if I follow what we did with PolePilot, it's likely to be a 60- to 90-day beta that we'll put in customers' hands and get feedback on very quickly. So typically, 2 to 3 months is what our beta period is, but we have more development work to do before we get to that. James Lindsay: Great. And you mentioned -- sorry, to carry on, I'll pass it back to Simon shortly. I think in the raising presentation, you talked about around about $11 million, I think, if I recall, for the 2 modules. Is that still on track? Or is there any sort of change in the view about what would need to be spent? Paul Cardosi: The only change that I would say that's material is we're, I would say, fast following in terms of our adoption of artificial intelligence. And I would say that, that is improving the way that we develop and leading to a faster development cycle. We haven't quantified the impact yet, James. But certainly, we're leaning into, I would say, faster AI adoption that could help accelerate the development, which ultimately would lead to lower cost. But I don't have a number that I can give you at the moment. Simon Hinsley: Our next question is from James Bisinella at Unified Capital Partners. James Bisinella: Congrats on the result. Lots of ground covered there. I might just ask a couple. Just on sort of the pipe, you mentioned some strength coming through there. Just keen to hear a bit more color kind of in the potential makeup of that. Obviously, some large deals signed in the past. You do have 8 of the 10 largest IO users at the moment. So, is this a makeup of sort of large deals, a combination of smaller ones? Or just any further color there would be helpful. Paul Cardosi: And just to clarify, James, are you asking for results to date or more of the pipeline that we're seeing as we move forward? James Bisinella: More so the go forward, yes. Paul Cardosi: Yes. I mean, we look at the pipeline constantly. And I would say that, we have very good coverage of the bookings that we need to close to hit that 35% guidance. So we're laser-focused in on the pipeline that we have, the deals that we have in that pipeline. And I would say, we have between 8 to 10 material deals of significant size that make up, I would say, maybe about half the pipeline. So we don't need to close all those deals to hit our 35% run rate. But my point is the deal flow is still -- potential deal flow is still very healthy. And it's -- I would say it's a mix of large 5-, 6-figure deals in the 8 to 10 category and then the rest is smaller deals. James Bisinella: That's great. That sounds very supportive. And then just another one for me, just last one, just on kind of the ARPUs of the new product line that's 9 months away. I think kind of blended ARPUs at around the NZD 2,000 mark. So just looking for any color on ARPUs of this new product and what we could see out of that? Paul Cardosi: We haven't priced it yet. But to give perspective, our PoleForeman ARPU runs around rounded up USD 2,000 is our PoleForeman ARPU. And our feeling is that, the new product has significantly more of a value proposition than PoleForeman. So we haven't priced it, but I would think that it would be well north of the USD 2,000 we have today for PoleForeman. Simon Hinsley: Thanks, James. Next question, congrats on PoleForeman reaching $10 million ARR. How much approximately is the total achievable ARR for PoleForeman just from your existing client base? Is the customer take-up of PoleForeman still accelerating? Paul Cardosi: It's still accelerating through -- I would say that, the revenue potential is still significantly higher. I know that in prior calls, we've shared market penetration and penetration within our accounts. And so, the short answer is in the next 6 to 12 months, I think the potential for PoleForeman is still there. We're not seeing a slowdown. And the pipeline that we have suggests there's still not a slowdown. So, without throwing a number out, Simon, I would say the potential and the upside is still significant for PoleForeman. Simon Hinsley: Thanks, Glenn. Just a question on what circumstances do you envisage that the company might raise more capital in the next few years? Paul Cardosi: I would say, it's based on a strategic direction more than financial need, if that makes sense. So today, we're tracking to get the business to EBITDA positive. And the increased gross margins give us more and more leverage as we grow that margin, we've got more to invest further the strategy. But to me, it would be strategic reasons that would lead to potential capital raise, meaning is there subsegments we could get into through an acquisition as an example. But today, I would say we're heads down executing on the strategy we have, and it would be something strategic that would lead to the need for a capital raise. Simon Hinsley: Thanks, Paul. That concludes the Q&A segment. Thanks so much for stepping in again. And if there's any further questions, details are at the bottom of the ASX and NZX announcement, but I hope you all have a good day. Thanks, Paul. Paul Cardosi: Thank you. Bye.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2025 BXP Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, Vice President, Investor Relations. Please go ahead. Helen Han: Good morning, and welcome to BXP's Fourth Quarter and Full Year 2025 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be a change. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time-to-time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to 1 and only 1 question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks. Owen Thomas: Thank you, Helen, and good morning to all of you. BXP had a very strong year of performance in 2025 in all areas critical to our business, namely leasing, asset sales, development starts and deliveries, financing and client service, notwithstanding our below reforecast FFO per share outcome for the fourth quarter. We remain on track, if not ahead, in executing the detailed business plan we outlined for shareholders at our investor conference last September. This morning, I'll review our progress toward achieving the critical components of this plan, which are leasing and growing occupancy, asset sales and deleveraging external growth primarily through new development, capital raising for 343 Madison Avenue and increasing focus on urban premier workplace concentration. Though Doug will provide details on BXP's leasing activity, in summary, we had a strong fourth quarter and full year of leasing and our forecast occupancy gains have commenced. We completed over 1.8 million square feet of leasing for the fourth quarter and over 5.5 million square feet for the full year 2025, well above our goals for the year. As we've explained on prior calls, leasing activity is tied to both our clients' growth and use of their space. We have every reason to be confident that the positive environment we are experiencing for leasing will continue into 2026 as earnings for companies in both the S&P 500 and Russell 2000 indices, a proxy for our client base are expected to grow at double-digit rates, an acceleration above 2025 growth levels. Return to office mandates from corporate users continue to grow and take effect. Placer.ai's office utilization data indicates December 2025 was the busiest in office December since the pandemic and showed a 10% increase in office visits nationwide from December 2024. Concerns and speculation about the impact of AI on job growth and by extension leasing activity are not supported by the actions of our clients, many of which are growing their footprints, upgrading their space, and/or executing long-term leases. In fact, we're experiencing accelerating demand from AI companies, particularly in the Bay Area in New York City. The near-term negative impacts of AI on jobs are more likely in support functions, which are generally not occupying premier workplaces. Providing further support for our leasing activity is the consistent strength and outperformance of the premier workplace segment of the office market where BXP is a market leader. Premier workplaces represent roughly the top 14% of space and 7% of buildings in the 5 CBD markets where BXP competes. Direct vacancy for premier workplaces in these 5 markets is 11.6%, 560 basis points lower than the broader market, while asking rents for Premier Workplaces continue to command a premium of more than 50% over the broader market. Over the last 3 years, net absorption for Premier Workplaces has been a positive 11.4 million square feet versus a negative 8 million square feet for the balance of the market, which is nearly a 20 million square foot difference. Given these positive supply and demand market trends and our strong leasing in 2025, we believe our target of 4% occupancy gain over the next 2 years remains achievable and more likely than when we made the forecast last September. Our second goal is to raise capital and optimize our portfolio through asset sales. During our Investor Day, we communicated an objective to sell 27 land, residential and nonstrategic office assets for approximately $1.9 billion in net aggregate sale proceeds by 2028. We are off to a strong start. So far, we've closed the sale of 12 assets for total net proceeds of over $1 billion, $850 million in 2025 and $180 million this month. In addition, we have under contract or agreed to terms the sale of 8 assets with estimated total net proceeds of approximately $230 million in 2026. In total, we have 21 transactions closed or well underway with estimated net proceeds of roughly $1.25 billion. As of now, dispositions estimated for 2026 aggregate over $400 million, and we will be exploring additional sales. For the $1 billion in dispositions that have been closed, there are 7 land sales for $220 million, 2 apartment sales for $400 million and 3 office lab sales for $400 million. We have been able to achieve attractively valued land sales by creatively positioning our office land for other uses. To date, we have sold or are in the process of selling land to a corporate user, a municipal user, a light manufacturing developer, a utility and most importantly, developers for residential use, both apartments and for-sale townhomes. Across Lexington, Waltham and Westin Massachusetts, Montgomery County, Maryland, Fairfax County, Virginia, Santa Monica, California and West Windsor Township, New Jersey, we have received or are pursuing entitlements for over 3,500 residential units which is creating significant value for shareholders and will be the backbone of both our apartment development and land sales activity going forward. We sold 2 high-quality apartment buildings, which we built in Reston Town Center in Cambridge, Massachusetts for approximately 4.6% cap rates both were profitable developments for BXP. Lastly, on office sales, we elected not to participate in a debt restructuring at Market Square North and sold our interest to our partner for our share of the existing debt balance. We sold 140 Kendrick Street, our only asset located south of the I-90 interchange on Route 128 in suburban Boston at a relatively high cap rate of 9.5%. However, we maximized its income potential, having leased the building to 96%, and the local market is not strategic to BXP given our lack of scale. Lastly, we sold our 50% interest in Gateway Commons to a strategic buyer that has significant scale in South San Francisco for a 6.2% cap rate and the property is 63% leased. Though we think South San Francisco is an attractive life science market longer term, given high vacancy rates and low net absorption, it will take some time to capture the upside and we received a reasonable price from a logical buyer. With this deal, we have exited the Life Science business on the West Coast, but remain committed to the sector through our substantial life science holdings in the Boston region. Supporting our disposition efforts, office transaction volume in the private market continues to improve as more equity investors become constructive on the sector, and financing is available at scale, particularly in the CMBS market, with tightening credit spreads. In the fourth quarter, Significant office sales were $17.3 billion, which is up 43% from the third quarter of 2025 and up 21% from the fourth quarter of the prior year. The transaction most relevant to BXP's portfolio that occurred in the fourth quarter was the sale of a 47.5% interest in 101 California Street in San Francisco, for a 5.25% cap rate and $775 a square foot. The building is a market leader in San Francisco, comprising 1.25 million square feet and is 88% leased with attractive property level financing through 2029. The third goal is to grow FFO through new development selectively with office given market conditions and more actively for multifamily with an equity partner. For office, we continue to allocate more capital to developments than acquisitions because we're finding very high-quality development opportunities with pre-leasing that we believe will generate over 8% cash yield upon delivery, which is roughly 150 to 250 basis points higher than cap rates for debatably equivalent quality asset acquisitions. Additional advantage as new buildings generally have longer weighted average lease term and limited near- and medium-term CapEx requirements. The trade-off is timing as developments obviously takes several years to deliver. This past quarter, we created a second preleased premier workplace development in the Washington, D.C. CBD market. Following our success at 725 12th Street, we were approached by Sidley Austin to find them a new Washington, D.C. headquarters. We identified 2100 M Street as an attractive site with frontage on New Hampshire Avenue and 21st Street. We simultaneously negotiated a purchase of this site for $55 million or $170 a square foot and executed a 15-year lease for 75% of the to-be built not yet designed 320,000 square foot premier workplace. The total development budget is estimated to be approximately $380 million, and the forecast unleveraged cash yield upon delivery is in excess of 8%. Though we have closed on the site, construction will not commence until 2028 and building delivery is expected in 2031. For multifamily, we have 3 projects with over 1,400 units under construction and are in various stages of entitlement and/or design for 11 projects totaling over 5,000 units, one of which will commence in 2026. We expect to continue to capitalize new development starts with financial partners owning the majority of the equity. We continue to advance our development pipeline with 8 office, life science, residential and retail projects underway, comprising 3.5 million square feet and $3.7 billion of BXP investment. We expect these projects will deliver strong external growth both in the near term with the delivery of 290 Binney Street midway through the year and over the longer term. Our final goal is to introduce a financial partner into 343 Madison Avenue, our leading premier workplace development in New York City, given its location with direct access to Grand Central Terminal and state-of-the-art design and amenities. We finalized a lease commitment with Starr for 29% of the space in the middle bank of the tower and are negotiating a letter of intent for another 16% of the building located just above Starr. We have committed to nearly 50% of the construction costs and our projections remain on track for a stabilized unleveraged cash return of 7.5% to 8% upon delivery in 2029. We are in discussions with several potential equity partners for a 30% to 50% leverage interest in the property and also have had constructive discussions with several construction lenders for financing at attractive terms. Our leasing, construction and capital markets execution continues to derisk the 343 Madison investment, and we intend to complete this recapitalization in 2026. We are making strong progress with our strategy for BXP to reallocate capital to premier workplace assets in CBD locations. We recently launched new developments at 343 Madison Avenue in New York City and 725 12th Street in Washington, D.C. We plan to launch construction of 2100 M Street in 2028 and the majority of the office and land assets we are selling are in suburban locations. We continue to evaluate additional premier workplace development and acquisition opportunities but remain disciplined about quality, pricing, and the result in leverage and earnings impacts. In conclusion, our clients are, in general, growing, healthy and more intensively using their space, creating increasingly positive leasing market conditions concentrated in the premier workplace segment of the market. New construction for office has virtually halted leading to higher occupancy and rent growth in many submarkets where BXP operates. Debt and equity investors are becoming constructive on the office sector, resulting in more availability of capital at better pricing. BXP is very much on track executing our business plan as outlined last September, which we believe will deliver both FFO growth and deleveraging in the years ahead. And I'll turn it over to Doug. Douglas Linde: Thanks, Owen. Good morning, everybody. So filling in some details on our leasing progress. When we made our presentations at our Investor Day, we had all of our regional executives on the dias and they described a very constructive and an improving environment for our portfolio across each of our markets. Our remarks last quarter reinforced that outlook. Our leasing results this quarter continue to affirm the sentiment. As you read last night, the fourth quarter total leasing volumes were strong and exceeded our expectations, and our occupancy jumped about 70 basis points, with about 35% of that gain stemming from improvements in the portfolio leasing and the other parts from reductions to the portfolio size, aka, the asset sales. We are excited to announce our new development leasing and those investments are going to drive net operating income growth from 29% to 32% but we are in the here and the now. It's our in-service vacant space leasing and covering near-term lease expirations that will drive our occupancy improvement and same-store revenue growth in '26 and '27. In the fourth quarter, we completed about 500,000 square feet of vacant space leasing, which included about 70,000 square feet of leases that were expiring in the fourth quarter, and we executed leases on 550,000 square feet of '26 and '27 expiring space. In the full year '25, we executed leases totaling over 1.7 million square feet of vacant space and we start 2026, with 1.243 million square feet of executed leases on vacant space that have yet to commence. Calendar year '26 expirations have been reduced down to 1.225 million square feet. The bottom line is that if we were to do no additional leasing in '26, our occupancy would remain flat for the year. The good news is that we have lots of activity, and we are going to doing lots of leasing and we have begun to execute leases. We expect to complete 4 million square feet of leasing in 2026, which is consistent with what we suggested during our Investor Day presentations. We have 1.1 million square feet in negotiations today, including more than 750,000 square feet of currently vacant space and 125,000 square feet associated with 2026 expirations. On top of that, our discussion pipeline currently sits at about 1.3 million square feet and includes more than 700,000 square feet of vacant space. This is about 10% larger than the pipeline from the third quarter call. We've made significant progress on residential entitlement work, as Owen described, across a number of our assets, and some of this work is going to allow us to take out of service and demolish suburban office buildings and then redevelop those parcels into higher-value residential uses consistent with our portfolio optimization strategy. In Waltham, our rezoning efforts have reached a point where we have removed 1000 Winter Street, a 275,000 square foot office building from the in-service portfolio this quarter. Next quarter, as leases expire, we will be removing 2800 28th Street, a 115,000 square foot office building and 2850 28th Street, a 146,000 square foot office building, both in the Santa Monica Business Park from the in-service portfolio. We've submitted our project application in mid-December for 385 units on the site of our 2800 28th Street office building, which is about 50% leased today. We will be relocating many of these existing tenants and hope to be under construction in early '27 on the first residential project in Santa Monica. We've also reached an agreement with an institutional partner to commence development at Worldgate in Herndon, Virginia, where we purchased 300,000 square feet of office space with plans to re-entitle and demolish it. These buildings were never in service. The entitlements are nearing completion, and we anticipate starting during the second quarter. As Owen said, we also received our zoning approvals to build 100 townhomes, which we are actively marketing and 200 apartments in Weston Mass on unentitled land and are moving forward with site plan approval. As Owen discussed, we sold a number of assets at the end of '25 and in January, we completed 2 more transactions. On a combined basis, these sales reduced our portfolio by 2 million square feet and the assets were 78% leased. The in-service portfolio as we sit here today, is 46.6 million square feet. Owen mentioned our expected property sales for '26. Based on the transactions in documentation today and the removal of the 2 buildings at SMBP, the portfolio is expected to be reduced by another 1 million square feet by the end of the first quarter. We ended the year with in-service occupancy of 86.7%. I said we are negotiating leases on 750,000 square feet of vacant space. We expect 600,000 of that to be in occupancy in the fourth -- by the fourth quarter of '26. Again, we're also negotiating leases on 125,000 square feet of '26 expirations. This 725,000 square feet of leasing on a portfolio of 45.6 million square feet will add 160 basis points of occupancy by the end of '26. We will sign additional leases on vacant space and/or renew '26 expirations and thereby achieve 200 basis points of occupancy improvement by the end of the year, ending the year at about 89%, just as we stated in September. The overall mark-to-market on leases signed this quarter was flat on a cash basis, though the regional variations were pretty meaningful. We had a 10% increase in Boston, New York and D.C. were essentially flat, and the West Coast was actually down 10%. Boston was led by strong markups in the Back Bay portfolio. New York was very space sensitive. In other words, we had 1 lease at the General Motors Building that was up 9%, along with another lease in the same building, same elevator bank that was a negative 13%. In our West Coast portfolio, in particular in Embarcadero Center, the structure of the leases made a big difference. For example, we had 2 leases in Embarcadero Center Four in close proximity that had a $20 square foot difference due to 1 lease having a very small TI allowance and no free rent and the other having a full build in the year. This quarter, we executed a number of large leases. Excluding the 2 development property assets, we signed 17 leases over 20,000 square feet, with the largest at about 115,000 square feet. 44% were involving renewals, extensions or expansions and 56% were with new clients. Existing client expansions encompassed about 162,000 square feet of the activity. We also had about 100,000 square feet of clients that renewed but contracted. The second generation rents in the leasing [ statistics ] this quarter represent about 900,000 square feet and the gross rents were down about 3%. The DC number reflects the reality of 10 years of 2.25% to 3% annual escalation on top of operating expense increases. As I've said in prior calls, almost every DC area lease has a cash roll down of upon expiration. In San Francisco, the statistics include only 57,000 square feet and just 23,000 square feet of that was CBD office. The change in the office portfolio rent was a decline of about 9%. Before I pass the call to Mike, I want to make a few comments on our individual markets. In the BXP portfolio, Midtown New York, the Back Bay of Boston and Western Virginia continue to have the tightest supply and therefore, the most landlord favorable market conditions. And this quarter, the most significant improvements we've seen were at -- in the Park Avenue South submarket in Midtown and the [ South of Mission ] Market in San Francisco. In the Boston CBD, where we are 97.5% occupied we completed another early renewal and extension in the Back Bay portfolio. We executed a 115,000 square foot lease, which included an 18,000 square foot of expansion that involved BXP freeing up space from other clients in the building. When you're 97.5% occupied, it's hard to lease vacant space. We completed a second large transaction in the Back Bay that was a 57,000 square foot renewal of a 95,000 square foot block. The client had sublet the remaining space in '24, and we're negotiating a lease with a current subtenant to go direct for 10 years when the prime lease expires in 2027. Again, an indication of the tightness in the market. In our Urban Edge portfolio, we signed another life science client at 180 CityPoint, actually done yesterday, which brings that building to 92% leased. Our remaining first-generation life science availability from the Urban Edge is now limited to 27,000 square feet at 180 and 113,000 square feet at 103, totaling 140,000 square feet. In our view, the macro issues around life science bottomed at the beginning of '25. Nonetheless, demand for wet lab space has not recovered. There are a few users actively touring but the requirements from early-stage clients continue to be limited. Construction at 290 Binney Street in Cambridge is nearing an end. Rent is going to commence in April and we expect to deliver the building into occupancy in June. In New York, the most significant change in our activity has been in the Midtown South portfolio. On January 1st, '25, we had signed leases of just over 100,000 square feet at our 450,000 square foot 360 Park Avenue South development. We executed leases on 4 floors in the fourth quarter, which brought the total leasing in the building to 262,000 square feet or 59%. We are negotiating leases on an additional 6 floors that should bring the building to 90% leased during the first quarter. We will have 2 floors available in the building. And across Madison Square Park, we leased an additional 32,000 square feet at 200 Fifth in early January, leaving us with a total of 33,000 square feet of availability where we had 350,000 square feet vacated in 2025. Starr is currently a tenant in 240,000 square feet at 399 Park. We expect their relocation to 343 Madison will occur in the third quarter of 2029. We have already received inquiries about their space. At each of our properties, at the 53rd Street campus, the average in-place fully escalated rent is less than $110 a square foot, which is significantly below the current market. As a case in point, we signed a lease of 599 Lexington Avenue in the fourth quarter of 2024. We are documenting a lease on an adjacent floor in the building today with a starting rent that is 25% higher. In San Francisco, the most significant change in the portfolio is at 680 Folsom and 50 Hawthorne. You will recall that in late October, about 90 days ago, I described the strong interest we were seeing at the building, where we had 208,000 square feet of vacancy and 63,000 square feet of expirations in June 2026, but no leases in negotiation. Today, we have executed 2 leases totaling 69,000 square feet and are negotiating leases for an additional 132,000 square feet. All of these leases agreed to terms during the last 60 days of 2025. While the AI demand has not translated into commensurate growth in ancillary professional service tenants in high-rise assets in the markets, overall, non-AI client activity is also improving. This quarter, we completed almost 200,000 square feet of leases at Embarcadero Center and 535 Mission, which is almost double what we did in the third quarter. Many of our asset sales were on the Peninsula of San Francisco. Our remaining in-service assets are in Mountain View. Client tours continue to accelerate in this market as well, and we have signed an LOI for a 52,000 square foot building at Mountain View Research. Finally, D.C. Activity in D.C. continues to be concentrated in Reston Town Center. This quarter, we were able to manufacture 43,000 square feet of expansion space for a growing defense contractor by doing an early termination with a client that was acquired not using their space and had a 2032 expiration. We also completed 195,000 square feet of additional transactions with 15 clients. Any leasing pause associated with the government shutdown from the fall is fully recovered. That wraps up my comments, and we'll turn it over to Mike to talk about guidance for 2026. Michael LaBelle: Great. Thanks, Doug. Good morning, everybody. So this morning, I plan to cover the details of our fourth quarter and our full year 2025 performance. I'm going to spend most of my time, though on our 2026 initial earnings guidance that we included in our press release, with additional details in the supplemental financial package. For 2025, we reported total consolidated revenues of $3.5 billion and full year FFO of $1.2 billion or $6.85 per share. Our fourth quarter FFO was $1.76 per share, and it came in short of the midpoint of our guidance by $0.05 per share due primarily to higher-than-anticipated G&A expense and noncash reserves for accrued rental income. Our G&A expense for the quarter was $3.5 million or $0.02 higher than our projection. $0.01 per share of this was from higher compensation expense and $0.01 was from higher legal expenses that were related to the elevated leasing activity that we saw in the quarter. We also recorded approximately $6 million or $0.03 per share of credit reserves for the accrued rent balances for 2 clients in the portfolio. One is a 60,000 square foot firm that provides educational services to federal employees in Washington, D.C. and the other is a 10,000 square foot restaurant in New York City. Both clients remain in occupancy today, and we fully reserved their accrued rent balances due to our concerns of future rent collection. In aggregate, the rental obligation at our share is relatively small at $4 million annually. The balance of the portfolio performed in line with our expectations with revenues modestly above budget and higher expenses, largely driven by elevated utility costs in the Northeast due to colder-than-normal weather. We also reported gains on sale in the quarter of $208 million on $890 million of asset sales. Gains on sale are not part of our FFO, but they are part of net income and EPS. We received net proceeds from the sales activity of $800 million that has increased our liquidity and will be used to reduce debt. We currently have $1.5 billion in cash and cash equivalents, a portion of which will be utilized in February to redeem our $1 billion bond that expires this quarter. With that, I will turn to our 2026 guidance. We are introducing 2026 FFO guidance with a range of $6.88 to $7.04 per share, which is within consensus estimates. The midpoint of our guidance for FFO was $6.96 per share, and it represents an increase of $0.11 per share from 2025. At a high level, our 2026 guidance can be summarized as follows: internal growth in NOI from higher occupancy in our same-property portfolio, external growth in NOI generated by our development deliveries, lower interest expense from utilizing the proceeds of asset sales to reduce debt. These are partially offset by a reduction in NOI from executing asset sales in 2025 and 2026 that is consistent with our strategic asset sales plan that we described at our Investor Day. Noncash amortization of our new stock-based outperformance plan, which is designed to align management incentives with long-term shareholder value creation and a reduction in NOI from taking buildings out of service for future residential development, positioning them for higher value creation. To get into details, I will start with the expected growth in our same-property portfolio. Doug did a great job describing the ramp-up in occupancy from both signed leases that have not yet started and our active leasing pipeline. As he described, we expect occupancy to climb from 86.7% at year-end 2025 to approximately 89% by the end of 2026, which is a meaningful increase. We expect first quarter occupancy in the same property pool to be relatively flat, followed by improvement with average occupancy during the year of between 87.5% to 88.5%. As a result, we expect our same-property NOI growth to build throughout the year. Our assumptions for 2026 same-property NOI growth are between 1.25% and 2.25% from 2025. Based upon our same-property NOI of $1.88 billion, this equates to approximately $33 million or $0.19 per share of incremental NOI at the midpoint. On a cash basis, our results will be impacted by several terminations that we have proactively manufactured to accommodate either growing existing clients or new clients, like the one Doug described. In each of these cases, we will have new clients taking occupancy with free rent periods during 2026, so we are effectively trading cash rent for GAAP rent in the near term to accommodate growing clients, and we're getting valuable additional lease term. One of these occurred in the fourth quarter, resulting in $8 million of cash termination income in 2025. Our 2026 guidance assumes termination income of $11 million to $15 million, A portion of this is from 3 additional terminations that we're negotiating. The incremental increase in termination income in 2026 is approximately $2 million or $0.01 per share at the midpoint of our guidance. Even though termination income is cash income, we do exclude it from our same property guidance, and the impact is muting our cash same-property growth in 2026. Our assumption for 2026 cash same-property NOI growth is 0% to 0.5% from 2025. Our assumption for termination income at the midpoint would equate to an additional 70 basis points of same-property cash NOI growth. As Doug described, we're taking 3 buildings out of service for redevelopment into future residential sites and are in varying stages of entitlement. We are not doing any new leases in these buildings and expect to relocate existing clients to other buildings. The reduction in NOI from these buildings in 2026 is $13 million or $0.07 per share. Turning to our development portfolio. In 2025, we delivered 3 new properties totaling 700,000 square feet and $518 million of total investment. These properties include 1050 Winter Street in Waltham and Reston Next Phase II, which are 100% and 92% leased, respectively. We also delivered 360 Park Avenue South, where we're 59% leased today. And as Doug described, we have leases under negotiation to bring it to around 90%. We expect to have occupancy of all of this space by the year-end 2026, and we will have a full year of revenue in 2027. The most meaningful development that will impact 2026 is our 573,000 square foot 290 Binney Street life science project in Cambridge that is 100% leased to AstraZeneca. We own 55% of this project, and it will deliver at the end of June with a total investment of our share of approximately $500 million. In aggregate, we project that the contribution from our developments will add an incremental 2026 NOI of $44 million to $52 million. And at the midpoint, the developments are projected to add $0.27 per share of incremental NOI to 2026. As we described at our Investor Day, we have embarked on a disposition program that will fund our development activities and optimize our portfolio of premier workplaces. To date, we have closed $1.1 billion in 12 transactions and generated net proceeds of $1 billion. Our guidance assumes an additional $360 million of sales in 2026 that are either under contract or in negotiation, which we expect will generate net proceeds of approximately $230 million. The financial impact of our sales activity is expected to result in a reduction of portfolio NOI from 2025 to 2026 of $70 million to $74 million. Investing the sales proceeds to reduce debt results in lower net interest expense in 2026. We expect the net impact of sales on our 2026 FFO will be dilution of $0.06 to $0.08 per share, which is in line with the guidance that we provided at our Investor Day in September. Overall, we expect our net interest expense will be $38 million to $48 million lower in 2026 versus 2025. A portion of this is in our unconsolidated joint venture portfolio where we anticipate lower interest expense at our share of $11 million to $14 million that is primarily from the repayment of secured mortgages. Our guidance assumes our share of joint venture interest expense of $60 million to $63 million in 2026. We expect a reduction in our 2026 consolidated interest expense net of interest income of $25 million to $37 million from 2025. And that results in a 2026 range for consolidated net interest expense of $581 million to $593 million. Our guidance includes refinancing our $1 billion bond issue that has a GAAP interest rate of 3.5% and expires on October 1st of this year. We currently expect to refinance it at maturity with a new 10-year unsecured bond. Our current credit spreads for 10 years are in the 130 to 140 basis point area. So a new 10-year bond issuance today would price between 5.5% and 5.75%. We have not incorporated into our guidance the likely changing capital structure of our 343 Madison development. As Owen mentioned, we're having active discussions with prospective private equity capital partners for 30% to 50% of the project, which would reduce our funding needs. We've also started the process of construction financing for approximately 50% of the cost or about $1 billion, the response to date has been excellent, and the banks we are working with are active lending to high-quality sponsors and projects and are excited to participate. The closing will likely occur late in the year, and I expect the financial impact on our 2026 earnings will be modest. Turning to our G&A. We project total G&A expense in 2026 of $176 million to $183 million. That is an increase from 2025 of $13 million to $20 million or $0.09 per share at the midpoint. $0.07 per share of the increase is noncash and is comprised of amortization of the imputed value of our recently announced outperformance compensation plan. While there is an annual noncash expense related to the plan, it is completely aligned with growing shareholder value and only results in a payout through additional share issuance if our dividend adjusted stock price rose at between 35% and 80% from our current price over the next 4 years. Lastly, we anticipate that our development and management services fee income will be $30 million to $34 million in 2026, which is a decrease of $3 million to $7 million from 2025. The decline year-over-year is from a reduction of development fee income from completing several joint venture developments, like 360 Park and 290 Binney, and lower property management fees from selling joint venture properties as part of our asset sales program. So to sum all this up, our initial guidance range for 2026 FFO is $6.88 to $7.04 per share representing an increase of $0.11 per share from 2025. At the midpoint, the increase is comprised of higher same-property portfolio NOI of $0.19, incremental contribution from our development pipeline of $0.27, lower net interest expense of $0.24 and higher termination income of $0.01. The increases are partially offset by a reduction of NOI from asset sales of $0.41, the removal of properties from service of $0.07, increased G&A expense of $0.09 and lower fee income of $0.03. 2026 represent a return to FFO growth for BXP. We expect our quarterly FFO run rate to consistently improve through 2026, leading us to a strong base for 2027 and our portfolio is well positioned for additional occupancy growth in 2027 as we see improving trends in our leasing markets, combined with very low rollover exposure. That completes our remarks. Operator, can you open the lines up for questions? Operator: [Operator Instructions] And I show our first question comes from the line of Steve Sakwa from Evercore ISI. Steve Sakwa: I guess maybe it's a combination for the 3 of you, but it sounds like you've had good success on the disposition front and maybe even accelerated the timing. I'm just curious, Owen, if you've kind of taken a harder or a sharper pencil to the portfolio and thought about maybe more dispositions to really tighten up the portfolio. And to the extent that you have I guess, how do you balance that in terms of Mike's comment about FFO growth? And I guess, are you willing to sell more to kind of sharpen the portfolio even if it has kind of negative FFO consequences in the short term? Owen Thomas: Steve, our original goal that we outlined in September last year was $1.9 billion of sales for over the 3 years from September and I think at this point, I'd say we're sticking with that forecast. That all being said, we have a list of assets that we'd like to sell. And if we get a price that we find attractive, we will execute on it. . We are paying attention to the dilutive impacts to earnings. One thing that we have repeated over and over, and I think it's important for everyone to understand. One thing that's helping us with this is a lot of the sales that we're doing are land, and those are completely accretive because they're not generating any income. I'm not sure they're being valued in the public market, and we're using the proceeds to reduce debt. So -- and we're going to continue to sell land assets. I described 3,500 residential units that we're currently getting entitled on land that former office development sites or buildings out of service. And when we go to sell that land, that will be accretive sales. But it will be balanced out with some additional office. I gave some an example, the 140 Kendrick was an example this quarter, which was a little bit of a higher cap rate, which is an offset. So net-net, the answer to your question is we're sticking with our forecast, we might sell more. We're paying attention to the dilutive impacts, but we're also paying attention to optimizing our portfolio and deleveraging and creating capital for our development program. Michael LaBelle: I would just add one thing. I mean, of the $1.9 billion that we discussed -- that Owen just discussed, we're off to a great start. Owen Thomas: Yes. Michael LaBelle: And I would say the pace of the first $1.1 billion that we've got kind of closed is slightly ahead of where we anticipated. So when you look at the $0.06 to $0.08 of dilution I just described, it is within the range that we gave at the Investor Day. The range of the Investor Day was $0.04 to $0.09. It's a little bit at the higher end. And the reason for that is that a couple of the office sales occurred more quickly than we anticipated, which is great. Douglas Linde: Yes. My only additional comment, Steve, is that -- so Owen described all this residential activity we had. I'm just sort of putting an order of magnitude on it, there's probably somewhere between $200 million and $300 million of land value there. And assuming a portion of it is just going to be sold as townhome sites that we will not have an equity interest, and we'll just sell away. But assume a majority of it is going to be residential. We're -- I assume we're 20% of that. And then our 20% is going to be added to our development pipeline, right? So we're going to take cash off the table and make incremental investment in development as we do that on a going forward basis. So there's a little bit of dilution on a relative basis, but there's actually accretion because we're going to be making what we believe to be highly accretive investments relative to what the residential yields will be. Operator: And I share our next question in the queue comes from the line of Michael Goldsmith from UBS. Michael Goldsmith: Doug, I think you said you had 1.1 million square feet in negotiations and 1.3 million square feet in discussions. What conversion rate are you underwriting for this pool? How is that maybe compared to the last couple of years? And the historical conversion rate during prior improvement cycles. . Douglas Linde: Yes. So Michael, on the 1.1 million, it's actually now at 1.2 million as of late last night of deals that are in "lease" negotiation, I think our conversion rate is like 95%. We rarely see something drop off there. And then on our sort of pipeline of things, I'd say the conversion rate there is somewhere in the 0.5 million square feet, plus or minus, but it keeps growing, right? So as I said to you before, we're going to lease 4 million square feet of space. And so we've identified as of today about 2.3 million square feet or 2.4 million square feet of space. We will probably have identified 5 million square feet of space to get to that 4 million square feet at the end of the year. Operator: And I show our next question comes from the line of Anthony Paolone from JPMorgan. Anthony Paolone: You mentioned in your commentary that you didn't feel that AI was cannibalizing any space needs in the portfolio. So can you maybe talk in a little bit more detail about how you're tracking that, if you think that, perhaps, it's cannibalizing other types of space that's not in your portfolio? Or just any more color on that would be helpful, I think. . Owen Thomas: Tony, I'll kick it off, and Doug and Mike may also have comments on this. This is incredibly hard thing to forecast. I think all of you on this call realize that. The points that we can only make to you right now is what we're experiencing, which is accelerating leasing activity. And I just -- Doug described it, I described it, our clients are -- they're growing more than they're shrinking. They're taking better space, they're signing longer leases. And in fact, I would say AI so far for BXP's footprint has been a net plus, not a negative because we've had very significant AI leasing not only at BXP but maybe more importantly, in the Bay Area, which is an important market. It's been a very important driver of net absorption there. So that's what we're seeing today. Our instinct on this is as we think about AI, and we use it in our own work is that it's much more likely in the near term to dislocate more repetitive tasks and support jobs. And those kinds of positions generally are not resident in premier workplaces, which is substantially our portfolio. But again, I'd just go back to -- this is hard to forecast. This is what we're seeing right now. Douglas Linde: I guess I'm going to ask -- I will ask Rod and Hilary to sort of make some comments on their markets because I think that they're emblematic of what is going on. And Rod will, I assume, talk about just the growth in technology jobs in the form of AI companies and AI "sort" of vertical and/or horizontal business structures that are coming. And Hilary is going to describe what's going on with not only technology but with sort of the financial services and professional services sectors that are so much and so important to New York. So Rod, why don't you start? Rodney Diehl: Yes. Thanks, Doug. So I think if we're talking about the cannibalization. I don't know that I can speak to that specifically. But with respect to the demand that we're seeing in San Francisco and the Bay Area in general, from AI, it's just been tremendous. We've been talking about it on calls in the past, and that definitely now is showing up in the statistics. The overall tenant demand in San Francisco right now sits just around 8 million square feet and 36% of that is from AI or AI-related technology companies. So that's pretty -- it's a lot. And every time we turn around, there's another deal that's being talked about or getting signed. So there's the big ones, the OpenAI, the Anthropics of the world, and then there's a lot of small ones, too, that keep getting [ informed ]. So I just -- it's definitely a wave of demand that we're taking advantage of. We spoke about 680 Folsom and the tenant demand down there. And it's happening. So that's all positive as far as we're concerned for our portfolio. Douglas Linde: Hilary? Hilary Spann: Thanks. We are seeing real strength in the financial services sector. We continue to see companies having a difficult time securing space that they need for expansion or simply if they're trying to locate in Manhattan for the first time. I heard a statistic the other day that there is only one space that is direct with a landlord above 100,000 square feet in the premier buildings in Midtown. And I think that's a pretty telling statistic. So we've continued to see demand from our existing clients wanting to expand. We have seen stronger interest from tech and media in Midtown South, which is reflected in the statistics that Doug mentioned regarding our lease-up at 360 Park Avenue South, which is approaching 90% when we complete the leasing that's underway now. Many of those tenants are either AI-powered or have an AI component to their business. And then we still are leasing to more traditional financial services businesses, and those have come down -- some of them have come down from Midtown to Midtown South as they're seeking premier workplaces. The other thing I would mention, and Rod referred to Anthropic, there was an article out last week that Anthropic is seeking between 250,000 and 450,000 square feet in New York City. So there's definitely an expansion of AI businesses in New York. And I think that, that is driving some of the demand pickup in Midtown South and the Flatiron District. But for Midtown proper in the Park Avenue submarket and the Plaza District and premier workplace, very heavily dominated by financial services industries who continue to expand. Douglas Linde: So just to sort of you may get -- come to a conclusion, I think that both things can be true. You can have job displaced from artificial intelligence products, but you can also have growth in certain submarkets and certain cities in the country. And as Owen said, we happen to be in those places where we're seeing the growth. So is there going to be less overall job growth because of AI over the next decade? Maybe, but we're not seeing it impacting our portfolio. Operator: And I show our next question in the queue comes from the line of John Kim from BMO Capital Markets. John Kim: I wanted to go to Mike's comments in his prepared remarks about quarterly FFO consistently growing throughout the year as occupancy improves, which sets up for a strong '27. Should we interpret that as the fourth quarter '26 being the quarterly baseline run rate for next year? Douglas Linde: You mean for '27, John? Michael LaBelle: Yes. I mean I think that's a good start. I think that we provide guidance for the first quarter of '26, which is always seasonally our lowest quarter because of the vesting for G&A. And we also expect that our kind of in-service occupancy from the same-property portfolio will be flat in the first quarter, and then the occupancy will build after that. And we'll see consistent growth. I would say there's more in the back half than the first half, that will lead to 2027 growth as we get a full year of some of this occupancy growth in '26. And then given the low rollover we have, we anticipate that we're going to have higher occupancy in '27. Owen touched on again the 400 basis points that we expect, and we still anticipate seeing that. So I can't give you 2027 guidance right now, but we're feeling really optimistic about where we stand. Douglas Linde: Yes. So John, my comment would be, I sort of gave you a lot of numbers in my remarks, which you can go back and read if you have the time. But big picture, right, what I said was our lease expirations in 2026 have been covered by the leases that we've already signed that have yet to commence, and we are going to lease more vacant space. We are also going to lease more space that's rolling over in 2027. It would not be a surprise for me to be talking to you in January of 2027 and saying, "Oh, by the way, we've already covered the vast majority of our exposure for 2027. So any occupancy increases that we get are going to be driving to the bottom line, AKA, what we're seeing in '26 is going to happen in '27. And obviously, we're getting in '25 to '26, the improvements from our development portfolios, which Mike described, in '27, we're going to have full year from an occupancy perspective on 290 Binney Street, and we're going to have all of this occupancy that is going to be in the portfolio in 2026 driving 2027. So that's why we were pretty bullish about both the growth in our earnings from our same-store and our growth in our development assets coming online as when we talked to you in September in Manhattan when we did our Investor Day. We just -- and we're just as bullish today as we were then. Operator: And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Sort of building on Steve and John's question, Owen, certainly appreciate the focus on minimizing dilution for earnings and Mike, your comment on FFO acceleration on a quarterly basis. As you guys think about leasing, is there a way to reimagine leasing? I'm not talking about development, but I'm talking when you have existing space to shorten the downtime, meaning I don't know if there's a better way to do the build-out, the demolition or how leases are structured. But one of the frustrating things that we see in REIT land is just the amount of time, like 2 years or whatever between a tenant moving out and a new one moving in. And I didn't know if there's a way to shorten that. So from an earnings perspective, all the good stuff that you're doing takes effect sooner versus waiting the 2 years or so that we often have to wait for office. Douglas Linde: So Alex, you're sort of asking, is there an accounting solution to the fact that you have turnover. And I think the answer is not really. I think as we've said in the past, the condition of our space is what matters. And what I would say is that the one thing that I think we have done, which doesn't help in the short term, but certainly decreases the amount of downtime is that we've been doing more turnkey builds and when we're doing a turnkey builds, we're kind of controlling the date when the space will get completed, and we're reducing the free rent component of the deal so that when the tenant comes in, instead of having free rent, they're having much less free rent. And so that's sort of truncating that. And wherever possible, we are trying to deliver space in its current condition. And if we're able to deliver space in its current condition, we can start recognizing revenue when the space is accepted by our next client, if it's a move. But I would say we're -- our focus always is on trying to reduce downtime. And so we look at lots of different levers to do that, but I don't think we're going to be able to eliminate it in a material way. Michael LaBelle: Yes. I would just add, Alex, I mean, we provide these tools to our leasing teams on things that they can do to structure leases so that we can recognize revenue more quickly regarding how the build-out is completed and who's doing the build-out and things like that. Ultimately, it's a negotiation with the client, though, because the client has an opinion as well on how they want that completed. So there's just a negotiation that has to occur. And obviously, ultimately, getting the transaction completed is the most important thing. Operator: And I show our next question comes from the line of Johnson Zhu from Scotiabank. Nicholas Yulico: This is Nick Yulico. So a question on -- in terms of -- I know the focus has been a return to FFO growth. Clearly, there's leasing that's a big aspect of that. But can you just talk about a couple of the other ways to sort of help that process, whether it's on the G&A side, are you able to find any better efficiencies through AI or other venues? And then also on the development side, how you're thinking about kind of managing the size of the pipeline and also bringing in equity stakes earlier to projects kind of like what you're talking about with 343 Madison as a way to sort of manage dilution from development, which for you guys can take a while. I guess I'm also wondering on like 121 Broadway, if you're considering any sort of partner there in relation to that. Douglas Linde: Okay. So you asked like 6 questions there. And I'm going to speed answer a couple of them, and then I'll let Owen to hit the last one. So with regarding to sort of how we're going to accelerate our FFO growth, the first, the second and the third thing that we can do is lease vacant space. That is by far the largest opportunity set. And we're doing that, and you're going to see that quarter after quarter after quarter, we believe, I'm accelerating in terms of the value from that. Second, on the G&A side, we are spending as much time as any organization thinking about whether or not there are ways to "reduce" our overhead costs relative to using tools from artificial intelligence. I will tell you that my view right now is that we're in AI 1.0, which is, I would say, unquantifiable productivity enhancement tools as opposed to cost reduction tools for a business that's the size of BXP. And so we are being thoughtful about how we deploy those things. So net-net, not much in the way of where you're going to see reductions in G&A. And obviously, our G&A as a percentage of our revenues is de minimis and a significant portion of our G&A, you don't see because it's embedded in our properties and it's part of our operating expenses. So there's not much impact on FFO that would occur from that other than when leases roll over and we have a gross lease. On the capital side relative to development, I'll let Owen answer that one. Owen Thomas: Yes. So Nick, I would break the portfolio into 2 pieces. One is the future residential and then the office developments. So on future residential, we intend to bring a partner in for everything. So if you look at the last deals that we've done, Skymark, 17 Hartwell, we have 80% partners on those, and we're working on another one right now at Worldgate, where we also have, we think, an 80% partner. So I think you should expect that to continue to be the case for the residential. On the office, this is core to the company, and we think the developments that we're putting together are very profitable. I mean we think delivering these premier workplaces at over an 8% yield, yields great profits for shareholders. So we're reluctant to share. But we are sharing because we're focused on our leverage. So we're starting with 343 Madison, as you heard from Mike and I, that's an important goal to recapitalize that project this year. And then in terms of bringing in partners on additional office developments, it's going to depend on what our leverage profile looks like and how many additional new developments we're able to identify and secure. Operator: And I show our next question comes from the line of Blaine Heck from Wells Fargo. Blaine Heck: Can you talk about the cadence we should expect for FAD or AFFO over the next several quarters? And I guess, how we should think about the impact of higher concessions associated with the lease-up of the office portfolio? Should we expect FAD to be down year-over-year given those increased costs driven by leasing successes? Michael LaBelle: So on AFFO, I actually expect it will be up slightly. We have less rollover to deal with. We are going to increase our occupancy. So we will have additional leasing that will commence for that. But net-net, having less rollover exposure is going to help us. Our expectation on leasing costs are pretty much in line, somewhere between $220 million and $240 million or $250 million a year, depending on what the transaction costs are. And our CapEx is somewhere between $100 million and $125 million, I would say. So if you look at the midpoint of our FFO, I think our AFO -- AFFO will probably be somewhere in the $4.40 to $4.60 range, something like that, which is, I think, a little bit higher than it was this year. So we feel pretty good about where that is. And I think that on the cadence-wise, it will follow the FFO. Although one thing to point out is that as we're gaining occupancy, a lot of these leases have free rent in the beginning years. So I think that the AFFO will lag a little bit the FFO because those deals will be in free rent. And if you looked at our free rent guidance for next year, it's $130 million to $150 million, which is higher than it was last year. So that's a little bit of an offset. But that will -- in 2027, that free rent will turn into a cash rent. So the AFFO should increase. Operator: And I show our next question comes from the line of Jana Galan from Bank of America Securities. Jana Galan: A question on 343 Madison. Great to hear about the additional 16% in negotiations. Can you talk a little bit more about the demand and touring activity? And then as New York City market rents for trophy increases, how does that relationship work for potentially higher rents for an asset 3 years out? Douglas Linde: Sure. So I'm going to let Hilary give you the specifics on this. I'd just make a couple of comments. So the first is I'm pretty sure that we're the only building that's going to be delivering new construction before 2029, which is a unique position relative to timing of the demand that Hilary is seeing. And second, we're going to be more, I would say, thoughtful about whether we want to lease the top portion of this building because it's probably some of the more valuable real estate in our -- in the BXP portfolio. And we think that getting closer to the ability to deliver that space to smaller tenants will inure to us. But Hilary, why don't you talk about in general, the demand that we're seeing for 343, particularly from medium-sized companies? Hilary Spann: Sure. So I would say that we have very strong demand in financial services tenancies from tenants that are about 150,000 square feet. That is very typically an asset or wealth management business or in some instances, more of a foreign bank type tenancy. And they continue to come through at a pretty decent clip, looking at space in the podium of the building as the mid-rises and sort of upper mid-rises now more or less spoken for. And so I think that we feel very good about where rents are trending for the building, and we will meet the market for rents, whatever that is. And we've had no trouble whatsoever meeting our pro forma on the terms that we're negotiating with existing and prospective clients. So there was some indication earlier in the call, I think Doug said it that rents are going up across Midtown, the Plaza District and Park Avenue, and my observation is that rents have gone up around 15% over the last 12 months. Now 343 Madison is at the top of the market in terms of rents. There are only a couple of other buildings in Midtown that are asking and receiving similar rents. So that market is a little bit in its own stratosphere with regards to the tenants and the demand for it. But I think demand continues to accelerate, and therefore, that will continue to put pressure on pricing from the tenant side, and that will inure to our benefit as we go forward. Operator: And I show our next question comes from the line of Seth Bergey from Citi. Seth Bergey: I guess I just wanted to ask maybe a little bit of a bigger picture question here. But you mentioned rents in New York are up around 15%. In the opening comments, you kind of mentioned the regional variation in the cash mark-to-market with Boston 10%, New York, D.C. flat, West Coast down 10%, just kind of understand that different markets are on a different recovery trajectory, but how do you kind of balance some of the rent improvements with the decline of rents from premarket levels? Just trying to get at a little bit of kind of what's the overall mark-to-market in the portfolio? And then as you kind of maybe start to lap some of the COVID rent roll downs or pre-COVID rent roll downs, kind of when does that kind of turn more into a headwind. Michael LaBelle: In the next couple of years. Douglas Linde: So you asked a really hard question to answer with a simple number. The way we think about things is we look at all of the space that we have that is currently occupied. So we're ignoring the space that's vacant because the mark-to-market on vacant space is 100%, right? I mean there's -- it's from a 0. And so the mark-to-market on space that's currently occupied across our portfolio, we sort of go through on a building-by-building basis every quarter, and we make sort of a guesstimate as where we think the market terms would be for that space. And I would say, as of today, across the entire portfolio, it's somewhere in the, call it, high 4s to low 5% range. And that's, I'd say, a meaningful jump from a year ago and a modest jump from where we were a quarter ago. And why is it only a modest jump? I think it's only a modest jump because where we've seen the biggest improvements have been in the Back Bay of Boston, where our rents have gone up and in our Manhattan portfolio where rents have gone up and at the tops of our buildings on the West Coast, in particular, where rents have gone up. But we're seeing still sort of, I'd say, a stability in terms of not -- no real movement in rental rates, and again, I'm ignoring concessions for a minute in sort of the bases of buildings on the West Coast, and our Washington, D.C. portfolio, where, as I said, the issue on a cash basis is the structure of leases in D.C., and I blame Jake Stroman for this, is that he gets these relatively significant annual increases in the rents and he leaves us with this problem where the cash rent upon the expiration of the lease is higher than what the market rent is, right? Because you just -- it's really, really hard to -- over 10 or 15 years, every single year have a 3 plus or minus percent increase. So that's kind of the sort of the makeup of the portfolio. And then within each of the individual markets, I think that we are in a position where we will see a modest amount of gains in our revenues from roll-ups or -- and mitigating roll-downs across the portfolio, but a much more meaningful impact from the occupancy gain, which is why, honestly, we focus on the occupancy gain and not really on what the mark-to-market is. And I think that's going to be the case at least in '26 and '27. Operator: And I show our next question comes from the line of Richard Anderson from Cantor Fitzgerald. Richard Anderson: So kind of by design at BXP, there's always sort of a lot going on, good solid real estate decisions that nevertheless can be disruptive in the short term to growth. So you're getting more than 200 basis points of occupancy gains in 2026 per your guidance, and that results in, call it, flattish same-store NOI growth for this year. Doug, you kind of alluded to occupancy falling more to the bottom line in 2027 sort of matriculating to the bottom line just because of all the work that's being done today in this year. Do you foresee sort of a less noisy 2027 so that the next 200 basis points of occupancy gains can be something more representative at the same-store NOI line something in the mid-single-digit type of number. I'm not asking for guidance, but I'm just wondering if you're trying to get ahead of a lot of this work so that you have a cleaner story to tell next year. Douglas Linde: Yes. I mean I think the answer is yes. I mean, I don't want to suggest that we're not going to let our regional executives find really interesting things for us to do that might put us in a -- take us slightly off that. But based upon our business in front of us today, we see -- I think, Mike, what was your same store was 1.5% to 2.5%? Michael LaBelle: 1.25% to 2.25%. Douglas Linde: 1.25%, 2.25%, and my expectation is that we'll -- that will be better next year than it is this year because of the nature of the vacancy that's being pulled up and the fact that so much of it is in the back end of the year. Michael LaBelle: Yes, I think that's an important point. And we went through this at our Investor Day with the graph we showed of the buildup in occupancy, where the first and the second quarter of '26 is not going to have as meaningful of increases as the back half of '26 based upon when we anticipate -- when we have the signed leases starting and when we anticipate the pipeline leases starting. And then that occupancy will build on itself into '27, right? So for '26, our average increase is only up about 100 basis points. By the end of the year, it's a little over 200 basis points, and then you get a full year of that in '27 plus the incremental occupancy we should get in '27. So it should continue to build on itself and improve. Operator: And I show our next question comes from the line of Caitlin Burrows from Goldman Sachs. Caitlin Burrows: Just maybe more specific question on 290 Binney. You mentioned that rents are going to commence in April and you expect to deliver the building into occupancy in June. So I was just wondering if you could clarify when does GAAP NOI start to be recognized? And when does capitalized interest come off? Does that happen at the same time? And is it early April, late June or something in between? Michael LaBelle: It does happen at the same time. And the way this transaction was structured is we had a hard rent start date, but the tenant improvement design and costs have taken a little bit longer than the original expectation based upon some design changes that were made by the client. And so those tenant improvements are not going to be complete and get a CLO until sometime probably late in June. And our revenue recognition rules are that we can't start revenue recognition until it's done. So we have to wait until the end of June to start revenue, and then we will stop capitalizing interest also on that. And just as a reminder, we're capitalizing interest at 100% of the cost because it's a consolidated joint venture, even though we only own 55%. That was something we talked about at our Investor Day. And it's just important because it impacts our net interest expense guidance. It's embedded in the guidance that I provided. So cash rent will start in April. It will be prepaid rent on the balance sheet. And then in June 30th, all that cash rent will come in and be straight-lined through the full lease term starting in June. Operator: And I show our next question comes from the line of Floris Van Dijkum from Ladenburg Thalmann. Floris Gerbrand Van Dijkum: My question was sort of philosophical on your outlook for tenant improvements. And you mentioned in one of your earlier prepared comments that some of the spreads that you reported were negative because you didn't provide TIs. What is happening in your opinion on TI packages? And maybe talk a little bit about -- because obviously, it depends a little bit on markets as well and market specifics, which markets are seeing improvements as one of your peers called out the fact that I think New York office TI packages, they expect to come down in '26. So maybe if you could talk about that a little bit, that would be useful. Douglas Linde: Sure. So I'll just sort of go around our [indiscernible] big picture. So I would tell you that our tenant improvement concession in our downtown portfolio is getting stronger, meaning it's becoming a lower number. Our tenant concession package in our Urban Edge portfolio is pretty stable. In our Greater Washington, D.C. portfolio, our concession package in our CBD assets is stable. Our concession package in our Northern Virginia assets is getting slightly lower. In our Midtown portfolio, we are pulling back on the concessions that we're offering by a modest amount. And on the West Coast, I would say the concession packages are still not going down. They're not going up the way they went up in 2024 to '25 and '25, but they're still pretty elevated, and that's largely just due to the overall availability of space. Operator: And I show our next question comes from the line of Brendan Lynch from Barclays. Brendan Lynch: Congrats on all the leasing momentum. We have, however, seen a number of announcements from Fortune 500 companies suggesting they will be shrinking headcount. How should we think about that impacting your portfolio? And maybe I could see it from 2 perspectives. One, they might need less space, but conversely, it could also be driving more return to office for the employees that are retained. So any thoughts on those dynamics would be helpful. Owen Thomas: That's a hard one to answer. Look, when we see announcements for job losses, it's obviously can't be a positive per se for us. But we -- as we've described, hopefully, very clearly on this call, we're just not seeing weakness in our leasing activity from our clients. We track our clients that we renew, are they growing or shrinking? And over the last several years, our indicator is that they've been growing. So it's just not our experience. We try to read into these layoffs and what exactly is going on. It feels in some of these cases, like it's business units that are being closed and things like that. So we're just not seeing the impact of it in our leasing activity. Operator: And I show our next question comes from the line of Vikram Malhotra from Mizuho. Vikram Malhotra: I guess just maybe a bigger picture, longer-term question for either -- anyone in the team or all of you, I guess. Given the momentum, you're talking about 88% going into '27 building further. I guess, would you venture whether it's like 3 years or 5 years, like what do you think BXP's kind of structural peak occupancies for the portfolio that you keep refining versus, say, pre-COVID or pre-GFC? And then can you link that to rent spreads or rent growth in your buildings, particularly maybe expand upon San Francisco? Thanks. Douglas Linde: So Vikram, what I would say is that getting above 93% on a portfolio with an average lease length of 8 to 9 years is probably attainable, but will be hard to surpass. And with regard to San Francisco, that's where we have the most opportunity for improvement. San Francisco obviously had the most difficult time of it from pre-COVID through COVID and now the recovery is obviously happening. And so I would say there, we have the most significant amount of upward opportunity. There, from a rollover perspective, I think we're going to -- on the overall portfolio of spaces that are currently in occupancy, we're probably modestly rolling down over that portfolio, and that's largely because the rents in the basis of the building have not kept up with the increases in the rents at the tops of the building. We are seeing positive mark-to-markets on the top 20% to 30% of every one of our towers in San Francisco. And when Salesforce Tower ultimately starts to roll over, we'll have significant positive mark-to-market. In the short term, the rollover that we have in Embarcadero Center, which is lower down in EC 1, 2, 3, there's probably a modest roll down that will occur there. Michael LaBelle: And I think it's clear that rental rates are directly linked to occupancy. And that's why we're feeling in the Back Bay of Boston and in Midtown New York, where the occupancy has tightened and rents are accelerating. So clearly, as we get the portfolio better leased, there's going to be less space for us to lease. We can be more choosy and charge more for those spaces. And then we also look for opportunities to work those spaces early like we are now with some of the terminations that we talked about where we're trying to take advantage of opportunities where there's not enough space in a building and trying to accommodate growth from our clients and grow our revenue stream. Operator: I show our next question comes from the line of Dylan Burzinski from Green Street. Dylan Burzinski: I guess just maybe sort of paralleling the question that was asked, I think, 2 questions ago about just job growth and that sort of not being as strong with layoffs going on. And maybe sort of adding the fact about return to office that I think you mentioned at the beginning of the call, Owen, I think a lot of what's going on is just pent-up demand driving a significant amount of leasing activity given, call it, lease [indiscernible] that's been happening over the last several years. Are you able to talk about sort of how long -- how much longer you guys would expect this sort of return to office movement to continue driving leasing activity? Is this sort of a 12-month phenomenon, 18 months? Just sort of curious where you guys think we're at as it relates to this return to office normalization driving pent-up demand. Owen Thomas: Well, I think there's room to go. I gave you the office visits. We try to come up with indices that help us understand what's going on. I've quoted the Placer.ai data. I think that we've got some additional improvement that could happen. The questions that were -- that you all are giving us are around these layoffs and jobs. The other side of it is, historically, our leasing activity has been tied to earnings growth because when companies are making money, they lease, they take risks, they go into new businesses, they hire people and they lease space. And if you look at the forecast for broad indices of U.S. corporations, earnings are projected to be higher in 2026. The job -- the earnings growth is projected to be higher in '26 than it was in '25. These layoffs that are going on, are they office using jobs? Are they jobs that are in premier workplaces, so front office jobs. There's lots of data that you need to have in addition to a press release to understand what the impact is of these layoffs are on office usage, particularly in the premier workplace segment. Douglas Linde: And Dylan, I'll give you my perspective on sort of what we're seeing in our portfolio and juxtapose that to what you read about from a job announcement. So one of the shipping companies has announced 48,000 job losses. My assumption is none of those jobs are being lost in any office space in Manhattan, Boston, Washington, D.C. or on the West Coast of California, in San Francisco, Seattle or West L.A. And when I look at the portfolio makeup in terms of where the growth is coming from and where the demand is coming from, what I would tell you is that our financial service clients, and I'm using that and asset management sort of in the same venue, those companies are just growing. Those -- this is not about we need more space because our people weren't showing up. They're basically hiring more people for various strategies associated with whatever their business plan is, and therefore, they need more space. It has nothing to do with return to work. Any of the expansion from our legal firms, I don't believe is about return to work. It's about, I think, our firms are hiring more attorneys because they have desires to grow their businesses and they're finding -- they're poaching from other organizations that may be losing. And because of that, they need another office for those people. I don't think they're saying, and now you have to come back to work 5 days a week and you're only coming back to work 1 day a week, and therefore, we're changing our makeup. I just don't see a lot of that going on. And then when I think about our portfolio in Northern Virginia, which is really more corporate America, and I'll let Jake sort of talk about where that demand is coming from. I don't think any of it is about, well, we now need more space because we "have more people" coming to the office every day. And Jake, you can sort of comment on where all of our expansion has been and our demand has come from in Northern Virginia and how that's all working. Jake Stroman: Yes, sure. Thanks, Doug. Yes, Dylan, what I would just say is that, in particular, in Reston Town Center, between the defense and cybersecurity industry, it's really a who's who of corporate campuses. And most of the employees of these organizations are tech-related, usually former military background, folks that are in their 30s that have a home and want to have a house and kids and white picket fence and so they typically live in Reston Town Center, Western Fairfax County and Loudoun County. And with Reston Town Center, it's really the first stop for those groups as it relates to where that talent rest its head every night. Operator: And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley. Ronald Kamdem: A lot of my questions have been asked, but just wanted a quick update, just looking at the data for San -- excuse me, L.A. and Seattle and some of the occupancy moves there and the market has been going in the wrong direction. Obviously, smaller markets for you all, but just a quick update on the market and sort of the strategy there on the ground for the few assets you have. Douglas Linde: Sure. Rod, do you want to take that one? Rodney Diehl: Yes, sure. So just starting up in Seattle. I mean, we have our 2 assets in the CBD. And we've actually had really good demand from some of our in-place tenants that have expressed some growth needs. So we're accommodating that. I don't think when you compare Seattle to the demand that we're seeing in San Francisco, it hasn't quite mirrored that yet, but it's starting to. And historically, Seattle has kind of lagged San Francisco, call it, a year to 18 months. And so I expect this year, we're going to see some continued demand -- increasing demand up there. So we're optimistic that we're going to capture some of that. Down in L.A., it's a little different story. Remember, we're just in West L.A. out in Santa Monica, we have 2 projects there. And I think that market is still kind of recovering still from many things, COVID being one of them, but then just the contraction in the entertainment business and the consolidation of that is affecting us in terms of demand down there. But that being said, we've actually started the year with some good activity. We've got a couple of proposals we're chasing. So we think that things have picked up there maybe as well. But it's been slower than we're seeing in the Bay Area. Douglas Linde: And Ron, I mean, I said it and Owen said it, I mean we're taking 2 Santa Monica Business Park buildings out of service totaling about 260,000 square feet of space. We're going to build high-value, very accretive, exciting residential multifamily projects there because we think that there's much more value in that asset class at that location than there is in hoping for a recovery in the office market in the short term. And so that's -- those are the decisions we're making. And we think that over time, we may see more and more of that going on in that particular asset. And that's a 30-acre asset, which could have an awful lot of residential use over the next decade or two. Operator: And I show our last question comes from the line of Michael Lewis from Truist Securities. Michael Lewis: I feel almost guilty asking another question. My question is about leasing capital. So we saw this $128 a square foot on the TIs and LCs this quarter. It sounds like from your comments, that's probably unique to the leases in the quarter, and you're not seeing more pressure on leasing capital. I was going to ask if you're able to share how much leasing capital you have committed but not spent yet? Because I would guess as you're leasing up and improving occupancy, maybe that pool of capital is building significantly more than you normally see. So I don't know if you have any comments around that. Douglas Linde: So I think you're asking how much of -- how much leasing have we "provided" to our clients that they have yet to spend, right? That's the question you're asking? Michael Lewis: Yes, that's right. Michael LaBelle: I do not have that number in front of me right now. And we do disclose that number in every Q and every K, however. Michael Lewis: Yes. Is that an interesting trend to look at? Or do you think that's kind of off base on thinking about the pool of capital that might be building? Michael LaBelle: I don't know how much it's necessarily building. I mean it is a significant number because many of our clients do take a long time to actually ask for the money or spend the money. So there is an amount of dollars out there that is in the hundreds of millions of dollars that will be spent sometime over the next few years as those clients complete that work. I have not seen it trend significantly higher. I think if you look at our transaction costs over time, you're right that this quarter is a definite outlier. They've really ranged between kind of $85 a square foot and a little over $100 a square foot as every quarter, which is a mix of renewal and new and includes leasing commissions and tenant improvement costs. So when I look at our AFFO projections, right, I'm not assuming $128 a square foot, but I am assuming somewhere around $100 a square foot on a going-forward basis based upon kind of where we are in the market right now. Douglas Linde: Yes. The other thing, Michael, just about the stuff that's in our supplemental is that those leasing costs are based upon leases that are having "a revenue event this quarter. And so it's typically a backward-looking portfolio. So there are leases that may have been signed in late 2023, early 2024 that are just starting to move into that revenue recognition change. And so over time, we would expect to see that trending slowly coming down as the market improves as well. Operator: That concludes our Q&A session. At this time, I'd like to turn the call over to Owen Thomas, Chairman and Chief Executive Officer, for closing remarks. Owen Thomas: Thank you all for your questions. I'm not sure there's much more we could possibly say. Have a good rest of the day. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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