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Operator: Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the third quarter of fiscal 2026. Later, we will conduct a question-and-answer session, and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to Garo Toomajanian, Vice President of Investor Relations. You may begin. Garo Toomajanian: Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the third quarter of fiscal 2026, which ended March 27, 2026. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer, and Csaba Sverha, Chief Financial Officer. This call is being webcast, and a replay will be available on the Investor section of our website located at investor.fabrinet.com. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors section of our website for important information including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation as well as additional details of our revenue breakdown. In addition, today's discussion will contain forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. Statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events except as required by law. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular the section captioned Risk Factors in our Form 10-Q filed on 02/03/2026. We will begin the call with remarks from Seamus and Csaba, followed by time for questions. I would now like to turn the call over to Fabrinet's Chairman and CEO, Seamus Grady. Seamus Grady: Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We delivered an outstanding financial performance in the third quarter, along with several notable achievements that we believe can extend our strong growth trends into the fourth quarter and fiscal year 2027. Revenue was above our guidance range at a record $1.214 billion, with year-over-year growth accelerating to an impressive 39%. Record non-GAAP EPS of $3.72 also exceeded our guidance range, reflecting continued excellent execution. Looking at our quarter by product area, Optical Communications revenue growth increased to 35% from a year ago. This was driven by 55% year-over-year growth in telecom revenue, which was fueled by strong growth in a wide range of products. Within telecom, data center interconnect revenue grew a robust 90% from a year ago and 38% from Q2, and we believe strong longer-term DCI growth trends remain firmly intact. This remarkable telecom performance more than offset softer-than-expected datacom revenue, which grew 4% year over year but declined 6% from Q2. Underlying datacom demand remains exceptionally strong. In fact, demand during the quarter far exceeded what we were able to ship, meaning our reported revenue does not fully reflect the true momentum of the business. Right now, demand is outpacing the broader supply of certain components, and we are actively working to narrow that gap. While we expect the supply-demand imbalance to persist into the fourth quarter, we remain optimistic that supply conditions will improve over time. The strong demand we are seeing today positions us well as that improvement unfolds. As we have outlined, our datacom strategy is to continue supporting the strong demand trends we are seeing with our largest customer, while actively expanding into new high-growth channels such as direct engagement with hyperscalers and partnerships with merchant vendors. With that in mind, we are happy to report that we have made meaningful, tangible progress on both fronts. First, we are excited to share that we have successfully completed and have already begun shipping two datacom transceiver programs directly to a hyperscale customer, with initial ramps starting in the fourth quarter. We expect volumes to ramp steadily throughout fiscal 2027, with these programs becoming a meaningful contributor to our datacom revenue over time. Second, building on the groundwork laid over the last several quarters, we are on track to qualify and ramp multiple merchant transceiver programs, including several for data center scale-out applications, with existing and new customers. We expect production to begin in the second half of the calendar year, aligning with the early part of fiscal 2027, with additional ramps progressing into the second half of the fiscal year. We expect this combination of hyperscale and merchant program wins to further diversify our datacom revenue and provide multiple new growth vectors in the new year and beyond. In non-Optical Communications, revenue jumped 52% year over year and 8% sequentially from Q2. This growth was driven primarily by high-performance compute revenue, which continues to ramp as we support our customers' transition to their latest product generation. At the same time, we are seeing encouraging traction beyond the current ramp, with new program wins and expanded scope across additional products that we will be manufacturing to support their accelerated computing infrastructure. We are also increasing capacity to align with the customers' ambitious growth plans, reflecting a deepening and increasingly strategic relationship. Automotive revenue moderated in the third quarter, as anticipated, with revenue decreasing modestly from Q2. This decline was more than offset by continued growth in industrial laser revenue, which was up 9% from a year ago and 7% from Q2. An important area of strategic focus for us over the past several years has been co-packaged optics, or CPO. In this space, we are deepening our engagement with customers across the CPO ecosystem including optical components, external laser source pluggables, as well as other integrated precision optical packaging solutions, building on our longstanding silicon photonics expertise. CPO relies heavily on advanced semiconductor packaging technologies, and we have been actively investing to expand our capabilities in this area with a focus on scalable, high-quality manufacturing processes and broader system-level integration. This includes leveraging and extending our in-house silicon photonics expertise, but also partnering with key technology providers to enhance our ability to deliver more integrated, end-to-end manufacturing solutions. With that backdrop, we have made a minority investment in Raytec Semiconductor, a Taiwan-based provider of advanced wafer-level packaging technologies, as an ecosystem partner. We already serve a number of common customers and expect this collaboration to further strengthen our capabilities and extend our offering. This investment supports our continued evolution from silicon photonics into more advanced packaging and integration solutions, reinforcing our role as a key manufacturing partner within the CPO ecosystem. Looking at our business as a whole, we are very excited by both the number and size of customer engagements for our advanced manufacturing services. The breadth and depth of these projects provide us with significant opportunities to demonstrate our differentiation and expertise that we have established as a key enabler for the success of our customers' most advanced products. As you know, we have been expanding our capacity to support our accelerating growth trends. We continue to make progress in the construction of Building 10, which will add 2 million square feet to our current 3.7 million square feet of space. With plans to be fully completed around the beginning of the new calendar year, we are on track to have a portion of Building 10 ready by next month, consistent with what we described last quarter. In addition to that, with our accelerated construction timeline, we now expect to commission an additional floor in this five-storey structure by September, with the rest of the building still scheduled to be completed by January. Beyond Building 10, we have sufficient land available at our campus in Chonburi for two additional buildings of more than 1 million square feet each. While this means we expect to have ample capacity available for the next several years, we continue to think ahead. In that context, we have recently acquired a building and land in the Navanakorn Industrial Estate in Thailand, not far from our Pinehurst campus. We have already begun renovations to make the existing 100,000 square foot building a world-class clean room factory, with sufficient space on the eight-acre site for additional expansion at a later time. In summary, our success in the third quarter extends well beyond our strong financial performance. We are particularly encouraged by the multiple new growth vectors we are adding across our datacom business, while our diversified telecom portfolio continues to show solid momentum and our non-Optical Communications segment expands further. This combination of execution and strategic progress reinforces our confidence in sustaining our growth trajectory, extending our leadership position in the fourth quarter, and carrying that momentum into fiscal year 2027. Now I would like to turn the call over to Csaba for more details on our third quarter results and our outlook for the fourth quarter. Csaba? Csaba Sverha: Thank you, Seamus, and good afternoon, everyone. We delivered another record-breaking performance in the third quarter of fiscal 2026. Revenue of $1.214 billion exceeded our guidance range, with revenue growth accelerating to a remarkable 39% from a year ago and 7% from the prior quarter. Strong execution and FX revaluation tailwinds led to non-GAAP EPS of $3.72 that also exceeded our guidance range. Turning to revenue by market in the third quarter, Optical Communications revenue was $889 million, with growth accelerating to 35% from a year ago and 7% from Q2. Within Optical Communications, telecom revenue was a record $628 million. Within telecom, revenue from data center interconnect modules, or DCI, jumped to $197 million, growing 90% from a year ago and 38% from the second quarter. Datacom revenue of $260 million increased 4% from a year ago, but moderated 6% from Q2 due to broadening component and material supply constraints in the quarter. Turning to Non-Optical Communications, revenue reached $326 million, growing 52% year over year and 8% sequentially from Q2. This strong performance was once again driven primarily by continued momentum in our HPC program, which delivered $107 million in revenue. Automotive revenue declined slightly as anticipated to $115 million, up 25% from Q2, while industrial laser revenue increased to $44 million. As I discuss the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis unless otherwise noted. Gross margin in the third quarter was 12.1%, a 10 basis point improvement from a year ago and a 30 basis point decline from Q2, as anticipated, primarily due to foreign exchange headwinds. We continue to demonstrate operating leverage with operating expenses declining to 1.4% of revenue. This resulted in an operating margin of 10.7%, a 50 basis point improvement from a year ago and a 20 basis point decline from Q2. Interest income was $7 million, and we saw a foreign exchange revaluation gain of $7 million in the quarter. Our effective GAAP tax rate for the quarter was 6.7%. We expect our tax rate to moderate in Q4, resulting in a mid-single-digit effective GAAP tax rate for the year. Net income was a record $135 million, or $3.72 per diluted share. Turning to our balance sheet, we ended the third quarter with cash and short-term investments of $946 million. Operating cash flow for the quarter was $53 million, down $60 million from Q2. Capital expenditure spending of $64 million reflects continued accelerated construction of Building 10, as well as capacity expansions to support the rapid growth across the business. As a result, free cash flow was an outflow of $11 million in the quarter. Before getting into our guidance, I want to provide some additional color on our recent capital allocation decisions. As Seamus mentioned, we have made a minority investment in Raytec Semiconductor to support our efforts in advancing manufacturing solutions for CPO. In April, we completed a private placement of approximately $32 million for 20 million shares of Raytec, representing approximately a 14% position. This investment deepens our partnership and supports our joint efforts toward bringing CPO technology to market at scale. Early in the fourth quarter, we expect to complete the purchase of an eight-acre campus in the Navanakorn Industrial Estate, Thailand, located approximately fifteen minutes from our Pinehurst campus. The Navanakorn facility currently consists of a 200,000 square foot building, with additional space on the site for future expansion. We have already initiated minor renovations to support world-class clean-room manufacturing capabilities, and we expect to begin utilizing the space early next quarter. The total purchase price of $11 million will be reflected in our fourth quarter financials. With our very strong balance sheet, we are well positioned to deploy capital efficiently, support our growth initiatives, and continue to generate superior returns while remaining committed to returning surplus cash to shareholders through our share repurchase program. In the third quarter, we did not repurchase a meaningful number of shares. However, our share repurchase program remains active, and we ended the quarter with approximately $169 million available under our current authorization. Now, turning to the details of our guidance, we expect revenue in all major product categories to increase in the fourth quarter despite a broader supply-constrained environment, with datacom growth expected to be more measured as we continue to navigate component availability that is not keeping pace with strong demand. At the same time, we are excited by the number of new customer programs coming online that we expect will contribute more meaningfully to our performance in fiscal 2027 than in the fourth quarter. With that backdrop, we expect total revenue to be in the range of $1.25 billion to $1.29 billion, representing year-over-year growth of approximately 40% at the midpoint. We expect gross margin dynamics to be similar to Q3, with continued operating leverage as top-line growth continues. As a result, we expect non-GAAP EPS to be in the range of $3.72 to $3.87. In summary, our third-quarter results were exceptional, with record revenue and earnings that exceeded our guidance as growth continued to accelerate. We also made strong progress against our longer-term strategic priorities, establishing additional vectors of sustainable growth that we expect to begin contributing as early as the fourth quarter, positioning us to extend our strong track record into fiscal 2027 and beyond. Operator, we are now ready to open the call for questions. Operator: Thank you. Ladies and gentlemen, to ask a question, please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from George Notter from Wolfe Research. Your line is open. George Notter: Hi, guys. Thanks very much. I just wanted to click on the datacom business. I know that last quarter, you talked about having some new supply of 200-gig-per-lane EML coming online that would help support growth in the data business. It sounds like that did not happen. I am just wondering what is going on in terms of EML supply. Is that the gating item you are referencing, or are there other components that are problematic now? Anything more you can tell us there would be great. And then I just wanted to ask one also on CPO. I just want to be clear on where you guys see your opportunity in CPO. I assume that ELSFP that go into CPO switches are a real natural for you. Are you also going to manufacture other elements of CPO switches? Historically, you have not really been involved in manufacturing the switches themselves, but, obviously, this is a unique architecture. There is a large amount of fiber attached that goes into that CPO package. I just want to be clear on what you guys see yourselves doing in terms of that manufacturing exercise. Thanks a lot. Seamus Grady: Hi, this is Seamus. There are a number of commodities, you could say, that are causing us constraints. First of all, we are very excited at the breadth and depth of the opportunities in front of us, not just with our main customer but across a number of new products and new markets for us. Since we started to see the revenue accelerate from this AI-driven demand, our strategy has been to support the existing demand while pursuing additional hyperscale-direct and merchant relationships. We are excited with the progress we are making there. What we are managing right now is not demand risk; it is supply constraints. With respect to datacom supply, we saw a broadening of supply shortages for components and materials for datacom products, and as a result, shipments and revenue were well below demand levels. We could have shipped a lot more if we had those components. Without these supply constraints, datacom revenue would have been a new record by a wide margin. While we expect the constraints to get resolved over time, we do have to deal with them in the near term. We anticipate that supply volatility will continue, and it is in a number of areas. It is not any one component. It is a number of areas, mainly lasers, memory—which is no secret, there is a global shortage of memory—and also certain ASICs, so it is across a number of commodities. On CPO, for us, CPO is really an evolution from silicon photonics and precision photonics packaging capabilities that we have had for many years. It continues to be an area of investment for us to align our capabilities with our customers’ roadmaps. For many years, CPO has been just on the horizon, but it is a lot more real now than it has ever been, and we are in an excellent position to benefit. We feel we are well ahead of our competitors in making this technology a reality. We are already seeing some CPO revenue, but the amounts are relatively small at this point. We are working on a number of CPO programs with three different customers. The specific timing on each of them we do not want to speak to on their behalf, but we are working on three separate programs, and as with our customer programs, we expect to see the impact in line with or slightly ahead of our customers’ production schedules. The growth in CPO is in front of us. As you rightly point out, there are several opportunities for us in CPO, and we feel we can participate at a higher level up the food chain than we have historically. We are excited about CPO. Operator: Thank you. Our next question will come from Karl Ackerman from BNP Paribas. Your line is open. Karl Ackerman: Yes, thank you. I have two, if I may. Seamus, do you believe you will be at the full run rate of the current HPC program in June? I think the previous expectation was March and June time frame. How much visibility do you have with that follow-on program? And then maybe for Csaba: Building 10 was 2,000,000 square feet, adding a fifth floor. Is the 2,000,000 square feet still the case, or is it presumably maybe two and a half or so? And with respect to the two additional buildings of 1,000,000 square feet, given the high ROIC and relatively low upfront cost of building this new manufacturing fab, how quickly can you accelerate these manufacturing facility investments so you are not capacity constrained for these very large opportunities? Seamus Grady: Our current HPC program is ramping according to our customer’s expectations. It is not ramping in a perfect straight line—these things never do. We have been working closely with the customer to transition production to their latest-generation product, and that transition is making good progress. We have also been awarded some follow-on business for additional programs separate from the main programs with that customer, so we are helping to support their accelerated computing infrastructure in a broader way than we have in the past. We are installing additional capacity right now to support both the technology transition and also the additional products we will be manufacturing. Because of this technology transition, we now believe that the $150 million mark will be pushed out by maybe one quarter, but as a result, we expect our high-performance compute revenue to continue growing even after we reach the first $150 million quarterly revenue milestone. So, short term, this quarter we do not think we get to $150 million, but we think it is probably a quarter away. Longer term, because we are now making more than just one family of products, we think that opportunity is more than that. While timing has shifted slightly, the overall trajectory is stronger, and we expect continued growth beyond that $150 million level. We remain very optimistic about the long-term outlook for our high-performance compute business overall. On capacity, right now our current capacity supports about $4.8 billion in our current footprint. As we mentioned on the last call, we are converting about 120 thousand square feet at our Pinehurst campus into manufacturing space that will add an additional $200 million of capacity, taking capacity up to $5.0 billion before Building 10. Building 10 would add about $3.0 billion of capacity, and then the new factory we have purchased in Navanakorn, down the road from us, initially doubles that site’s capacity for about $250 million in the current factory that is on that land, with room to build another factory. Overall, that purchase will give us capacity for about another $500 million. So $4.8 billion in our current footprint plus the Pinehurst addition plus the Navanakorn factory plus Building 10 would take us to capacity of about $8.5 billion, if you add all that up. The timing on Building 10: the first floor will be coming on stream in June. We plan to have another floor ready, which will be mostly clean room space, by September or October, and the building would be finished by the end of the year, with the opening ceremony in January. Building 11, which we have not broken ground on yet, would give us capacity for about another $1.5 billion of revenue, and Building 12 the same. If we were to build out everything we have on the current land and space that we have, that would give us capacity of about $11.5 billion, there or thereabouts, probably a little bit more because as our growth accelerates, our revenue per square foot is also increasing. The timing of that is too early to talk about at this stage. We are focused on meeting our customers' needs and making sure we have capacity in place. We have ample capacity for the next few years, but we are seriously considering the timing for Building 11 and Building 12, and we are also looking for additional land in and around both the Pinehurst campus and Chonburi. High-quality problems. Operator: Thank you. Our next question comes from Samik Chatterjee from JPMorgan. Samik Chatterjee: Hi, thanks for taking my questions. Seamus, starting with the new datacom customer opportunities that you outlined with both the hyperscaler and some of the merchant opportunities, can you help us size that up in terms of what these customers are communicating to you in terms of their demand at full run rate? Just trying to compare it to your primary customer with whom you are doing about $250 million a quarter or so—how do these new opportunities size up relative to that? Is the supply chain different, where we should not expect some of the supply constraints you have with your primary customer to impact the ramp with the new customers? And then a follow-up on gross margins for Csaba. Seamus Grady: I think the supply chain is broadly similar across most of these primarily scale-out applications. Taking both of those in turn that you just mentioned, for the hyperscale relationship, we are excited about the new datacom opportunities we announced today. They are two separate products. We have already begun shipping, albeit in small, qualification-type quantities, but we have begun shipping those and expect that growth is already in front of us. We believe it will be significant. It is a significant piece of business for us. The demand we are seeing from the customer is very significant, and we are very focused on making sure we have the right capacity and capability in place to support the customer. In terms of merchant programs, for several quarters we have been working towards expanding our datacom business to encompass direct hyperscale and also deepening and broadening merchant relationships, and we have made sizable progress there. We have a couple of programs there as well that we are working on. Both hyperscale-direct and merchant are very significant and have the potential to be meaningful revenue contributors for us, but, as I said, all of these opportunities are essentially a very similar supply-chain ecosystem. Samik Chatterjee: Understood. Are you expecting that these programs, stand-alone, are like 10% of your revenue—are they that sizable? And then on gross margins, it sounds like you will be at the low 12% for the next quarter as well. How should we think about the recovery on the gross margin profile, particularly as ramp costs continue to feed through the P&L? Seamus Grady: We never predict which customer may or may not become a 10% customer. We only talk about that at the end of the year when we have to disclose which customers are 10% customers. We do not talk about it looking forward. They are significant opportunities; that is all I would say about that. On gross margin, I will let Csaba provide more color. Csaba Sverha: On gross margin, we are seeing a combination of external and internal factors. On the external side, exchange rates have been a headwind for a while, and that dynamic continues into this quarter. Margins from an exchange-rate perspective will be similar in Q4 as in Q3. We have some visibility with our hedging program in place, and Q3 panned out as anticipated in terms of headwinds, so Q4 we anticipate to be at that same level. At the same time, we are ramping a large number of new programs across multiple growth vectors, which sometimes creates short-term inefficiencies. This is a function of strong demand and the pace at which we are scaling the business. As these programs mature, we expect efficiencies to improve and to get back to our higher margin ranges. The good news is we are very disciplined on operating expenses. As you saw last quarter, we continue to generate operating leverage, and OpEx is trending down overall as a percentage of revenue; last quarter we were at 1.4%. While there are near-term pressures on gross margin—some of which we cannot control from an exchange-rate perspective—the overall model continues to deliver very strong, solid, and improving profitability as we scale. We feel very good about the underlying model and our ability to drive long-term profitability growth, and our ultimate focus is to drive strong return on capital and deliver consistent value to shareholders as we scale these programs. Operator: Thank you. Our next question comes from Christopher Rolland from Susquehanna. Your line is open. Christopher Rolland: Hi, this is Dylan Olivier on for Chris Rolland. Thanks for taking my question. For my first question, you spent some time talking about CPO and your role here. You mentioned that you are working with three customers or three programs and that you have begun getting revenue now. Are all these programs generating revenue today, and can you provide any color on whether these are all scale-out or if any of these engagements are related to scale-up? Seamus Grady: We are shipping to all three customers. They are both scale-up and scale-out. We are really putting the capacity in place and making sure we have the right technology in place. You can see with our investment in Raytec, it is to help us ensure we have the right capability. We are excited about CPO, but the revenue is largely in front of us at this point. Christopher Rolland: Thank you for that. For my second question, I wanted to ask about another opportunity that you did not discuss on this call, but OCS is seeing a nice explosion right now. Any color you can provide on how your engagements are going, when you think this could materialize, and if you can get a dominant share of the externally contracted OCS market? Seamus Grady: OCS remains a great opportunity for us as we look ahead. The technology is very similar to products that we already make for our customers, which gives us a head start versus our competition. There is no change in our optimism about OCS, but to be clear, the new merchant opportunities we talked about earlier are not OCS-related; they are separate. OCS opportunities are incremental to that and, similar to CPO, are largely in front of us. We are focused on one or two. It is too early to talk about them until we have something to talk about, but we are excited about OCS as a segment. Operator: Our next question will come from Ryan Koontz from Needham & Co. Your line is open. Ryan Koontz: Thanks for the question. Just wanted to ask more generically regarding your transceiver wins. Can you expand on where you would be in your milestone process before you would announce that you have a win? Is it when you have a contract, qualification, sampling? Not asking about a specific customer, but generically, at what point do you typically disclose, and might we consider these different programs somewhere between ramping to material revenue and maybe an MOU that is not contractually bound? Seamus Grady: Generally, we do not talk about wins until we have actually won the program. That means we have been awarded the business, we have contracts in place, we have purchase orders, and we have been qualified and approved. We are really at that milestone phase where we are getting ready to ramp at this point. We do not signal specifics on new programs until we have them won. Not all products that you think you have won early on turn into real products or real demand. In this case, we have a number of programs that we have won—contracts in place, product being shipped, subcontracts signed with customers—so we have actually won those. Ryan Koontz: That is helpful, Seamus. Thank you. As a follow-up on your strength in telecom—obviously DCI is a big star there—how would you characterize your customer mix within DCI? Is it changing? Can you share anything about the product mix there—400ZR to 800ZR? Are you seeing some industry shifts that are working in your favor within the telecom mix? Seamus Grady: Our position supplying the DCI market is very strong. We have all of the major players there as customers of ours. As we noted in the prepared remarks, our growth in DCI has been pretty staggering, and our telecom portfolio continues to go from strength to strength. We provide components, 400ZR and 800ZR modules, as well as telecom systems. We have evolved our business from being a niche optical component supplier several years ago into a diversified, strategic ecosystem partner for the leading OEMs for both optical components and systems across AI-driven growth in both datacom and telecom. The best example of that is our strength in DCI. Demand looks very strong. We continue to win business in that space and execute very well for our customers. There are a number of new programs that we are working on as well, in addition to ramping existing programs, with new products we are gearing up to ship. We feel very good about our momentum in DCI with the leading customers there. Ryan Koontz: Do you consider multihaul an opportunity in your wheelhouse within the telecom sector? Seamus Grady: Anything in the telecom space where we can have a high level of content is a good fit for us. Certainly, those types of products would be a good fit. Operator: Thank you. Our next question comes from Steven Fox from Fox Advisors LLC. Your line is open. Steven Fox: Hi, good afternoon, everyone. Seamus, on the supply constraints, it sounds like they got worse during the quarter, and at the same time, end markets are getting stronger. How do constraints not get worse going forward, and how do you manage through this and start catching up with demand? Is there any line of sight to improvements? And then I have a follow-up. Seamus Grady: We are not unduly concerned long term, but we do feel obliged to point it out in the short term because we guide one quarter at a time. It did impact our ability to ship last quarter—we could have shipped a lot more if we had those components—and the same this quarter. Overall, it is really a function of the growth we are seeing in the industries that we serve and in our business overall. We are proud of our track record of excellent execution built on dedication to customer service. That track record has allowed us to deliver the sales growth we have seen. Over a ten-year period up to FY 2025, we compounded revenue 16% annually and earnings 22%. In FY 2025, we grew 19% versus FY 2024, and for FY 2026, if you take the midpoint of our Q4 guidance, that would put us up 34% versus FY 2025. Growth is accelerating, and with that acceleration, it does expose certain supply constraints. The component supply ecosystem is doing everything it can to catch up with demand, but there is a lag right now. Our focus is on execution and ensuring we capitalize on this strong demand environment by having more than enough capacity in place to support the needs of our customers while we work on these challenges in the supply chain. It is nothing unusual; it is really a function of the explosive growth we are seeing. Steven Fox: Understood. On accelerating your own capacity additions, if we started today as another starting point, your ability to accelerate further—what else would you have to see? Would it be more new programs or loosening of the supply chain, and how long would that take? Seamus Grady: For us, these are quite straightforward capital allocation decisions because of the upside. We build a 2 million square foot factory that will give us capacity for an additional $3.0 billion of revenue. The CapEx is around $130–$132 million, depending on exchange rates. At full run rate in that factory, about six months’ worth of operating profit would pay for the entire 2 million square feet of manufacturing space. On the downside, if there is a downturn and we end up with no new business going into that factory—which we do not anticipate—the gross margin headwind would be about 50 basis points, a negligible headwind versus significant upside. The capacity is very fungible. Whether it is the 2 million square feet in Chonburi, the couple of hundred thousand square feet we just acquired in Navanakorn, or the 120 thousand–150 thousand square feet that we are converting in Pinehurst, customers are comfortable having their products built in either location. We have room to add two additional factories in Chonburi, and we can add another 200,000 square foot factory on the land we purchased in Navanakorn. We have ample land and capacity for the next several years and continue to look for more. As we see strong demand signals from our customers, making those capital investments is a relatively straightforward decision because we are not taking big risks; we are making sure we have capacity in place to support our customers’ needs. Operator: Thank you. Our next question comes from Mike Genovese from Rosenblatt Securities. Your line is open. Mike Genovese: Seamus, in talking about the direct hyperscale datacom business, I think you mentioned that there are two products. Does that imply an 800G and a 1.6T, or two 800G products? Can you comment on that? And then on DCI growth this quarter, did 800ZR in particular drive an outsized portion of the growth, or was it more broadly spread? I also noticed that you had some telecom growth above and beyond DCI. If you could call out those products that were not DCI that also grew in telecom, that would be helpful. Thank you. Seamus Grady: They are both 800G, but they are different applications, and they are both scale-out. On the mix between 800ZR and 400ZR, it is probably more appropriate for our customers to talk about that. 800ZR is ramping—it is getting going—and we have very big hopes for that. It looks to be a very strong product. A lot of those new programs are really in front of us and are just beginning to ramp, and I would put 800ZR in that category. On telecom growth outside of DCI, we continue to win business with our customers, both at the component level and at the system level, mostly share gain from some competitors. We are very fortunate to have what we believe are the best companies in the industry as customers, and demand for their products is very strong. Because of the very good job we do taking care of them and executing, they reward us by giving us more business. It is a self-reinforcing loop: the better we execute for customers, the more business they give us. It is a combination of growth in DCI and other telecom programs. Operator: Our next question will come from Timothy Savageaux from Northland Capital Markets. Timothy Savageaux: Seamus, I am going to take you back to OFC. You commented that you wished you could get farther out sometimes, and I am going to try to afford you that opportunity here with the following context. You mentioned maintaining momentum into ’27 and sustaining this growth trajectory. Looking at these datacom wins, it seems plausible that you could sustain, if not accelerate, this 34% growth rate that you are putting up in fiscal ’26. Any comments on that? And then, would you expect your two datacom direct wins to be at full run rate by ’27 or maybe even earlier? Lastly, on the merchant wins, how should we think about those opportunities, the rate they ramp, and whether that crosses over into the boundary of outsourcing from some of your historical one-time 10% customers? Seamus Grady: FY ’25 grew 19%. FY ’26, at the midpoint of our guidance, will grow 34% versus FY ’25. We have managed to do that with strong operating leverage. For example, in Q3, we grew revenue from $872 million to $1.214 billion—39% year-over-year growth—while operating expenses grew by 6.2% from $16 million to $16.99 million. Therefore, on revenue growth of 39%, our operating income grew 46% and our net income grew 48%. Growth without profits is not much fun for anyone, so we are focused on being cautious with the company’s resources while delivering operating leverage. The growth is accelerating. Demand signals we see from our customers look very promising for some time to come. We will continue to guide one quarter at a time, but that does not stop us from being optimistic about the future—certainly more optimistic than we have been in quite some time—with a very strong demand pipeline across telecom and datacom, and also industrial laser where we are seeing growth and new wins. On the two datacom direct wins, we would expect ramping throughout FY ’27, and likely earlier than late ’27—probably into the middle of ’27. On the merchant opportunities, some of these are very significant. The demand is very strong. We do not mind who we are making transceivers for, as long as we are making somebody else’s design. We are a services company. We will never have our own products, and we will never compete with our customers. That is very important for us and for our customers. Even a relatively modest percentage of any hyperscaler’s demand supplied directly would still be very significant. Any one of these could be a noteworthy opportunity, and the exciting part is we have several: two separate programs shipping to a hyperscaler, merchant business, and our main customer, plus strong telecom. Lots of growth vectors. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, greetings and welcome to the Lattice Semiconductor Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please signal an operator by pressing star and 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Rick Muscha, Vice President of Investor Relations. Please go ahead. Rick Muscha: Thank you, Operator, and good afternoon, everyone. With me today are Ford Tamer, Lattice Semiconductor Corporation’s CEO, Lorenzo A. Flores, Lattice Semiconductor Corporation’s CFO, and Sanjoy Maiti, AMI’s CEO, who will provide a financial and business review of 2026, an overview of the AMI acquisition, and the business outlook for 2026. Both a copy of our earnings press release and the press release announcing our planned acquisition of AMI can be found at our company website in the Investor Relations section at latticesemi.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company’s official guidance for 2026. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We will refer primarily to non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company’s performance and underlying trends. For historical periods, we provide reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at latticesemi.com. Lastly, we streamlined our financial reporting to better align with our strategic focus. Beginning this quarter, we will break out revenue across two primary end markets: compute and communications; and industrial and embedded. Our consumer business is now included within the industrial and embedded end market. For comparability, we have recast all prior period results so you can make a direct apples-to-apples comparison. With that, I will turn the call over to our CEO, Ford Tamer. Ford Tamer: Thank you, Rick, and welcome, everyone, to our first quarter earnings call. Lattice Semiconductor Corporation delivered an excellent start to 2026 with results that underscore both strong market tailwinds and our disciplined execution against a clear strategy. Our first quarter performance exceeded expectations, and our second quarter outlook reflects our expected continued momentum across the business. This is the seventh earnings call since I joined Lattice Semiconductor Corporation, and I hope we have now demonstrated that we consistently say what we will do and do what we say. These positive factors in aggregate provide the foundation for our proposed acquisition of AMI. This acquisition positions Lattice Semiconductor Corporation to create the industry’s most comprehensive secure management and control platform and enables us to deepen our customer relationships and expand our long-term growth opportunity. Now turning to our results and outlook. Revenue for the first quarter was $170.9 million, representing 42% year-over-year growth, with strength across all end markets. Our compute and communications end market achieved record revenue, driven by continued momentum in data center AI applications. In Q1, 62% of our revenue came from compute and communications products, with expanding opportunities ahead. As Rick highlighted in the safe harbor, we have now merged our industrial and automotive end market with our consumer end market into what we now term industrial and embedded. The revenue from our industrial and embedded end market grew more than 20% sequentially, reflecting improving market conditions and expanding adoption of Lattice Semiconductor Corporation solutions. As importantly, along with increased consumption, channel inventory reduced from three months last quarter to close to two months of inventory on hand, and we expect this trend to continue to under two months in Q2. As we anticipated, profitability grew faster than revenue, with EPS up 86% year over year. These results demonstrate the operating leverage in our model and our ability to scale efficiently as revenue accelerates. Demand trends continue to build across AI servers, networking, industrial automation, and emerging physical AI applications. We are seeing accelerated bookings which now support a strong backlog that extends well into 2027. We are also witnessing improved customer visibility and healthy design win momentum across our FPGA portfolio. Taken together, we are confident that we are in the early innings of a multiyear growth cycle and our ability to deliver sustained above-market growth for the foreseeable future. Our results also highlight the progress we have made in evolving Lattice Semiconductor Corporation into a system-level solutions company. Customers increasingly value Lattice Semiconductor Corporation not just for low power programmable hardware, but for complete solutions spanning connectivity, security, management, and control. As system complexity increases, particularly in AI-driven and advanced computing architectures, our customers are giving their highest priority to platforms that reduce integration risk, shorten development cycles, and enable faster deployment at scale. These trends continue to expand Lattice Semiconductor Corporation’s role within customer systems, increase attach rates, and drive higher value per design. We also continue to benefit from our everywhere companion chip strategy, positioning Lattice Semiconductor Corporation broadly across the ecosystem. Rather than competing with CPUs, GPUs, or other processors, our low power FPGAs enable and enhance them, providing secure boot, power sequencing, platform management, IO aggregation, sensor bridging, and control. This approach allows Lattice Semiconductor Corporation to participate across hyperscale data centers, communication infrastructure, industrial automation, aerospace and defense, automotive, medical, and emerging physical AI applications, while remaining silicon agnostic and ecosystem neutral. Looking to the second quarter, our revenue guidance of $185 million at the midpoint represents nearly 50% year-over-year growth. This underscores our confidence in the accelerating momentum of the business. Our midpoint EPS outlook of $0.44 reflects roughly 80% year-over-year growth. It highlights the powerful operating leverage in our model and the differentiated products we bring to market. We maintain a disciplined capital strategy and believe we will be able to consistently drive earnings growth that significantly outpaces revenue growth, and we are committed to continue to do so. Turning now to the planned acquisition of AMI we announced earlier today. We are excited to have signed a definitive agreement to acquire AMI, a leader in firmware, orchestration, and system-level manageability. The combination of Lattice Semiconductor Corporation’s low power programmable hardware with AMI’s industry-leading solutions, including BIOS, BMC, and platform security, creates the industry’s most complete secure management and control platform. Together, we will enable customers to accelerate development, simplify system integration, and bring increasingly complex platforms to market faster across AI servers, advanced compute, communication infrastructure, and industrial applications. Strategically, this acquisition represents a pivotal milestone in advancing Lattice Semiconductor Corporation’s long-term growth strategy. AMI’s firmware is expected to remain processor and silicon agnostic, preserving open ecosystems and customer choice, while Lattice Semiconductor Corporation’s FPGAs provide a complementary hardware foundation, reinforcing our everywhere companion chip strategy. We expect this transaction to be accretive to gross margin, free cash flow, and EPS on a non-GAAP basis. It also supports our trajectory toward exceeding a $1 billion annual revenue run rate by 2026. We look forward to welcoming the talented AMI team to Lattice Semiconductor Corporation and expect this combination to strengthen our system-level roadmap and long-term growth profile significantly. Looking forward, we are encouraged by the continued durability of demand across our end markets, the depth of customer engagement, and the expanding role Lattice Semiconductor Corporation plays in next-generation systems. With a differentiated strategy, a scalable financial model, and an increasingly complete platform spanning hardware, firmware, security, manageability, and control, we are confident that Lattice Semiconductor Corporation is exceptionally well positioned for the future. With that, I will turn over the call to Lorenzo for a comprehensive review of our first quarter results. Lorenzo? Lorenzo A. Flores: Thank you, Ford, and good afternoon, everyone. We will begin with an overview of our first quarter 2026 financial performance and our second quarter outlook, followed by an overview of our planned AMI acquisition. With a quarter this good and guidance this strong, it is worth repeating some of what Ford said. Revenue reached $170.9 million, growing 42% year over year and 17% quarter over quarter. Earnings performance was even stronger, as Q1 non-GAAP EPS demonstrated the leverage in our model. EPS grew more than 80% year over year to $0.41, a 30% increase quarter over quarter and above the high end of our guidance. We expect Q2 to continue this growth trend and I will detail our guidance in a few moments. Back to Q1. Revenue growth was driven by a record performance in compute and communications, up 86% year over year and 15% sequentially. We continue to benefit from strong data center growth as Ford noted. Additionally, our industrial and embedded end market grew 21% quarter over quarter, primarily driven by increased demand in factory automation, robotics, and medical applications. Q1 non-GAAP gross margin was a little better than expected at 70%, up 60 basis points quarter over quarter and 100 basis points year over year. Our gross margin continues to reflect the value and differentiation our products provide for our customers. Non-GAAP operating expense was $60.8 million, up roughly 8% sequentially and 18% year over year. Much of the sequential increase is from performance-based bonuses and commissions as our revenue and profitability are exceeding expectations. We also continue to invest in order to capitalize on our near- and long-term opportunity. Our Q1 non-GAAP operating margin expanded 370 basis points to 34.4% and our EBITDA margin increased 310 basis points to 39.6%. Both were a little better than expected. Q1 cash flow was impacted by year’s annual bonus payout as well as revenue linearity in the quarter associated with our rapid growth. GAAP net cash flow from operating activities for Q1 2026 was $50.3 million compared to $57.6 million in Q4. Free cash flow trended with operating cash flow. In Q1, free cash flow was $39.7 million, down from $44 million in Q4. We expect a strong recovery of cash flow as we continue to grow. During Q1, we repurchased $15 million of stock. We ended the quarter with $140 million in cash and no debt. Now for our guidance. We are targeting closing the AMI acquisition in Q3, so this guidance reflects expectations for Lattice Semiconductor Corporation standalone. In Q2 2026, we expect revenues to be in the range of $175 million to $195 million. At the midpoint of this range, this is almost 50% growth from Q2 2025 and 8% over Q1. We expect gross margin to be 70%, plus or minus 1%, on a non-GAAP basis. We expect non-GAAP operating expense to be between $64 million and $67 million. Most of the growth in OpEx will be in R&D and reflects disciplined investments to drive long-term sustained revenue growth. We expect the income tax rate for Q2 to be 4% to 6% on a non-GAAP basis. We anticipate non-GAAP EPS to be in the range of $0.42 to $0.46 per share. At the midpoint of this guidance, we expect that we would again exceed 80% year-over-year earnings growth as we continue to demonstrate the leverage in our model. Turning now to the AMI transaction. I am just as excited as Ford, our Board of Directors, and our leadership team that we have entered into a definitive agreement to acquire AMI. AMI is a leader in platform firmware, secure boot, device management, and system control software. This acquisition represents a strategic expansion of Lattice Semiconductor Corporation’s capabilities to deliver system-level solutions, further accelerating our growth. The total consideration of the deal is expected to be $1.65 billion with $1 billion of cash and $650 million of equity. This is approximately 5.4 million shares based on the closing price on May 1. We expect the acquisition to be equally compelling from a financial perspective. With AMI, we expect our revenue to exceed an annual run rate of $1 billion by the end of this year. We anticipate AMI’s software-centric, asset-light model to further enhance Lattice Semiconductor Corporation’s already strong business model. We expect that the transaction will be immediately accretive to gross margin, free cash flow, and EPS on a non-GAAP basis. We will cover our pro forma expectations in more detail after we close the transaction. In closing, we are truly excited about our organic growth and financial performance. We are all very enthusiastic about the opportunity to combine Lattice Semiconductor Corporation’s strengths with those of AMI. Finally, the Lattice Semiconductor Corporation team remains focused on execution and taking advantage of the expanding growth opportunities ahead. We are well positioned to drive continued short- and long-term revenue growth, expand our operating margin, increase free cash flow, and grow earnings faster than revenue. Operator, that concludes our formal remarks. We will now open the call for questions. Ford Tamer: Operator, before we jump into questions, can we introduce AMI CEO, Sanjoy Maiti, who has a few remarks? Sanjoy? Sanjoy Maiti: Thank you. At AMI, our management team, our employees, board, investors, and I are equally excited to be joining with you and the Lattice Semiconductor Corporation team. The strategic combination with Lattice Semiconductor Corporation pairs the low power programmable leader with the leader in the platform firmware and infrastructure manageability for cloud and AI data centers. Lattice Semiconductor Corporation and AMI share a long history of collaboration and a common vision for a secure management and control platform. Now together, we can build on that foundation, extending the reach of Lattice Semiconductor Corporation’s low power FPGAs and AMI’s trusted platform, while we will maintain the open, silicon-agnostic, multivendor support our customers value. We also share the same commitment to disciplined execution, strong margins, and a focus on building value for our investors. Thank you again. I am very excited and looking forward to building a great future together. Ford Tamer: Sanjoy, great to have you here. Welcome to Lattice Semiconductor Corporation. Operator, we can now take questions. Operator: Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We will wait for a moment while we poll for questions. Our first question is from Ruben Roy with Stifel. Please state your question. Ruben Roy: Yes. Thank you. Hey, guys, congratulations on the strong results and outlook and the deal announcement. I guess, Ford, to start, in the press release, you talk about doubling the SAM opportunity here. Can you talk about how we should think about that expansion? How much is incremental addressable opportunity from AMI and their existing firmware installed base versus combined solution categories that perhaps neither company could attack independently? And as part of that question, the core business is inflecting, particularly on the compute side. If you think about 2026, how are you thinking about mix of revenue from servers specifically and maybe AI overall? Thank you. Ford Tamer: Thank you, Ruben. Good question. We expect our total serviceable available market to double from about $6 billion currently to about $12 billion jointly with AMI over the next three to four years. That main increase would come from the compute and communications subsegment. As you pointed out, the two major indicators in that segment are the percent server and the percent AI. On percent server, that has been growing steadily for us from the teens a couple of years ago to this year expected to be about 38% of our total revenue coming from server. On the percent of our revenue coming from AI, it grew from the mid-teens in 2024 to the high teens last year, to where we expect it to be about 25% of revenue in 2026. AMI plus Lattice Semiconductor Corporation is going to be uniquely positioned to provide solutions to customers in this compute and communications market. Ruben Roy: Thank you, Ford. If I could ask a quick follow-up for Lorenzo. It is great to see that you are flagging the deal as immediately accretive on gross margin, free cash flow, and EPS. Can you give us a framework for the gross margin profile? I know it is early, but any thoughts on the software and firmware business relative to your 70% non-GAAP gross margin run rate at this point? How much of the accretion as you look ahead would be structural versus maybe dependent on synergies? Lorenzo A. Flores: That is a great question, Ruben, and we will get into this in more detail once we close. The way to think about this acquisition, as Ford said, is that it is very strategic and in the midterm opens up really significant growth opportunities for us. The really nice thing about it immediately, thinking about this deal strategically and looking at the very complementary P&L structure and operating model that AMI has, is that we are not dependent upon synergies to make the deal accretive. In fact, AMI’s business is very high gross margin. It is higher than ours, and we will share more detail on that later. They have a different structure, but at the operating margin level, it is pretty close to ours. They generate a very significant EBITDA percent of revenue, close to ours or maybe slightly above ours right now. So if you think about it that way, there is not a dependency on cost cutting. We will look at efficiencies through time, for sure, but on a go-forward basis, we are able to fund the debt and cover the interest and still show accretion immediately. Ruben Roy: Appreciate all the detail. Congrats again. Operator: Our next question comes from Christopher Rolland with Susquehanna International Group. Please state your question. Christopher Rolland: Hi, guys. Thank you for the question. I wanted to dig in a little bit more on the strategic value of AMI. Looking over the website, it seems like they offer firmware but also infrastructure management software. Would love to know the cross synergies here between Lattice Semiconductor Corporation FPGAs and what you are going to do with this software. And perhaps if you could also talk about the growth rate for AMI. I know you talked about $200 million revenue in 2026, but that growth rate expectation moving forward would be helpful as well. Ford Tamer: Yes. Thank you, Chris. Let me start by drawing on my background where I have done this twice already; this is the third time. At Broadcom, we were second in switch market share to Marvell, and by the time I left, our team had done a great job becoming number one. One of the key acquisitions we did along the way was a company called Level 7 that provided us with protocol software. We used that to come up with reference designs for the ODMs in Taiwan that made it much faster for customers to go to production with their switch systems. Think of this protocol software almost like hardware—very low-level stuff. Then at Inphi, when I joined, we were second to II-VI; by the time I left, we were the number one leader in optical interconnect. Along that journey, we partnered with Microsoft to deliver a DCI module, 80-kilometer, then called Colors. That complementary addition of a system or subsystem, if you wish, with a module was very critical. We debated whether this was a departure from selling silicon and components, but it made sense. About 80% of the business ended up being components we were selling as a platform and 20% was the module, which started with Microsoft and eventually became standardized across the whole market. The addition of that module/system skill was very critical to help the silicon side go to market faster and do a better job. AMI has 40 years of developing test cases and very deep knowledge of the whole industry—from server to switch to NIC. They are the first ones to be brought up when a CPU gets brought up, the first when a GPU gets brought up, and with a lot of systems. They are a very key complementary partner to the BMC, the board management controller, today, and we intend to continue to be a very strong partner to all of these BMC vendors—HPE, Nuvoton, NXP, and others in the market. It is an extremely strategic move that complements our low power FPGA business. The growth rates are going to be in the high teens, and we expect next year to be accelerating. We do expect to bring solutions to market together that will help grow our revenue faster. We are growing at 40% on revenue and 80% on EPS, and we should be able to grow faster on both revenue and EPS together in the 2028 timeframe as these solutions go to market. Solutions are being fitted today; we had many discussions with many customers about these solutions. They are very excited. We have an investor deck on our website that details the AMI acquisition. On slide 5, it shows the challenges that data centers face today as you go from managing servers to racks to pods and the whole data center. Modularity becomes extremely important. AI is adding a lot of complexity, uptime is critical, and there is huge pressure on time to market and shift-left. Then if you jump to slide 11, it shows the solutions that we are providing together—rack boot, power and cooling, retrofit, and plug-and-play—along with our low power FPGAs and AMI’s platform firmware and manageability infrastructure. Very exciting future ahead. Christopher Rolland: Thank you for that, Ford, and congrats on this deal. As a follow-up, I think you said inventory maybe was even under two months at this point in time. We should have an uplift here; I think we can see it in the guide. If you want to talk about it more broadly as you are no longer burning, could there potentially even be an opportunity to refill? How are you thinking about all this into the future and next quarter? Will we be balanced? Ford Tamer: Good question. We are very excited about it. When I joined about a year and a half ago—this is my seventh quarterly call—I said we would bring this under control. When I joined, the numbers were closer to six months. We thought we would be at three months by the end of last year, and we were. By 2025, we got to three. I thought we were going to be in the twos; we are in the twos. I told you we would bring it under two, and we are on our way to under two. The last time the company was under two, we had 10 good quarters ahead in one-point-x. We may be entering a very strong period here. Our industrial and embedded business grew 22% sequentially, which is amazing, and hopefully more to come. Lorenzo A. Flores: The way to think about channel inventory right now is that it is no longer a business imperative to bring it down. We are focused on keeping the right balance of inventory at distributors across the globe and the right type of inventory so they can service their customer needs. I would characterize this as a non-issue for Lattice Semiconductor Corporation going forward. We now have much greater, more direct visibility into end-customer demand, so our build is much more efficient. Christopher Rolland: Appreciate it. Congrats. Operator: Our next question comes from Melissa Weathers with Deutsche Bank. Please state your question. Melissa Weathers: Hi there. Thank you so much for letting me ask a question. Congrats on nice results and an interesting deal, and to Sanjoy, looking forward to working with you in the future. For my first question, I wanted to touch on the data center side of things. In the past, you have given an FPGA attach rate per server, and it seems like the applications you can use an FPGA for in the data center are growing massively, and those conversations with engineers are happening live. We heard Jensen talk at GTC about using more FPGAs in those racks. Can you help us with an updated framework for FPGA attach in the data center? I am also curious on the wireline side in addition to the server side—any help on content in the data center would be helpful. Ford Tamer: Thank you, Melissa. A couple of trends I will highlight. In recent customer visits, a server OEM showed me how the “unit of rack” has evolved from an all-in-one rack to now four racks together—a compute rack, networking rack, power rack, and cooling rack. That is a profound change and will allow us to increase our content in comms as well as power and cooling. Second, in data centers now, these cooling racks are attached by large pipes coming from the ceiling. It is going to be much harder to change the cooling racks, so this cooling rack may have longevity needs closer to our industrial embedded business, lasting for many years, as opposed to the faster cadence on the compute side. In the AMI presentation, we highlight Rack Boot on slide 11 where the cloud would like to power up not just a server at a time, but the whole rack at once. We can have very interesting applications for our FPGAs in that new application. The third bullet on slide 11 shows retrofit—customers want to retrofit older systems for better uptime, security, and fault detection. That is another new opportunity. From a modeling point of view, we still have a forecast of a 16.5 million server market in 2026. We are roughly saying about three FPGAs per server overall. You can then calculate total FPGAs and revenue contribution. We gave you today a breakdown of that server business in Q1—about 38% of our revenue—so you can use our Q1 revenue to estimate ASPs and content. Lorenzo A. Flores: Our ASP is continuing to increase on a per unit basis through this progression as we keep finding more value-added opportunities for our customers. Ford Tamer: As we said in the past, what is helping us is number of servers increasing, AI increasing, and, even in the shorter term, big demand increases not only from AI but also traditional CPU and storage because of things like cloud and generative coding. That drives not just AI but also traditional CPU and storage. The attach rate continues to find new applications, new ASPs with new products. The ASP continues to increase, hence increasing that server dollar amount. Melissa Weathers: Thank you for all the color. And then maybe just a quick follow-up. These growth rates seem to be a lot faster than what we were expecting coming into the year. From a supply perspective, can you talk about your ability to secure supply? It seems like your customer visibility is increasing, but what about your supplier visibility? Do you have the front end? Do you have the back end? Anything we should consider there? Ford Tamer: We do. Our SVP of Operations, Divya Shah, has been in the industry for a long time. We have had many calls with our suppliers. This is definitely straining us, and we are working hard on it. We have been able to secure supply. It comes at a cost, but we are working with our customers and suppliers to deal with this, and we are in good shape. Lorenzo A. Flores: Unlike some other industry players, our wafers are more legacy-node wafers, and our supply there is less challenged. The back end is where we see pressure, and we keep expanding our supply chain in that area to provide a diversity of suppliers and additional capacity. We are beginning to bring our lead times down as we expand supply. Melissa Weathers: Perfect. Thank you. Operator: Our next question comes from Tristan Gerra with Robert W. Baird. Please state your question. Tristan Gerra: Hi. Good afternoon. As a follow-up to an earlier question, is there any step-function increase in the content for root of trust security with the upcoming cyber and payment platform? And also, is there any potential for Avant content in data center, or is that going to be in other end markets? Ford Tamer: We are not commenting on specific platforms, but our security continues to be a major factor in allowing us to grow our business here. Tristan Gerra: Regarding Avant and whether there is any data center potential opportunity for the higher-density FPGA that is coming up—what type of use cases do you see for Avant, and whether there are any data center applications, potentially datapath or anything else outside or even for a root of trust? Ford Tamer: Thank you. You are asking whether our mid-range FPGA Avant platform has application in data center. So far, it has been mostly our Nexus and pre-Nexus products that are applicable for data center. Over time, Avant may find its way there, but Avant is really focused on our industrial embedded segment. Tristan Gerra: And then just a quick follow-up. Your gross margin is starting to increase again, and your lead times have been expanding, which typically is good for ASP. I know you only guide a quarter at a time, but what is the potential for gross margin to go higher given the supply constraint and the state of demand versus supply? Lorenzo A. Flores: We have talked about this a few times, especially leading into the year, where we thought we should be prudent about our outlook on gross margin because we saw the supply chain cost increases coming. We have been able to work with our customers on ways to offset the cost increases we are seeing. We do also expect that the cost pressure will continue and increase in the second half of this year versus the first half. We will provide more specific guidance as we get into the second half on how the cost increases are playing out. Our approximate range remains about 69.5% plus or minus 1%. This quarter we happened to be at 70%, a little higher than that, but that is the approximate range we see going forward. Tristan Gerra: Thank you. Operator: Our next question comes from Joshua Buchalter with TD Cowen. Please state your question. Joshua Buchalter: Hi, guys. This is Manny on for Joshua. Congratulations on the quarter, and I will extend my congratulations for the deal as well. Focusing on the core business quickly, you have mentioned that Lattice Semiconductor Corporation is still on track for hitting that over $1 billion run rate in the fourth quarter of this year. Can you clarify if that is specifically for the core business, or is that inclusive of the AMI acquisition as well? Ford Tamer: It is inclusive of the AMI acquisition. Joshua Buchalter: As a follow-up, as it relates to AMI, what capabilities does this give Lattice Semiconductor Corporation that you did not have before? And can you talk about AMI’s current go-to-market monetization strategy and how that fits with Lattice Semiconductor Corporation’s business model currently and going forward? Ford Tamer: Thank you. Together, we expect to exit the year at this $1 billion run rate with roughly 40% free cash flow, so you can see we would be able to delever pretty fast from there. The combination is going to be very strong financially. From a capability point of view, it gives us much stronger system skills jointly and allows us to bring these solutions to customers much faster. We will be able to discuss further at our next quarterly call when we discuss Q2 and guide to Q3, and give you a lot more details on AMI’s business and financials. Today, we wanted to focus on our business and introduce the acquisition. We expect to close in early Q3, and at that time, we will provide full details. Joshua Buchalter: Alright. Thank you very much. Operator: Our next question comes from Quinn Bolton with Needham and Company. Please state your question. Quinn Bolton: Thanks for squeezing me in, guys. I will also add my congratulations, Ford. High-level question on the AMI acquisition. AMI talks about security and board management. You have historically talked about similar things for your FPGAs. Is there any place where the two businesses compete, or is it truly complementary? Does the Lattice Semiconductor Corporation FPGA root of trust protect the AMI firmware/BIOS as it resides in the servers? Any direct overlap? Ford Tamer: Great question, Quinn. We have been working together since 2019, so it has been seven years of close collaboration. There is no place where we compete. This is totally complementary. It is very complementary to our customers and should really benefit our customers and partners. We are committed to remain agnostic. They support all the other silicon partners, and we are partnered with the same silicon partners. We see it as very complementary and beneficial to our customers and partners. It should be very strong—one plus one equals three. Sanjoy is sitting with me today; he wants four, five, and six, hopefully. He is laughing here. Quinn Bolton: You had a great start to the year in terms of revenue growth. We came into the year thinking the server business could be up something like 20% to 40%, and industrial and now the embedded business up 5% to 15%. It looks like you are tracking well above that. Are you prepared to talk about growth rates for those businesses given the strong start? Lorenzo A. Flores: For the year, it is still early. The trend that started late last year and has led to our results in the first quarter continues. Our business continues to book in very strong. Customers are continuing to increase their demand, and we are booking out even longer in time. At this point, we have high confidence that our growth this year will be strong—stronger than we originally thought at the beginning of the year. Compute and communications as an end market will be a key driver for the reasons we all know. Industrial and embedded is recovering, and we saw signs of that in the first quarter. The extremely high year-on-year growth rates might not hold for the rest of the year for compute and server, but they will be pretty strong. The comms business will be aligned; it goes up and down relative to compute growth rate, but it is still going to be high. Industrial and embedded will continue to grow, but probably not at the Q1 versus Q4 rate. They did grow 10% year over year in Q1, and that is a pretty good range to think about for the year. Ford Tamer: And, Quinn, right now, as Lorenzo said, demand is strong for the foreseeable future with bookings well into 2027. Quinn Bolton: Got it. A quick clarification on the deal. Will THL Partners be locked up for any period post close on that $650 million of equity issued, or are they free to sell once the deal closes? Lorenzo A. Flores: They have a lockup that extends for 12 months from close—25% per quarter. Quinn Bolton: Perfect. Thank you. Operator: Our next question comes from Bank of America. Please state your question. Analyst: Hi. Thank you for taking the question. Congrats on the strong results as well. Following up on some of the earlier gross margin questions. You have been talking about bookings strong well into 2027, backlog is building up, lead times are expanding, and AMI margins are stronger. Is it possible that the margin structure is now more structurally higher than before? I think you have not really sustained 70%+ before. Should we think this is more achievable now? Ford Tamer: This opens up opportunities for us that we may have shied away from before and across various markets. We do not intend to go much above that. We can, but right now there are opportunities we have not gone after that we could go after, so it could potentially open up a higher top line. Analyst: Got it. One follow-up on broader competitiveness of the supply chain. Intel has now divested Altera and it is now a standalone company. They have a different supply chain with internal manufacturing. Does that give them more advantage in this supply-constrained environment? If not, why? Ford Tamer: Our suppliers have been fantastic. We are with UMC, Samsung, and TSMC on the fab side—extremely supportive. We have strong assembly and test partners and are adding more because this is where the shortages are. We feel very good about our supply chain and our ability to supply. That is not an issue for us. Operator: Ladies and gentlemen, that concludes the time we have for the Q&A session. I will now turn the call back to the company’s Rick Muscha for any closing comments. Rick Muscha: Great. Thanks, everyone, for joining us on the call today. We will be attending the following investor events this quarter: the JPMorgan 2026 Global TMT Conference on May 19 in Boston, and the TD Cowen 54th Annual TMT Conference in New York City on May 28. This completes our call. Thank you very much for your participation, and have a good evening. Analyst: Goodbye. Operator: Ladies and gentlemen, the conference call of Lattice Semiconductor Corporation has concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Good afternoon, and welcome to Cryoport, Inc.'s first quarter 2026 Earnings Conference Call. All participants will start in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. As a reminder, this call is being recorded. I will now turn the call over to your host, Todd Fromer from KCSA Strategic Communications. Please go ahead. Todd Fromer: Thank you, operator. Before we begin today, I would like to remind everyone that this conference call contains certain forward-looking statements. All statements that address our operating performance, events, or developments that we expect or anticipate occurring in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and not on the information currently available to our management team. Our management team believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events, and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item 1A Risk Factors and elsewhere in our Annual Report on Form 10-Ks to be filed with the Securities and Exchange Commission and those described from time to time in the other reports which we file with the Securities and Exchange Commission. As a reminder, Cryoport, Inc. has uploaded their first quarter 2026 in review document to the main page of the Cryoport, Inc. website. This document provides a review of Cryoport, Inc.'s financial and operational performance and the general business outlook. Before I turn the call over to Jerry, please note that because of the strategic partnership that has been established with DHL Group, and the related sale of Cryo PDP to DHL in June 2025, Cryo PDP's financials, which were previously a part of Cryoport, Inc.'s Life Sciences Services reportable segment, are now presented as discontinued operations. Please note that unless otherwise indicated, all revenue figures discussed today will refer to continuing operations. This includes Cryoport, Inc.'s fiscal year 2026 revenue guidance. It is now my pleasure to turn the call over to Mr. Jerrell W. Shelton, Chief Executive Officer of Cryoport, Inc. Jerry, the floor is yours. Jerrell W. Shelton: Thank you, Todd, and good afternoon, ladies and gentlemen. With me today is our Chief Financial Officer, Robert S. Stefanovich; our Chief Scientific Officer, Mark W. Sawicki; and our Vice President of Corporate Development and Investor Relations, Thomas J. Heinzen. Our first quarter results continue to demonstrate our market-leading position, as revenue was $47.8 million, up 16% year over year, which puts us off to a very strong start for the year. This growth is a combination of our momentum over the past several quarters across our integrated services and products platform. Revenue in support of our commercial cell and gene therapy grew 26% to $9.1 million, while revenue from clinical trials grew 18% to $12.9 million. We continue to support one of the industry's broadest cell and gene therapy pipelines, and our leadership across both commercial and clinical programs positions us well for future sustainable growth. As of March 31, we supported a record total of 766 global clinical trials, a net increase of 55 clinical trials over the prior year, with 91 of these clinical trials in Phase III. From this market-leading base, we believe we will continue to drive robust growth in our commercial revenue in both the near and the longer term. During the first quarter, I am happy to report that our client, Rocket Pharmaceutical, received an accelerated approval from the FDA for their gene therapy, Crislotti. With this approval, the number of commercial therapies we are supporting has increased to 21. For the remainder of 2026, based on current information, we expect another 10 BLA or MAA application filings and up to eight additional new therapy approvals. Our Life Sciences Services segment delivered a strong quarter, with revenue increasing 18% year over year, including 21% growth in biostorage/bioservices. This performance reflects increasing adaptation of our full-service portfolio in conjunction with the increasing scope and complexity of the cell therapy programs we support. It also underscores the critical role we play in supporting our clients with our extensive array of integrated temperature-controlled supply chain services and solutions. Our Life Sciences Products segment also performed well, generating 15% revenue growth driven by global demand for MVE Biological Solutions cryogenic systems. For over 60 years, MVE has provided high-quality, reliable cryogenic systems to the market, and every day it continues to further reinforce its position as the global leader. For example, during the first quarter, MVE introduced its new Fusion 800 series, which is a self-sustaining cryogenic freezer that eliminates the need for a continuous liquid nitrogen supply feed, delivering exceptional reliability, safety, and sustainability in a compact footprint designed for space-constrained environments where a source of liquid nitrogen is not readily available. This is quite an accomplished engineering feat, which will pay dividends for years to come as we open up new markets that were heretofore inaccessible. Growth across both our reporting segments—Life Sciences Services and Life Sciences Products—combined with solid gross margins and continued operational discipline, drove a $2.2 million year-over-year improvement in adjusted EBITDA from continuing operations, advancing us meaningfully along our pathway to profitability. We also reached a milestone moment during the first quarter as our IntegraCell team shipped its first cryopreserved clinical trial patient materials from both our Houston, Texas, and Liège, Belgium, facilities for two separate clients. This achievement highlights IntegraCell's progress as it continues to develop and moves us a step further toward being a meaningful contributor to the cell and gene therapy industry and to Cryoport, Inc.'s future revenue and profitability. In parallel, we continued to advance our digital and information strategy, including initiatives in digitization and generative AI to support complex internal workflows and improve our effectiveness and efficiency in day-to-day operations. Our focus is currently on enabling employees to use secure, enterprise-approved generative AI tools to automate repetitive tasks, analyze data in real time, manage risk, and accelerate decision-making and execution. We are already seeing tangible benefits and believe AI will play an increasingly important role in our future. Reflecting on our strong performance for the first quarter and our increased visibility into the remainder of the year, we are raising our full-year 2026 revenue guidance to $192 million to $196 million. We continue to review our guidance on a quarterly basis and we will make any further adjustments as warranted. We also believe that, based on our progress year to date, we will achieve positive adjusted EBITDA in the second half of this year. This concludes my prepared remarks. We will now open the call for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Puneet Souda from Leerink Partners. Please go ahead. Puneet Souda: You had a $3 million beat versus the consensus, but you are raising the guide by $1 million. How much of that is prudence being early in the year? Any other considerations? And how should we think about 2Q, if you can provide some context there, given the momentum you are seeing in the business versus core clinical trials? Jerrell W. Shelton: Thank you for the question, Puneet. We think that Q1 was an outstanding quarter, but we think it is a responsible guide given the continued uncertainty on a global macroeconomic basis. We will continue to evaluate this on a quarterly basis and adjust the guidance if warranted. Puneet Souda: Maybe switching gears to MVE Life Sciences Products. You had 15% growth against an easier comp. How should we think about growth for Life Sciences Products overall with the new product introduction this year? Wondering if Robert can comment on that too. Jerrell W. Shelton: Robert can comment on it, but I will start. All products in life sciences take time to ramp up, whether it is products or facilities. It will take time for those products to ramp up in the marketplace and to have any kind of an impact. We do think the markets are solid and have solidified, and we see continued indications that support that. We think that we will have a high single-digit growth market going forward. We may exceed that from time to time, but that is our assessment. Robert, you may want to add some things there. Robert S. Stefanovich: The outperformance during Q1 was really driven by strong demand across all geographies and solid performance, particularly in animal health, but also life sciences overall. MVE is the number one leader in the market worldwide. We already saw stability in 2025 in terms of the return of product demand for cryogenic systems, and we continue to see that improvement as demonstrated in our Q1 performance. Puneet Souda: We have seen improvement in biotech funding in the fourth quarter that has continued so far in the first quarter. Are you seeing higher momentum from that for RFP or contract volumes in the first quarter or the second quarter so far? Your net clinical trial adds were only six, but are you seeing momentum from customers given the funding environment? Jerrell W. Shelton: Mark will take that. Mark W. Sawicki: Happy to. We are seeing definitive continued investment into Phase II and Phase III programs. If you take a look at our numbers, the Phase II data itself and Phase III data are increasing very nicely. Phase III was up five trials sequentially, which is very unusual, and we have not seen that in a long time. Year over year, Phase II is up almost 30 programs. A lot of that money is going into pushing these late-stage clinical assets over the finish line. We do see very positive signs from that. Jerrell W. Shelton: To add to it, it is less about the number of increases in clinical trials. It is really looking at the 706 clinical trials we are supporting. That is a very strong number. As Mark mentioned, the maturation of those trials moving into Phase II and Phase III is key. You will remember that the majority of cell therapies approved to date went directly from Phase II to commercial launch, conducting their Phase III in parallel. You really have to look at the [inaudible] Phase II clinical trials and the 91 Phase III as potential for commercial launches. Puneet Souda: That is super helpful. Congrats on the quarter. Robert S. Stefanovich: Thank you. Operator: Your next question comes from the line of Anna Snopkowski from KeyBanc Capital Partners. Please go ahead. Anna Snopkowski: Thanks for taking my question, and congrats on a great quarter. You mentioned you shipped your first clinical trial patient material for IntegraCell, which is very exciting. Could you walk us through your initial learnings from this rollout and what your expectations are for IntegraCell in 2026? Mark W. Sawicki: We are really pleased that we are now supporting actual clinical processes in both locations—the site in Belgium and the site in Houston. It is a very nice achievement and something we have been working toward for a long period of time. IntegraCell, as an organization and as an asset, is going to be a very important driver for long-term revenue and margin expansion. It is a long cycle time for onboarding. It typically takes 12 to 18 months in some cases to onboard. We have active projects ongoing and additional clients coming on board now. Our overall outlook is extremely positive. From a learning standpoint, it has been extremely well received. One of the key elements is the fully integrated platform—our fully integrated service platform includes biologics and bioservices—and our initial clients are using all of our competencies. That is very important for our team as we harmonize and optimize those processes to really drive efficiency for our clients. Anna Snopkowski: On the EBITDA side, could you walk us through some of the assumptions to get to second-half positivity? It seems like there are some facilities ramping that should help, and then also the commercial therapies mix. Any variables and areas of upside would be helpful. Robert S. Stefanovich: If you look at our Q1 performance, we were very close to breakeven on the adjusted EBITDA side, with a negative $600 thousand. We reiterate reaching positive adjusted EBITDA in the second half of the year. This is driven by the revenue growth we see. You mentioned some of the initiatives and investments we have; those are really going to drive operating leverage in 2027. The achievements for Q2 of this year are driven by current organic revenue growth. The new facilities are investments we began in 2025 and are completing now in 2026. They are going to drive further enhancement of our profitability and adjusted EBITDA in 2026 and beyond. Operator: Your next question comes from the line of David Joshua Saxon from Needham. Please go ahead. David Joshua Saxon: Good afternoon, everyone. Thanks for taking my questions, and congrats on the strong start to the year. In the script this quarter and last quarter, you talked about AI initiatives that are helping reduce OpEx. How durable is that and can it be applied to more of the business, or are we seeing the full extent of the savings potential? Jerrell W. Shelton: All of our AI initiatives are durable, and they are focused internally to enhance our efficiency and effectiveness. It is a very powerful tool that will reshape our business over time. We are excited about our AI initiatives, but they are focused today on practicality—improving efficiency and effectiveness in internal operations. David Joshua Saxon: My second one might be for Robert. On the supply chain centers in Paris and Santa Ana, both in the second half, what is baked into guidance from those two coming online? When could we start seeing customer audits of those facilities? Anything from a gross margin perspective we should be aware of? Robert S. Stefanovich: These initiatives we started in 2025 are being completed this year. The Paris, France site went operational with biologics in November, so that is already starting to ramp and clients are doing their audits. We will complement that with bioservices in Q3 of this year. The second is the Santa Ana, California site, which gives us a significant West Coast presence. It consolidates three of our existing locations into one and expands to about 94 thousand square feet to offer biologics, bioservices, consulting, testing, and ultimately space for IntegraCell. These are significant initiatives driven by client demand. From a guidance perspective, the revenue contribution is smaller because they come online in the second half. Clients will conduct their audits this year, and they will start contributing more significantly in 2027. David Joshua Saxon: Anything on gross margin from that, or just generally how to think about gross margin? Robert S. Stefanovich: What we mentioned at year-end still applies, albeit we came in higher on services gross margins than initially expected. We expected gross margins in the first half to have some pressure and to start rebounding in the second half. We did not really see that pressure in Q1, but margins should come back more significantly in the second quarter and second half of this year. Operator: Your next question comes from the line of Analyst from Guggenheim, on behalf of Subhalaxmi Nambi. Please go ahead. Analyst: Hi. This is Ricky on for Subbu. Thanks for taking our question. The commercial cell and gene therapy revenue grew 26% year over year in the first quarter. Is that the right growth rate to think about for the year, or should we expect more acceleration as newer approvals ramp? Is the growth concentrated in a few key therapies like Carvykti, or is it broad-based across your supported commercial products? Robert S. Stefanovich: On commercial revenues, research reports on the market range on the low end 20% and on the high end 40%. You are right—we saw solid revenue growth on the commercial side. We do expect that 2026 will be a very good year for commercial revenue. Our revenue guidance is really based on the existing commercial therapies that we are supporting. While there may be some revenue contribution from new approvals, the guidance is based on the existing platform we have for 2026. Thomas J. Heinzen: Bristol Myers and J&J have already reported, and they reported a strong Q1. We cannot really talk about the rest of our commercial therapies we support because they have not reported their quarters yet. Operator: Your next question comes from the line of David Michael Larsen from BTIG. Please go ahead. David Michael Larsen: Congratulations on the great quarter. Sticking with commercial products, how many commercial products are you supporting now, and did I hear you say that you could have potentially eight more launch within the next 12 months? Robert S. Stefanovich: We are supporting 21 today, and yes, there are eight potential approvals of new therapies this year. Five of them already have PDUFA dates set by the FDA. David Michael Larsen: Can you talk about the dynamics of a commercial product you are supporting versus a clinical trial product? Is there a difference in margins or revenue per product? On the commercial side, since they are in the market being used, I would think there would be much more revenue potential per product because it is being used across the world for patients and not limited to one specific clinical trial. Any color on the revenue potential and margin relative to clinical trials? Robert S. Stefanovich: A couple of things related to commercial therapies. One, as we support clinical trials, we then work with their commercial team in preparing for the launch of the commercial therapies, whether in one country or globally. We are part of the launch and provide program management that is billed separately as well. The increase in commercial revenues is driven by the patient population. As more commercial therapies come to market and move from teaching hospitals to regional or outpatient settings, the acceleration of patients being treated occurs, which drives more revenue. We are continuously expanding our service platform—initially biologics, adding bioservices, and ultimately IntegraCell cryopreservation services—which further expands revenue on a per-patient basis as we provide services along the supply chain of the cell and gene therapy market. David Michael Larsen: Your revenue growth this quarter versus two years ago is a huge positive. What do you attribute the resurgence in growth to? Is it simply the cell and gene therapy market coming back after working through the IRA? Robert S. Stefanovich: It is a number of things. We have broadened our revenue stream; bioservices, which is a newer offering, increased over the last couple of quarters—20% plus year over year—and we expect that to continue. On the product side, we saw in 2025 demand normalizing and coming back. Across our different revenue streams, we are seeing stronger demand, and that has been driving revenue, which led us to increase the guidance for the full year. Operator: Your next question comes from the line of Richard Baldry from Roth Capital. Please go ahead. Richard Baldry: On the commercial acceleration, has it been concentrated around the CAR-T area with the regulatory burden easing, or is that still a catalyst ahead that has not really had an impact yet? Thomas J. Heinzen: Cell therapies are the majority of our commercial customers. Gene therapies have had a slower start, but cell therapies are pulling the wagon—Bristol Myers, Gilead, J&J. Looking at our clinical trial portfolio, close to 90% of the clinical trials we are supporting are autologous and allogeneic cell therapies. Operator: Your next question comes from the line of Analyst from Craig-Hallum Capital Group. Please go ahead. Analyst: Nice start to the year. Regarding the Fusion 800 series, could you talk a little bit about the pipeline? You mentioned positive response and some early adoptions, but what does that pipeline look like? Jerrell W. Shelton: It is early to comment on the pipeline. We sell through distributors, and the first thing we do is get our 800 series into distribution. We are moving out very nicely, but it is too early to comment on the pipeline. Analyst: Switching gears, we are approaching a year since the REMS was removed. There was a lot of build-up as patients moved out of hospitals to ambulatory and other centers. Has that momentum continued? Are you seeing that opportunity expand beyond the core hospital setting? What can that mean for growth later this year and into next year? Jerrell W. Shelton: Tom, you may want to comment on that. Thomas J. Heinzen: If you look at companies that have reported—J&J and Bristol—outpatient and community hospital growth is helping to drive their revenue, which in turn helps to drive ours. Operator: Your next question comes from the line of Analyst from Stephens. Please go ahead. Analyst: Good afternoon, and thank you for taking my questions. Following up on margins, MVE product margins were relatively light compared to our expectations. What are you seeing in terms of the storage industry in general and how are energy prices factoring into performance in the quarter and expected to factor into the remainder of the year? Robert S. Stefanovich: Energy prices did not factor into the quarter for our products business. The margin variance is purely a result of specific product mix. Year over year, margins are pretty close. Sequentially it is down, but that is related to product mix we typically see in the first quarter. There is no pricing erosion or competitive element; it is product mix related. Analyst: It has been about six months since funding really started to tick back up. As you look at how the quarter is shaping up to date, what can you tell us about the level of activity and sentiment within your customer base today? Robert S. Stefanovich: Overall, it is very good for the industry, especially for companies in need of raising funds to drive their clinical trial portfolio. Many clients we serve are very well established and funded, especially given the large number of Phase II and Phase III programs that are close to the finish line pre-commercial. We do not see a huge risk on the funding side there. It is mostly smaller companies in need of funding. It is certainly good for the industry to see funding coming back, with strong funding especially in April. Thomas J. Heinzen: To peek under the hood with our clinical trial count, it increased by six net sequentially. There were 29 new trial adds in the quarter and 23 removed—net six. Of those 23 removed, 16 of the trials were completed. That is a great thing that shows the maturation of our pipeline. That means ones are going to go to twos, and twos are going to go to threes. Operator: Your next question comes from the line of Matthew Jay Stanton from Jefferies. Please go ahead. Matthew Jay Stanton: Robert, to close the loop on margins, given inflationary pressures over the last few months on commodities and logistics, can you remind us of your pricing structure? I believe you are able to pass along an uptick as part of the contracts you have in place. Can you remind us of the mechanics on pricing as it relates to inflationary pressure coming back into the P&L for the rest of the year? Robert S. Stefanovich: In transportation and logistics—the component of our solution—fuel surcharges are normal. They may go up or down, but they are passed on to our client base. That is common practice, so it does not impact our gross margins. From a product side, we have not seen an impact from increased oil prices at this point, but we are keeping an eye on it like everyone else. Matthew Jay Stanton: On the product side, I think, Jerry, you said that market could grow high singles. I think prior you thought products could be mid-singles for the year, maybe high singles if things came back better. After a strong Q1, do you feel like products is more like a high single-digit business in 2026 than mid-singles? Jerrell W. Shelton: I do feel like it is high single-digit growth. It seems like it is solidifying across the globe, so I have no reason to think differently. Matthew Jay Stanton: Maybe one for Mark to go back to IntegraCell. Now that customers at those two sites have started to move product, any finer point you can share on the volume or size of product you expect there? I know it takes a while to get things validated and started, but now that they are started, how meaningful could that be as IntegraCell ramps up? I think prior you had been bullish on the revenue opportunity given the number of products and services as part of IntegraCell. Jerrell W. Shelton: We are bullish about everything we do. Since we formed the company, we have set standards in the industry. IntegraCell is another example of our industry-leading movement forward based on what the markets need and conversations with clients. IntegraCell is off to a good start. We would always like to have a more robust start, no matter what it is, but it is gaining a lot of attention. It does take time for these things to take hold, for other clients to come in, and for our integrated services approach to take effect. Stay tuned. As Mark said, it will unquestionably be a very important contributor to Cryoport, Inc. in the future. Operator: There are no further questions at this time. I will now hand the call back to Mr. Shelton for any closing remarks. Jerrell W. Shelton: Thank you, operator. Ladies and gentlemen, thank you for your questions and our discussions. In closing, I would like to remind you that we continue to be the market leader, and we have had a great start to 2026, marked by 16% revenue growth year over year and strong double-digit growth across both our reporting segments. Our Life Sciences Services revenue increased 18% year over year, driven by 21% growth in biostorage/bioservices revenue; a 26% increase in revenue from commercial cell and gene therapy support; and clinical trial–related revenue growth of 18%. At the same time, our Life Sciences Products revenue grew 15%, driven by global demand for MVE's cryogenic systems. Remember, MVE is the world leader in cryogenic systems. Our top-line growth was accompanied by solid gross margins, contained operating expenses, and continued operational discipline, which resulted in a $2.2 million year-over-year improvement in adjusted EBITDA from continuing operations, pushing us further down our pathway to profitability. Based on these results and the progress we have made with our strategic initiatives, we are more positive on our outlook for the year than when we last spoke on our year-end earnings call, and that led us to raise our full-year revenue guidance as we continue to execute on the opportunities ahead of us. We look forward to keeping you up to date on our progress. We appreciate your continued interest and support, and we look forward to speaking with you again when we report our second quarter financial results. We wish all of you a good evening. Operator: This concludes today's call. Thank you for participating. You may all disconnect.
Operator: Good day, and thank you for standing by. Welcome to the ON Semiconductor Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please go ahead. Parag Agarwal: Good afternoon, and thank you for joining ON Semiconductor Corporation’s first quarter results conference call. I am joined today by Hassane El-Khoury, our President and CEO, and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our first quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements, are described in our most recent Form 10-K, Form 10-Q, and other filings with the Securities and Exchange Commission and in our earnings release for the first quarter. Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other events that may occur, except as required by law. Now let me turn it over to Hassane. Hassane El-Khoury: Thank you, Parag. Good afternoon to everyone on the call, and thank you for joining us. This quarter marks a clear inflection point for ON Semiconductor Corporation. Improving demand signals, accelerating AI data center growth, and sustained gross margin expansion demonstrate that the structural changes we made over the past several years are now translating into tangible financial results. We delivered revenue of $1.51 billion and non-GAAP diluted earnings per share of $0.64, both above the midpoint of guidance, driven by growth in AI data center. We expanded gross margin for the third consecutive quarter to 38.5% while returning meaningful capital to shareholders. As volumes recover and new products ramp, our focused portfolio and lean cost structure are driving the operating leverage we designed this model to deliver. Turning to the demand environment, we saw a clear improvement as the quarter progressed, with strengthening order patterns and an increase in short lead-time orders. Taken together, these signals give us confidence that this cycle has found its low point, and we are now on a path to recovery. On the new products front, our execution on Treo continues to accelerate as the platform moves from product proliferation into ramping revenue and design wins. In the first quarter, revenue increased more than 2.5 times sequentially, and we saw broader adoption across high-volume automotive, industrial, and AI applications, with Treo design wins supporting the transition to software-defined vehicles. Programs in our funnel include zonal architectures built on 10BASE-T1S paired with smart FETs; auto ADAS park-assist systems using ultrasonic sensing; power management for AI client platforms; and inductive position sensing for humanoids and advanced automation use cases. These wins reinforce Treo’s penetration as customers move to a more centralized compute model with zonal for a scalable software architecture and require a faster time to market. Our Treo-based driver ICs and inductive position sensing combined with our gallium nitride products deliver high power density, efficiency, and ease of use in humanoid applications, AI data centers, and automotive. Our overall GaN solutions design funnel, which includes vertical GaN, now exceeds $1.5 billion supported by a rich product portfolio spanning 40 to 1,200 volts. Ten products are already sampling with another 20 sampling in 2026. With a balanced model that combines internal GaN development and foundry partnerships, we have a differentiated roadmap and resilient supply chain that positions us to begin ramping in these markets with revenue starting in 2027. Diving deeper into automotive, in the first quarter we began production shipments of our Treo-based T1S Ethernet solutions for a leading North American customer’s next-generation zonal architecture. The platform integrates more than 30 Treo devices enabling end-zone connectivity. Higher energy costs are accelerating EV demand, with cost-optimized EV platforms driving increased adoption of IGBT-based traction inverter solutions. Our latest generation IGBTs deliver a compelling balance of performance, efficiency, and cost, complementing our silicon carbide wins, particularly in front-axle applications. During the quarter, we were awarded a new IGBT-based traction inverter program with a North American OEM that is transitioning to direct semiconductor sourcing. As the industry transitions to 900-volt EV architectures led by Chinese OEMs, we are the preferred power solution and are already in production at customers in their next generation EV platforms, enabling fast charging and higher efficiency for a longer drive range. Our China automotive revenue grew year over year in Q1 despite a decline in the China passenger vehicle market of 6% for the same period. Our silicon carbide share of new EV models deployed at the 2026 Beijing Auto Show in April is approximately 55%. Recent expanded collaborations with Geely and NIO highlight our role in enabling these customers to scale globally with their next-generation 900-volt platforms. The latest reports from the China Association of Automobile Manufacturers highlight continued strength in new energy vehicle exports in the first quarter, supporting our view that EV adoption is extending beyond the China domestic market. With ongoing fuel supply disruption and elevated energy costs, we expect demand for high-efficiency EV platforms and silicon carbide content to remain durable, supporting long-term growth opportunities for ON Semiconductor Corporation and automotive power globally. Turning to AI data centers, our revenue grew more than 30% quarter over quarter, nearly double our expected growth rate entering the quarter, driven by broader adoption across the PowerTree with multiple XPU vendors and all the leading hyperscalers. Looking ahead, we now expect our AI data center revenue to double year over year in 2026. As the only broad-based U.S. power semiconductor supplier, ON Semiconductor Corporation continues to build a leading position in AI data centers across the full set of power capabilities required to modernize the power tree, including high-voltage conversion, intelligent power stages, protection and control, and system-level integration from the grid to the processor. As policymakers push for greater transparency in U.S. data center energy use, it reinforces a trend we have been aligned with for some time. ON Semiconductor Corporation’s power portfolio helps hyperscalers overcome power density and efficiency constraints, reducing losses from the grid to the processor. We are engaged with all major power supply vendors serving every major AI hyperscaler. With FlexPower, for example, our partnership now spans more than 30 active programs across intermediate bus converters, power supplies, battery backup, supercapacitors, and next-generation 800-volt DC architectures. The AI halo effect continues to drive incremental demand in adjacent infrastructure markets, particularly energy storage systems, as rising energy costs and declining battery prices accelerate project economics. Driven by our differentiated SiC hybrid modules, we are seeing renewed growth in our string ESS and microgrid business globally, from China to North America. We now expect to outpace the power semiconductor growth for this market in 2026, with more than 40% revenue growth year over year and a market share approaching 60%, and are now ramping revenue for large U.S. OEMs’ microgrid deployment. Our announcement with Sungrow Electric highlights our hybrid power integrated modules combining EliteSiC technology and FS7 IGBTs, enabling higher efficiency and higher power density for utility-scale solar inverters and liquid-cooled energy storage platforms. These solutions deliver the best system-level electrical and thermal performance and reinforce our position as a technology partner of choice as customers scale next-generation renewable and storage deployments. Turning to sensing, we are delivering a multimodal sensing capability that customers can deploy across industrial autonomy, automotive sensing, and emerging robotics applications. We secured a meaningful design win with a leading global robotics platform where our high-resolution image sensor and indirect time-of-flight technology were selected to enable reliable depth perception and navigation in autonomous systems. Our roadmap spans complementary modalities including high-resolution imaging, depth, and other sensing approaches like SWIR that are designed to work together with automotive-grade reliability and long-lifetime performance. As we move forward, we are encouraged by improving market conditions and the momentum we are seeing across our highest-value applications. Our continued evolution towards a product- and solution-centric portfolio combined with disciplined investment decisions and our FabRight actions is strengthening our operating model and enhancing margin durability. We are executing a clear strategy with deeper customer intimacy and a portfolio aligned to the most important long-term power and sensing transitions. This positions us well to deliver sustainable growth, expanding profitability, and long-term value creation. I will now turn it over to Thad to give you more details on our results and guidance for the second quarter. Thad Trent: The improving market conditions are coming through in our financial results and outlook as demand visibility improves. This year, we expect the impact of the structural changes we have made to become increasingly visible in our results. With a leaner cost structure, a more focused portfolio, and differentiated power and sensing investments, we have built a model that delivers strong operating leverage, with incremental revenue driving expanded margins, earnings, and free cash flow. In the first quarter, order patterns and improving backlog visibility indicate that we are moving away from the bottom of the cycle and we are on a path to recovery. We delivered revenue of $1.51 billion, better than normal seasonality, and non-GAAP earnings per share of $0.64, both above the midpoint of our guidance. We expanded non-GAAP gross margin for the third consecutive quarter to 38.5%, and we expect sequential gross margin expansion throughout the year. We returned $346 million to shareholders through opportunistic share repurchases, representing nearly 160% of free cash flow. Q1 revenue was $1.51 billion, down 1% versus the fourth quarter and up 5% year over year. As expected, there was roughly $50 million of planned non-core exits in the quarter. Turning to the end markets, automotive revenue was $797 million in the first quarter, roughly flat quarter over quarter and up nearly 5% year over year, marking the first year-over-year growth after seven quarters of decline. We continue to see stabilization in the automotive market and we now believe we are shipping to natural demand. China electric vehicle programs continue to outperform other regions driven by a strong export market. Industrial revenue was $417 million, down 6% sequentially but ahead of our expectations. We saw broad-based strength across our traditional industrial business for the second consecutive quarter, partially offset by typical Chinese New Year seasonality. Our AI data center business is accelerating, with Q1 revenue growing more than 30% quarter over quarter and doubling year over year, reflecting platform ramps and expanding engagement across the PowerTree. We expect our 2026 AI data center revenue to double compared to full year 2025. For the first quarter, total revenue for the Other category was $299 million, an increase of 3% quarter over quarter due to AI data center strength. Looking at the first quarter split between the business units, revenue for the Power Solutions Group (PSG) was $737 million, an increase of 2% quarter over quarter and 14% year over year. Revenue for the Analog and Mixed-Signal Group (AMG) was $540 million, a decrease of 3% quarter over quarter and 5% year over year. Revenue for the Intelligent Sensing Group (ISG) was $256 million, a 5% decrease quarter over quarter and a 1% increase over the same quarter last year. Moving to gross margin, in the first quarter GAAP and non-GAAP gross margin of 38.5% increased sequentially in a seasonally down quarter. The improvement in gross margin is a result of the structural changes we have made over the last several years that have improved our manufacturing performance. Manufacturing utilization increased sequentially to 77% as we ramped production quickly to respond to stronger demand signals in the quarter. In Q2, we expect utilization to be flat to up slightly. Given the improving demand outlook and our ongoing FabRight actions, we expect sequential gross margin expansion throughout the year. GAAP operating expenses were $637 million, including $329 million in restructuring expenses. Non-GAAP operating expenses were $294 million, a decrease of 7% from Q1 2025 driven by cost optimization actions. GAAP operating margin for the quarter was negative 3.5%, and non-GAAP operating margin was 19.1%. Our GAAP tax rate was 26.2%, and our non-GAAP tax rate was 15%. Diluted GAAP loss per share was $0.08, and non-GAAP earnings per share was $0.64. GAAP diluted share count was 394 million shares, and non-GAAP diluted share count was 396 million shares. We opportunistically purchased $346 million of shares at an average price of $60.54. Turning to the balance sheet, cash and short-term investments were approximately $2.44 billion, with total liquidity of $3.9 billion, including $1.5 billion undrawn on our revolver. Cash from operations was $239 million, and free cash flow was $217 million. Capital expenditures were $22 million, or 1.4% of revenue. Inventory increased by $60 million to 201 days from 192 days in Q4. The sequential increase was a result of higher internal loadings and customer commitments as we continue to deplete the 75 days of strategic inventory, which is down from 76 days in Q4. We plan to deplete this inventory over the next two years. Excluding the strategic builds, our base inventory is at 126 days. Distribution inventory was flat at 10.8 weeks. Looking forward, let me provide the key elements of our non-GAAP guidance for Q2 2026. As a reminder, today’s press release contains a table detailing our GAAP and non-GAAP guidance. We anticipate Q2 revenue will be in the range of $1.535 billion to $1.635 billion. We expect to exit an incremental $30 million to $40 million of non-core revenue in the second quarter. Excluding these exits, our revenue is expected to increase approximately 7% at the midpoint and be above seasonal. Our non-GAAP gross margin is expected to be between 38% and 40%, which includes share-based compensation of $6 million. Non-GAAP operating expenses are expected to be between $287 million and $302 million, which includes share-based compensation of $28 million. We anticipate our non-GAAP other income to be a net benefit of $6 million, with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 15%, and our non-GAAP diluted share count is expected to be approximately 194 million shares. This results in an anticipated non-GAAP earnings per share in the range of $0.65 to $0.77. We expect capital expenditures in the range of $25 million to $35 million. To wrap up, our first quarter results demonstrate continued execution and the operating leverage embedded in our model. I would like to thank our teams around the world for their commitment to excellence. Looking ahead, as our end markets continue to recover, we expect to deliver sequential gross and operating margin expansion throughout 2026. With that, I would like to turn the call back over to the operator to open it up for questions. Operator: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Ross Clark Seymore with Deutsche Bank. Your line is open. Ross Clark Seymore: Hi, guys. Thanks for letting me ask a question. I guess for my first one, Hassane, one for you. Cyclical conditions are clearly getting better, but I think the structural and secular stuff is more important to investors when they think about ON Semiconductor Corporation. You rattled off a bunch in your preamble, whether it be the AI data center, the electric grid, the zonal. There is a whole bunch of them. How do you think those are really going to show through to investors, and when do those become the dominant driver of revenue that we can really see externally? And as my follow-up, a good segue to the gross margin side for Thad. Top line is significantly better. You talked about the loadings being better. Can you just update us on what the levers are on the gross margin side? People expect a little bit more stair-steps than kind of a slow linear ramp on the gross margin side. Is that something we should expect in the second half of the year? And if not, when will those larger steps start to be apparent? Hassane El-Khoury: Yes. I will take them one at a time. If you think about the AI data center, you are already seeing it in 2026. If you recall, we entered the year thinking we were going to be in the high-teens sequential growth for AI data center. We ended up at 30%. You see the strength is starting already to come in, and for the year, doubling our revenue from last year. So that is going to be a top-line growth driver. For the zonal, the 10BASE-T1S, and so on, that is all really related to the Treo traction that we have been talking about. That is already being seen in the revenue with the 2.5x increase that I talked about, but more importantly, that is going to start showing up in the top line as we progress in ’26, ’27, ’28 towards that $1 billion in 2030. More importantly, it is going to come with the margin expansion that this product line will offer, not just the top line. If you recall, the margin range for the Treo product is 60% to 70% gross margin. You can think about it as both a top-line driver and a gross margin driver. That is going to be both in the AI data center and automotive with the zonal. Then other opportunities, as they progress for the AI halo effect that I talked about, you will see that in the industrial business. I already talked about that side of the business growing 40% year on year. As the rest of industrial starts to grow, you are going to start seeing that as a reflection of our overall industrial business. Overall, I would say investors are going to see a lot of the growth in the right markets and the right applications, both from a top line, but more importantly, the margin expansion. Even in ’26, Thad in his prepared remarks talked about margin expansion throughout 2026. So you are going to already start to see that shift, and that is all a lot of the portfolio rationalization and the manufacturing work that we have been doing starting to reflect. Thad Trent: Yes, look, we expect expansion throughout the year as we are seeing the favorability from our FabRight activities that we have been taking through 2025. As utilization improves, you will see that as well. We have also had some headwinds on input costs going up, and our pricing actions are now going to offset that as we think about later in this year. The puts and takes are similar to what we have talked about in the past. It is utilization, where every point of utilization is 25 to 30 basis points of gross margin improvement. We think longer term there is another 200 basis points of improvement from the FabRight initiatives that we are driving. Hassane just talked about favorable mix, and longer term you are going to see over 200 basis points impact to gross margin there. We divested the fabs back in 2022. I do not think we are going to see that here in ’26, but in ’27 you should start to see some impact from that, and longer term that is another 200 basis points. When you start to stack it up, you can get over 50% when you do the math. We expect expansion throughout the remainder of this year, and probably larger step functions than what you saw here in the first quarter. Operator: Our next question comes from Vivek Arya with Bank of America. Your line is open. Vivek Arya: Thanks for taking my question. For the first one, last year we saw the analog industry had a decent first half and then things started to get a little more muted in the second half. Do you think this year’s second half plays out differently than what we saw last year? What are you seeing in your customer discussions and demand visibility? Because you mentioned a lot of positive words, demand inflection and demand strengthening. Should we be expecting seasonal or better-than-seasonal trends in the second half? How should we think about the second half of this year? Hassane El-Khoury: I do not want to guide the outlook from a seasonality perspective, but let me give you how the year is laying out. The signals that I look at, whether it is book-to-bill, order patterns, lead times, etc., are all pointing in the right direction. We are expecting the second half to outgrow the first half. I am not talking about flattish; I am talking about a good outlook that we have based on all the customers. It is driven by programs that we started ramping already and will continue to ramp. You can think about it as we have gotten one quarter and then we are going to get the rest of the quarters as the ramp happens. Whether it is AI data center or automotive, driven primarily in China, those models that I referenced with 55% being ON Semiconductor Corporation silicon carbide just got released and will be in production in the second half. You can start seeing a lot of the leading indicators of a solid ordering pattern, and you can extend that to AI data center and industrial. All of these positive patterns started and will continue through the second half of the year. That was not the sentiment that I personally had last year. In contrast, we see a much better outlook than we did last year. Vivek Arya: Got it. And for my follow-up, on the AI data center, you mentioned that it grew 30% sequentially. How big is it for ON Semiconductor Corporation right now? Is it something like mid-single-digit percent of sales? There is a lot of interest in that segment, so if you could help give us some range on how large that segment is. And do you think you have the scale and the internal resources to become an important player in that segment, or do you think you will need some inorganic resources to help you become a more important player in the AI data center segment? Thank you. Hassane El-Khoury: Let me first tackle the first one. Last year, we talked about $250 million in AI revenue. We just mentioned that we will be doubling that this year. That is pretty healthy growth given where we started. We have all the power technologies from the wall to the core, both inside the data center, which is the revenue that we report, but also outside the data center, which we report under industrial. From a technology perspective, I feel very good. We have done some inorganic acquisitions in 2025 that are playing to our advantage. We talked about the Aurasemi acquisition, and we did the JFET silicon carbide acquisition. All of these are pieces of that puzzle that gave us a very well-rounded power technology platform that we can deliver. Treo is also a very big internal technology for the AI data center. Those together cover the technology. From a team perspective, you have seen our actions on OpEx, but both Thad and I have always said we are very focused on capital and R&D allocation in the areas of growth. That is where they are going. To answer your question directly, we absolutely have the focus that we need to be a major player in power for AI data center. Operator: Our next question comes from Analyst with Needham & Company, on behalf of Nathaniel Quinn Bolton. Your line is open. Analyst: Thank you for letting me ask the question. You talked about addressing the full AI data center power tree, from energy infrastructure, UPS, rack-level power, and point of load. As architectures move towards higher-voltage distribution, how should we think about the biggest incremental content opportunities for ON Semiconductor Corporation? Is the larger dollar opportunity still outside and at the rack, or is the VCORE point-of-load side becoming a more material contributor? And then I have a follow-up. Thank you. Hassane El-Khoury: If you think about it from the rack or 800-volt or HVDC all the way to the outlet, there are more incremental dollars for us, which is exactly where we play. Outside of the data center, you can think about a very large opportunity for us with solid-state transformers as well. That is forward-looking and incremental to the opportunity we have today. To break it down, there is more incremental opportunity from where we are today for the high voltage all the way to the infrastructure, if I include the solid-state transformers. But also within the rack, you cannot forget that today, at the rack, you can think about a 120-kilowatt rack at roughly $9,500 of content. At the 800-volt or high-voltage rack, we are thinking about roughly $115,000 of content. So although our content is almost 10x inside the rack, there is additional incremental content from the rack all the way to the grid that we also participate in, because this is all high voltage, which is exactly in our sweet spot. Analyst: Great, thanks. And then, you noted the company has moved beyond the cyclical trough for automotive, with inventory digestion largely behind you. As automotive begins to recover, how much of the improvement are you seeing is true unit demand normalization versus content growth from things like image sensors and zonal architectures? And beyond China, are you seeing any meaningful differences by region? Thanks. Hassane El-Khoury: Let me answer the regional question first. Obviously, very healthy automotive in China, followed by North America, followed by Europe if you think about it from a recovery and health standpoint. As far as your question about content, we absolutely leverage more content than SAAR. If you look at the global SAAR, it is flat, maybe slightly down or slightly up depending on the outlook you look at. To give you an example, in China specifically, Q1 is seasonally down. The number of passenger vehicles was down 6%. Our revenue was actually up. Therefore, that tells you it is a content story. In certain areas, it is a share gain story as well. We are both gaining share and gaining more and more content. I talked about 10BASE-T1S for zonal with an OEM in North America. That is net new content that did not exist about a year ago because zonal is new and Ethernet-based is new. That is content that we are adding to an existing SAAR as vehicles upgrade to a software-defined vehicle. We are more leveraged to content than SAAR, and in certain areas, we are gaining share. Operator: Our next question comes from Joshua Louis Buchalter with TD Cowen. Your line is open. Joshua Louis Buchalter: Hey, thanks for taking my question. Maybe following up on some of the previous ones about data center. When we think about the doubling this year, can you help us understand how much of that is from GaN, how much from silicon carbide, and are we at the point where we can expect any contribution from Treo in the data center? Or are some of those lower-voltage applications more of a 2027 and beyond story? Thank you. Hassane El-Khoury: We are not breaking it down to that level by product family, but I will tell you it is everywhere from low voltage all the way through high voltage. That includes mixed-signal analog on the GPU or XPU side—low voltage but high power—along with silicon carbide and silicon carbide JFET, and of course our medium- and high-voltage silicon anywhere in between. We keep focusing on ON Semiconductor Corporation as the only U.S.-based supplier with the breadth of power technologies that we can offer, and that is starting to come to bear. I gave the example of applications with FlexPower. That gives you an indication of the breadth of our approach. It is not just tied to a single XPU. It is with ASIC vendors as well as hyperscalers. The breadth is what we are leveraging. That is where the growth came in better than we expected as they proliferate, and why the 2026 outlook is to double. Joshua Louis Buchalter: Thank you for the color there. And then for a follow-up, I think entering the year, you gave us a sort of growth algorithm of taking whatever we think for the industry growth and subtracting 5% for the business exits. Is that still the right way to think about it? A few years ago when you were walking away from some of this business, it took you longer than anticipated because the pricing environment was better and your customers did not react as you expected them to. Any risk of that happening again this year, or has anything changed with that old growth algorithm overall? Thank you. Thad Trent: Josh, no change. As I said, we have exited approximately $50 million in Q1. There is another $30 million to $40 million here in Q2. If you annualize that, you roughly get to the $300 million that we planned on exiting. So we are done in 2026. Your algorithm is still true: take the market growth rate, take 5% off, and that would be our comparable. We have line of sight to that, and we are executing to those exits. I do not plan on that changing for the rest of this year. Operator: Our next question comes from Vijay Raghavan Rakesh with Mizuho. Your line is open. Vijay Raghavan Rakesh: Yes, hi. Thanks. Just a quick question on auto and industrial. Can you talk about how you see that progressing in June and into the back half? Thad Trent: Let me give the end-market view for Q2. Automotive in Q2 we think will be roughly flat. As I said, we think we are shipping to natural demand. We have not seen the full recovery or the replenishment cycle in automotive yet. If that were to happen later in the year, that would be a good thing. For our industrial business, we are looking up mid-single-digit percentage-wise. That will be driven by the broad industrial, our traditional market that has been growing the last two quarters sequentially. And our Other market, which includes our AI data center, will be up mid-teens quarter on quarter. Vijay Raghavan Rakesh: Got it. And then as you look at the gross margin into ’27, you mentioned the puts and takes. Any thoughts on how we should think about utilization improving? And are there any exits that are still left in the core business? Thank you. Thad Trent: There will not be further exits beyond ’26. On utilization, we are at 77%. We took utilization up quickly within the quarter to support the strong demand signals that we were getting, which is a good sign. If the market continues to recover, we will see some slight improvement over time. We are going to match our utilization to whatever the demand signal is for the remainder of this year. Utilization is the biggest factor in driving gross margin expansion, and that is why we are comfortable with incremental expansion through the remainder of the year. Operator: Our next question comes from Gary Wade Mobley with Loop Capital. Your line is open. Gary Wade Mobley: Hi, guys. Thanks for taking my question. Congratulations on the upturn in the cycle and the secular drivers as well. I wanted to ask about utilization. I assume it is going to be trending above 80% broadly across all your manufacturing assets exiting 2026. At what point do you need to take up your capital intensity above the 5% level you have been running at for a while now to support the growth in 2027 and 2028? Thad Trent: Gary, I do not anticipate any change to our capital intensity. I expect it to be in the mid-single-digit percentage of revenue for the foreseeable future, and that goes into 2027 as well. To get to fully utilized for us, which is just over 90%—call it low nineties—we would need revenue that is 25% to 30% higher than where we are today. Once we hit that, we start flexing to the outside as well. We actually have a lot of capacity here, and that is why, as we sit here today, we do not look at having to bring on capacity. Hassane El-Khoury: Just to give you an example, Treo is already ramping out of East Fishkill. That investment was made a few years ago. A lot of the investment we have made over the past two to three years is to build the capacity that we need for the new products that are ramping today, like Treo, the AI data center for silicon carbide, or the JFET, etc. It is not about adding more capacity. It is about utilizing capacity we already invested in, and that is the leverage in our model with the fall-through at mid-single-digit CapEx. Gary Wade Mobley: Actually helpful. Thanks, guys. And for my follow-up, I want to ask about pricing. You did mention passing along some inflationary pressures in your supply chain onto your customers. How pervasive are those pressures? Or asked differently, how pervasive are your pricing adjustments as we look forward over the next few quarters? Hassane El-Khoury: I would say a couple of things. Coming into the year, the pricing environment is better than we anticipated. There are commodities and energy costs that we are passing to customers as a matter of fact. In areas where we are fully constrained, those are more surgical based on the technologies that we are constrained on. It is not a one-size-fits-all. It is either a material cost offset or an allocation methodology that comes with the pricing adjustment. Those are more surgical than broad. Thad Trent: We are already seeing the impact of input costs being higher in the P&L, although we are not seeing the impact of the higher pricing yet. It just takes a while for that to become effective and hit the P&L. In the second half, we think you will start to see that pricing impact show through on the margin line. Operator: Our next question comes from Christopher Rolland with Susquehanna. Your line is open. Christopher Rolland: Thanks so much for the question. I think in the press release, you talked about some AI wins, both with chip guys as well as hyperscalers. I was wondering if perhaps you could elaborate a little bit more there. Is this like a vertical power delivery or VRMs or VCORE solutions? Or is it something else? And when you say the chip guys, are you talking about GPUs or merchant XPUs? Any other details here would be great. Hassane El-Khoury: Let me give you what our wins are and what the reference is for. The reference is across the XPU—whether it is GPU or CPU—the power delivery right at the GPU or XPU, in whatever form that is required, whether it is an SPS or anything else. Then if you keep going outside from that point, you go to the rest of the rack where you have the medium- and high-voltage discrete FETs and integrated analog mixed signal. When you get more on the power boxes, whether it is the UPS and so on, like I mentioned with Flex, FlexPower, those are across a multitude of technologies that we offer, whether it is silicon carbide MOSFET or silicon carbide JFET. It changes as you get from the low voltage, which is more integrated mixed-signal power, all the way to discrete or module-level high-voltage power as you get outside of the rack. It is across the board. We do not break it out by which one. It is across the PowerTree because of our broad portfolio. One more thing: when I talk about hyperscalers, a lot of it is in the power domain. In the power domain, a power rack or a UPS is architecturally defined with the hyperscaler. We work with the likes of FlexPower across all hyperscalers, but it is architecturally defined with the hyperscaler. That gives you a little bit on the breadth, but also the go-to-market. Christopher Rolland: Thanks for the clarity there, Hassane. Maybe secondly, just geographically, it looked like EU and Japan bounced back a little bit here. Maybe you could just talk about what you are seeing geographically and if there are any differences in the recovery? Hassane El-Khoury: It depends on the market and the geography. Automotive shows strength in China. We have industrial AI strength in North America. These days it is hard to talk about regional without talking about market specifics that drive the regions. It is more market-dependent. In Europe, the automotive market has not really recovered, so you can think about it as going sideways, and that matches what our customers, the OEMs, have been reporting. Industrial is better than we expected. In North America, AI is strong. Auto is better than we expected with certain names in North America. Industrial is doing well and starting the recovery. Looking forward, we are resuming aggressive growth in energy storage and renewable energy in industrial with 40% growth. That is going to be fueling the second half of the year as that comes back to recovery, primarily in North America and China. Operator: Tom, your line is open. Analyst: Hey, guys. Thanks for taking my question. I wanted to ask about the channel. The channel was flat into the quarter. When you look into the second half of the year, you are seeing some more robust trends in your business. Can you talk about your appetite to potentially expand the channel? And then the second one, around the direct customers, there was a time during the pandemic where we went from just-in-time to just-in-case. It feels like you have moved away from that as inventory has burned down. As you are seeing a recovery, are you seeing customers move more towards building backup inventory, or do you see that being something that you are going to have to carry on your balance sheet in the future? Thank you. Thad Trent: On the channel, we have been running nine to eleven weeks in our sweet spot. We were at 10.8 weeks last quarter, consistent with Q4. I expect it to remain at this level. The good news is we have been investing in inventory in the channel. We took it up early last year for the mass market, and what we have seen is that mass market revenue going through distribution grew quarter on quarter and year on year, and that is what we want to see. As a reminder, about half of the business through the distribution channel is fulfillment where we own that customer. We focus on where the distributors do demand creation, and we are seeing growth there. As we go through the year, we will watch the demand signals and match that. If it goes up, it is because we have to seed that market for a future revenue ramp. You have to have that inventory sitting out there. Right now, line of sight is to keep it in the ten to eleven weeks range. Hassane El-Khoury: As far as just-in-time versus just-in-case, at the end of the day, if you do not place your orders with enough visibility, you are not going to get your order. Some technologies are already on allocation. Automotive has not seen a recovery yet. Technology is technology, whether it goes in AI data center or automotive. We have been pushing for getting the backlog. Backlog is starting to layer in, and lead times are starting to extend. It is irrelevant what model the industry lands at. We are not going to carry all of it on our balance sheet. What we are carrying is our WIP on our balance sheet, and we will ship it as fast and as quickly as we get the orders. That is our view of just-in-time and just-in-case. Operator: Our next question comes from Joseph Moore with Morgan Stanley. Your line is open. Joseph Moore: Yeah, on the same lines, are you seeing any kind of lead time extensions or hotspots? And at our conference, you had talked about the automotive OEMs looking to take on some inventory because the tier ones were not. Anything around that and any anxiety that you see around the inventory situation? Thad Trent: Our lead times have stretched slightly. In Q4, we were around 23 weeks. In Q1, we are about 26 weeks. So it has gone out just slightly, and that is across the board on average. We are seeing a number of orders coming in inside of lead time and expedites. I think that is this market recovering faster than many had expected. Thus we took utilization up quickly, trying to match that as fast as we can. I will let Hassane comment on the inventory. Hassane El-Khoury: Some of the OEMs are starting to do directed or direct semiconductor sourcing. Whether they hold inventory or we have an agreement with them at a cost associated with it will be an operational decision. The anxiety is there. I am starting to get calls. We are on allocation in certain technologies. The strength is not yet shown in automotive, but it will come, and it will come with even stronger allocation in the automotive market given that AI data center has been showing a ton of strength. Operator: Thank you. Our next question comes from James Edward Schneider with Goldman Sachs. Your line is open. James Edward Schneider: Good evening. Thanks for taking my question. Maybe related to the last one, I was wondering if you could broadly characterize your customers’ willingness to take up their own internal inventory. Are we starting to see that already in the industrial sector but not yet in automotive? And are there any other areas where you start to see that behavior? Thank you. Hassane El-Khoury: I do not think you are already seeing that. In AI data center, there is no inventory; it is all going to end build-out. In industrial, it is a ramp. We can see the deployments, whether it is energy storage systems or standard industrial. That is not an inventory build; that is actual end-demand recovering. In automotive, as Thad talked about, we are shipping to natural demand. I do not believe there is inventory being built out. How they protect from shortages that we know are coming is a question for them—whether they want to put it on their balance sheet or wait in line. We will see how that plays out when automotive starts to show a little bit more strength. James Edward Schneider: Thanks. And then just as a follow-up about capital allocation, you have done a very good job of opportunistically buying back shares when the stock price is low. With the stock price having recovered quite nicely, how are you thinking about the calculus for incremental buybacks versus other things to do with the capital? Thank you. Thad Trent: Just as a reminder, capital allocation is after investing in our business—after making the R&D investments and the CapEx. We have been returning 100% of our free cash flow to our shareholders. Last quarter, it was 160%. Over time, our goal is to return 100%. You can see that we will flex up at times when we think there is a dislocation. As I noted, we were buying last quarter at an average share price of $60.54, so you saw us flex up. Over a longer period of time, you should think about 100% of our free cash flow being returned to shareholders. Operator: Thank you. Our final question comes from Harlan Sur with JPMorgan. Your line is open. Harlan Sur: For a while now, you have been giving us metrics on customer comps in your mass market business. It has been a good leading indicator of cyclical improvement dynamics. I recall a discussion a couple quarters ago—you reiterated today that mass market is roughly 25% of your distribution business, small to medium-sized customers. Your distribution business was strong this quarter, almost up 24% to 25% year over year. How much of this was mass market strength? And then for the mass market, are you targeting Treo for more general-purpose catalog for some of these customers as well? Thad Trent: The mass market, as highlighted earlier, was up quarter on quarter and year on year—about 35% growth. That is accelerating. A few quarters ago, we said it was about 30% growth. You can see that acceleration as we have been seeding the distribution channel with the right inventory for that mass market. Hassane El-Khoury: For Treo, absolutely. Treo is a very versatile platform. It is an analog mixed-signal platform upon which we build a lot of solutions and products. These are all application-specific products that are definitely for the mass market. We do not make ASICs or custom chips. We make chips to solve specific problems for customers, and we deploy those in the mass market through our distribution channel and network. So, absolutely, Treo is part of our broad mass market push. Harlan Sur: I appreciate that. During the downturn and stabilization period last year, you focused on building your portfolio across your power and mixed-signal analog portfolios. Two of those acquisitions—VCORE controllers and vertical GaN from NextGen—were targeted to have products into the market in the first half of this year for VCORE and sampling of your vertical GaN products. Is the team executing to this? And with VCORE, there is a sizable market opportunity, especially on the CPU side where we see new server CPU SKUs. Is the team seeing strong interest for your new multiphase controller and regulator products? Hassane El-Khoury: One hundred percent. We are fully focused on it. We have a dedicated team covering that not just from a go-to-market perspective, but from a product perspective as well. There is complete focus on it. It is a very large opportunity, and it is the same focus that we have across the company across the whole power tree. At the GPU level or on the board or blade level, there is a focus across all technologies. The vertical GaN is more on the high voltage. We are sampling vertical GaN and we are on track to continue to do that, with revenue starting in ’27. That is still on track as discussed previously. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Hassane El-Khoury, President and CEO, for closing remarks. Hassane El-Khoury: Thank you for joining us on the call. Before we close, I would like to recognize the extraordinary efforts of our global teams. Over the past several quarters, they have navigated one of the most challenging cycles our industry has seen while continuing to execute, invest, and move the company forward. Their focus, resilience, and commitment are what have positioned ON Semiconductor Corporation to deliver consistently today and to perform even more strongly as conditions continue to improve. Thank you. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Backblaze, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Mimi Kong, Head of Investor Relations. You may begin. Mimi Kong: Thank you. Good afternoon, and welcome to Backblaze, Inc.’s First Quarter 2026 Earnings Call. On the call with me today are Gleb Budman, Co‑Founder, CEO and Chairperson of the Board, and Marc Suidan, Chief Financial Officer. Today, Backblaze, Inc. will discuss the financial results that were distributed earlier. Statements on this call include forward‑looking statements about our future financial results, the impact of our go‑to‑market transformation, sales and marketing initiatives, cost‑saving initiatives, results from new features, the impact of price changes, our ability to compete effectively and manage our growth, and our strategy to acquire new customers, retain and expand our business with existing customers. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those described in our risk factors that are included in our most recent quarterly report on Form 10‑Q and our other filings. You should not rely on our forward‑looking statements as predictions of future events. All forward‑looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by law. Our discussion today will include non‑GAAP financial measures. These non‑GAAP measures should be considered in addition to, and not as a substitute for, our GAAP results. Reconciliation of GAAP to non‑GAAP results may be found in our earnings release, which was furnished with our Form 8‑K filed today with the SEC. You can also find a slide presentation related to our comments in the webcast, which will be posted on our Investor Relations page after the call. Please also see our press release or presentation for definitions of additional metrics such as NRR, gross customer retention rate, and adjusted free cash flows. We will be participating in the Needham Technology, Media and Consumer Conference on May 12 in New York. I hope to see many of you there. Thank you for joining us, and I would now like to turn the call over to Gleb Budman. Gleb Budman: Thank you, Mimi, and thank you, everyone, for joining us today. Q1 was a strong quarter. We beat revenue and adjusted EBITDA guidance, ending the quarter with $38.7 million in revenue, up 12% year over year with B2 growing 24%. We more than doubled our average sales deal size and drove 72% year‑over‑year growth in our $50 thousand‑plus ARR cohort as we continue to move upmarket and are on track for our first full year of free cash flow positivity as a public company. What excites me most about Q1 goes beyond the numbers. AI is making storage increasingly important, and our organization is gelling and executing better than ever to capture that opportunity. This is evidenced by more than one third of all new bookings coming from AI and the number of AI customers using our platform growing by 76% year over year. We entered 2026 saying we would build a more scalable, more predictable growth engine that serves the AI opportunity. Q1 started to show what that looks like. In AI, we are seeing demand from two parts of the market. One is companies building the infrastructure and tools that enable AI. The other is companies using that infrastructure to bring AI into products and workflows. We are winning in both. On the infrastructure side, there is a major replatforming happening in the market. For the first time in about two decades, the traditional hyperscalers are not the only place companies are building. They are also building on the Neoclouds. Synergy Research estimates that the Neocloud market was $25 billion in 2025 and growing to about $400 billion by 2031. In order for these Neoclouds to support their customers’ AI workflows, they need to offer cloud storage. Some Neoclouds have offered cloud storage built on flash. It was fast, and it worked, but as these platforms have scaled and AI workloads have grown, the economics have become increasingly difficult. Flash is now about 10 times more expensive per terabyte than hard drives. It works well for use cases requiring the lowest latency for smaller data sizes but becomes unsustainable at exabyte scale. As a result, Neoclouds are now actively looking to introduce a cost‑efficient hard drive tier to manage both performance and economics across their infrastructure. At Backblaze, Inc., we built an internet‑scale file system to optimize performance per dollar out of hard drives and thus believe Backblaze, Inc. is ideally positioned to provide exactly what these Neoclouds need. We have seen support for that belief not only from the multiple signed Neoclouds we provide this for already, but also the active engagement we are having with many of the top Neoclouds. We estimate our opportunity to support Neoclouds at $14 billion by 2030, and with the success we are seeing, we are aligning resources internally behind that opportunity. In addition to Neoclouds, we are seeing a significant opportunity supporting other AI infrastructure. For example, we are seeing strong demand from companies supplying large datasets into the AI ecosystem because they need a place to store large datasets efficiently but also be able to move them where they need to go rapidly. One recent example is a training data provider serving AI use cases that selected B2 to store large volumes of video data. A hypergrowth company, it was experiencing rate limits and bandwidth constraints with its existing provider and needed a solution that could scale quickly. Backblaze, Inc. won on both economics and technical fit. The deal closed in just 11 days at nearly $1 million of ARR, underscoring how quickly these companies move when infrastructure becomes a constraint and how well Backblaze, Inc. is suited to the infrastructure side of the AI opportunity. The other part of the AI market we are seeing is companies using infrastructure like ours to bring AI into their products. As AI models move from text to multimodal, incorporating video, audio, and images, the volume of data required to train and run those models grows by orders of magnitude. This is not a future trend. It is happening now, and it is creating significant and growing need for storage that can handle it economically and at scale. With the generative AI customers we have today, we are finding that price and performance get us in the door, but it is the experience that keeps them and grows them: transparent pricing, responsive support, and a team that works with them rather than just selling to them. These customers are scaling fast. They do not have time to manage infrastructure problems. With Backblaze, Inc. they do not have to. A good example from Q1 is an AI‑powered video creation company that selected B2 to store data used to train its models. The customer had been running into cost and performance issues with its existing provider. The platform was difficult to manage, and the economics were not working at its scale. Backblaze, Inc. offered the best performance per dollar and a platform that was easy to use and easy to scale. The initial deployment represents nearly $500 thousand of ARR and creates a clear path to expand into higher‑performance workloads over time. These customer wins are just examples of where we won in Q1 and are reflective of opportunities we have in pipeline going forward. It is clear that whether customers are building AI infrastructure or using AI in their products, they are scaling fast, their data is growing exponentially, and they need infrastructure that is performant, open, and cost‑efficient at scale. That is the moat we have spent 19 years building, and AI is making it more valuable, not less. To be the leading storage platform for AI, we are also meeting developers where they already work. We are embedding Backblaze, Inc. into the AI ecosystem by integrating directly into the tools developers already use. For Hugging Face, which has 13 million users and over 2 million models, we shipped the tool that lets teams store and share model caches on B2. For ComfyUI, recently raised at a $500 million valuation, we built a plugin to support generative AI workflows. For CVAT, which is used by tens of thousands of computer vision teams, B2 is now integrated as a backend for training data. And for MLflow, the most downloaded tool for taking AI projects from lab to production, with 15 million monthly downloads, B2 has now been added as an integrated artifact store. So the AI opportunity is making what we do increasingly critical, and we are also stepping up to meet it. A year ago, we began a meaningful transformation of our go‑to‑market organization focused on three things: increasing awareness, driving greater pipeline consistency, and expanding revenue within our installed base. We delivered progress on all three in Q1. On awareness, the Flamethrower startup program is getting real traction. We have now welcomed approximately 100 companies in under three months, half the time it would typically take. We have been added to the a16z Founder Resource Program, the LAUNCH Startup Showcase, and the Startup Grind conference, all of which expand our reach with venture‑backed startups. On pipeline consistency, we have completed our core go‑to‑market systems upgrade, giving our team better visibility and a stronger foundation for a faster, more disciplined revenue motion. And within our installed base, pipeline sourced from existing customers has nearly doubled year over year, reflecting our growing ability to land and expand with our customers. To accelerate this next phase, we welcomed Anuj Kumar as our Chief Revenue Officer. Anuj has scaled go‑to‑market for cloud infrastructure and enterprise storage at NetApp, VMware, Red Hat, and SUSE. He brings the pipeline discipline and execution rigor this phase of our growth requires, and we believe his leadership will be a meaningful complement to the upmarket momentum we have already built. We also saw encouraging new customer momentum during the quarter across a range of data‑intensive use cases. That included a healthcare data company that selected us for disaster recovery, a cloud gaming platform that chose B2 to store video across multicloud environments, and an audio streaming platform migrating from self‑managed infrastructure to B2. These wins reinforce a broader point: Backblaze, Inc. is winning where data is valuable, active, and operationally important. This is why I am excited about the opportunity ahead. The shift to multimodal AI is driving exponential data growth, and the need for high‑performance yet cost‑efficient storage has never been greater. The customers who are choosing Backblaze, Inc. are exactly the kinds of customers that compound with us over time. We are stepping up to this opportunity with an upleveled team, a go‑to‑market transformation well underway, and a platform we have spent nearly two decades building and optimizing. AI is making everything we have built more valuable. We are becoming the storage infrastructure that powers the AI economy. With that, I will turn it over to Marc. Marc Suidan: Thank you, Gleb, and good afternoon, everybody. Our first quarter results reflect the strategy that we have been executing against. We exceeded the top end of both revenue and adjusted EBITDA guidance. The Q1 outperformance reflects stronger sales execution, and the EBITDA beat demonstrates the operating leverage in the model. Let me walk through the quarter and then cover our outlook. We finished Q1 with revenue of $38.7 million, above the high end of our guidance of $38 million. The beat was broad‑based across both B2 Cloud Storage and Computer Backup, with B2 remaining the primary growth driver. B2 Cloud Storage grew 24% year over year to $22.4 million, and ARR grew 28% year over year, reflecting the underlying strength and momentum of the business. The Q1 revenue outperformance was driven by higher customer data consumption on the B2 cloud platform and Computer Backup coming in slightly more favorable than our forecasted decline. On bookings, which primarily affect revenue in future quarters, we closed multiple large deals for a strong quarter. We made several updates this quarter to improve the calculations of our ARR and RPO metrics. I will briefly walk through those changes as I cover the results. ARR increased by more than $5 million sequentially to $158 million, with B2 growing 28% year over year. This quarter, we updated our ARR methodology to improve comparability across periods, and the changes are defined in the earnings presentation posted on our Investor Relations website. Under both the new and previous methods, the sequential ARR improvement is approximately $5 million. We ended the quarter with 187 customers contributing over $50 thousand in ARR, up 51% from a year ago, reflecting continued strong progress upmarket. We also updated our RPO methodology this quarter and described the change in our earnings presentation. The change is aligned to our peer group, and RPO is now a more important metric as we continue to move upmarket, signing both annual and multiyear customer commitments. Under the updated methodology, RPO increased by $6 million sequentially and by $31 million from the prior‑year period. Our gross customer retention metrics remain very healthy, with customers continuing to use both our B2 and Computer Backup solutions for nine years on average. Beginning this quarter, our reported net revenue retention reflects an in‑quarter methodology, which we believe provides a more current view of our customer expansion and retention trends. In B2, net revenue retention was 110%, up from 105% a year ago, reflecting continued expansion within the customer base. As a consumption business, B2 benefits from both organic customer data growth and the cross‑sell/upsell sales motion. Q1 gross margin was 61% versus 56% in the prior year. The year‑over‑year improvement shows strong operating leverage continuing to kick in as we tightly manage costs and also from the extension of the useful life of our fixed assets. Total operating expenses were $29 million in Q1, roughly flat compared to Q4 and improved by approximately 600 basis points from the prior year as a percentage of revenue, reflecting strong operating leverage as we maintain our focus on cost management. Q1 adjusted EBITDA was $10 million, or 26% margin, up from $6 million, or 18%, in the prior year, reflecting strong operating leverage as revenue scales. Sequentially, margin declined modestly from 28% in Q4, primarily reflecting the one‑time benefits we referenced in our last earnings call. Adjusted free cash flow was negative $1.8 million in Q1, reflecting earlier payments in the quarter. We are also pulling forward a portion of 2027 CapEx into 2026 in response to strong demand signals. Even with that pull forward, we continue to expect adjusted free cash flow to be positive for the full year, with improvement weighted towards the second half of the year. We have the capital in place to support the growth that we are seeing. We currently have more than $100 million in capital leasing capacity, with approximately half of that utilized. Based on our current operating plan, we expect to fund growth through operating cash flow and capital leases, and we do not anticipate the need to raise additional capital through follow‑on equity. In fact, we plan to continue to focus on reducing our dilution through our modest stock buyback and our next‑year settlements for RSU grants. Looking ahead, we introduced updated B2 pricing and packaging effective May 1. The change reflects the investments that we have made in our platform performance, our effort to further simplify pricing by removing API transaction fees, and the rising cost of hardware and data centers. On a net basis, we expect the pricing update to be accretive to revenue and margins, and that will be reflected in our guidance. Moving on to our guidance: For the second quarter, we expect revenue to be in the range of $39.8 million to $40.2 million. On our last earnings call, we said B2 growth in the second quarter would be 12%. Based on this new midpoint, B2 growth in Q2 will be closer to 20%, which is a big improvement. The Q2 outlook includes a partial‑quarter benefit from the May 1 pricing update, along with variable usage from customers that we have already actualized in April. We are not assuming the same level of variable usage in the second half of the year. Adjusted EBITDA margin is expected to be in the range of 21% to 23% for Q2. The sequential step down from Q1 reflects the timing of investments as we continue to build for growth. Turning to the full year, we are raising our full‑year revenue guidance to $161.5 million to $163.5 million, up $5 million from our prior midpoint of $157.5 million. That increase reflects two factors: stronger first‑quarter performance impacting the rest of 2026 and the benefit of the new B2 pricing and offering. Each contributes to approximately half of the raise. We are also raising our full‑year adjusted EBITDA margin guidance by 400 basis points to a range of 23% to 25%, up from 19% to 21% previously. As a reminder, our guidance philosophy excludes individual deals greater than $500 thousand, high variable usage above contracted minimum, and incremental upside from our go‑to‑market transformation. As these elements become more predictable and repeatable, we will incorporate them into our forward guide and communicate that transition clearly. In summary, Q1 was a strong quarter across the board: revenue beat, adjusted EBITDA beat, B2 growth accelerating, and bookings improving. We remain focused on executing on our AI opportunity by driving forward our go‑to‑market transformation and scaling our B2 business. We look forward to your questions. With that, operator, please open up the line. Operator: Thank you. We will now open the call for questions. If you have dialed in and would like to ask a question, please press star one. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit to one question and one follow‑up. Again, it is star one to join the queue. Our first question comes from the line of Michael Cikos with Needham. Your line is open. Michael Cikos: Hey, guys. Thanks for taking the question here. Congratulations on the strong start to calendar 2026. First question, I guess, is more for Gleb. I just wanted to get more on the success that you guys are seeing with the AI customers following the go‑to‑market transformation initiatives you have put in place. Can you talk to the improved visibility you have for those AI customers in the pipe and, as you have more of these customers begin to season, are you noticing a significant departure as far as cohort behavior or sales cycles? And then I just have a follow‑up. Gleb Budman: Hey, Mike. Thanks for the question. I will use the two customers that I referenced in my prepared remarks as a good example. One of the customers came to us through the GTM motion that we are building, the combination of outbound targeting, better systems, and going to the AI events. We found them through that outbound process. The other one actually came to us as a referral from one of our existing AI customers who said that they were having a great experience. Specifically, they said the combination of the performance they were getting from our platform at the price point they were getting was unmatched, and so they referred them over. We are seeing more AI companies coming to us. We feel like the market is coming our way, and it is really from both of these: part of it is from the work that we are doing, and part of it is from the referrals and the market coming to us. In terms of the cohort behavior, one of the things we mentioned on the prior call is that we are seeing the AI companies growing much faster, about three times faster than our average customer, and that is just a function of their inherent data growth driven by their AI use cases. Did that answer the question you were asking? Michael Cikos: It does. Thank you for that. And then for the follow‑up, I think it might be more geared towards Marc, but I just wanted to double‑check on B2 with the NRR of 110%. I know you said we drive that between two factors: you have the data consumption, which grows each year, and then you also have the cross‑sell/upsell. Can we unpack that a little bit more to get evidence of the go‑to‑market actually driving adoption, whether it is the cross‑sell/upsell motion? What are the drivers behind that B2 NRR today if I am trying to unpack consumption growth versus go‑to‑market initiatives to expand wallet and drive additional offerings into the installed base? Marc Suidan: Yeah. Hey, Mike. I will start off by saying I think the best evidence of the GTM working is the RPO disclosure of committed contracts and the change quarter over quarter. For commitments of less than a year, it is up $3.4 million. You can see it on slide 19 of our earnings deck. That is the best evidence of the performance. Now that is made up of both new logo as well as expansion sales. The expansion sales realistically do fluctuate. On the NRR, we did move to in‑quarter reporting versus the trailing four‑quarter average, specifically to give you more visibility and to hold us accountable to explain what is happening. So there will be more fluctuation there from that perspective. It is up to 110% from 105% a year ago because a year ago was a quarter where we did talk about one large customer going away. Since I joined, that was the only time we have had to reference that. That is what drove that improvement year over year. It generally fluctuates around 110% on a stable basis, but there are going to be some ups and downs, and the expansion changes will be the biggest driver of that because organic growth tends to be incredibly stable and predictable. Michael Cikos: Excellent. Thank you so much, and congrats again on a strong start to the year. Operator: And our next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open. Ittai Kidron: Thanks. Hey, guys, and congrats. Great, solid numbers. I had a couple of things, maybe some with you, Marc. Can you give us a little bit more color on the pricing update, the magnitude of this, how much of this you think you can capture? I am just trying to think about your growth without the pricing update. How would your outlook have looked without it? I am just trying to get my hands around that. Marc Suidan: Absolutely, Ittai. In the $5 million raise for the year, half of it is from the pricing and packaging change, and half of it is from the strength of the business that we observed in Q1. If you look at that RPO number I referenced just a few moments ago, that roughly equates to the raise from the organic health of the business for the rest of the year because that has no price increase in it. We continue to guide very prudently for the rest of the year: the same philosophy we laid out last time, which is no large customers, no go‑to‑market benefits, and not accounting for large variability of that large customer. Within Q2, last time we said B2 would grow by 12% year over year; now it is 20%. That difference is more anchored on the organic health of the business because the price change took effect May 1, so it is not a full quarter, and we obviously actualized some of the things we saw in April in the business. On the price, it is not a flat price change; it is a pricing and packaging change. For instance, we are now including transaction API fees, so in the spirit of being the simplest billing model out there, we further simplify it by no longer billing customers for transaction fees. Ittai Kidron: Got it. Okay. And then as a follow‑up, maybe one for each of you. Marc, for you on the Computer Backup, the net retention rate is now well below 100. Is this a business we should model towards decline going forward? And for you, Gleb, on the go‑to‑market side, great to see the progress there. What else is left here? What is it that between now and year‑end still needs to kick in that has not from your perspective? Marc Suidan: Just to reiterate, we are still thinking of Computer Backup as declining year over year 5%. The NRR is going to be tightly tied to that because it is a subscription business, not consumptive. Which would mean that B2 would grow 24% year over year. The change in outlook is pretty much all on B2, and Computer Backup remains at a decline of 5%, which is what we are forecasting and guiding. Gleb Budman: Thanks for the question about the GTM transformation—what is done and what we still have to do. We have made great progress this quarter, and there are still a variety of things that we want to push further. We hired Anuj Kumar to run that organization. I have asked Jason, who is with us, to take on and focus most of his time on the Neocloud opportunity. Jason works for Anuj, and we see that as a $14 billion opportunity, so we are putting focus and resources on that specific part with Jason leading it. The awareness generation is off to a good start with Flamethrower, but it has only been a couple of months. We have been invited to participate in great organizations and partnerships with a16z, Startup Grind, and LAUNCH, but there is a lot of opportunity there still, between that and the open‑source developer efforts we are doing. There is a lot of opportunity to make sure that everyone thinks of Backblaze, Inc. as their first spot for price‑performance storage. I am excited that we are seeing pipeline growth stronger than we have seen in the past, with more of our sales team hitting their quota than ever. A lot of the right things are happening, and we are going to keep working on it. Ittai Kidron: Appreciate it. Good luck. Thanks. Operator: And our next question comes from the line of Analyst with B. Riley Securities. Your line is open. Analyst: Yes. Thanks for taking the question, and congrats on a really good quarter. Can you speak to what portion of the Neo market you are either servicing or at least engaged with? And then, where are you in terms of the hiring on the sales front? Are you adding additional salespeople at this point, or where are you from that perspective? Gleb Budman: Thanks. There are about 200 Neoclouds. We went to GTC, NVIDIA’s premier conference, and had a host of great conversations there. We are engaged with most of the top Neoclouds at this point. The part that we are servicing for them is the data lake layer. If you think of the AI workflow, there are the GPUs themselves, there is the very low‑latency, high‑performance flash that you want adjacent to the GPUs, and then you need the place where you store all of the data. If the whole AI workflow were a laptop, you have your compute (CPU/GPU), you have the RAM, and you have the hard disk or SSD. We are providing that hard disk layer. There are about half a dozen companies that provide that RAM layer, and the base Neocloud part is that CPU/GPU part. We are providing that large‑scale, high performance‑per‑dollar data lake layer for them. We are the white‑labeled provider for them. As we talked about in the last call, we have six‑, seven‑, and eight‑figure deals that we have signed for that. We have others in the works, and we are engaged with a bunch of the Neoclouds at this point. Analyst: Can you give us a sense of what portion of the Neoclouds out there—the 200—that you are speaking to? Do you think it is a quarter? Any gauge on what penetration you have had? Gleb Budman: On the conversations and engagement side, probably somewhere around that number, but I would say we are engaged with pretty much all of the top ones at this point and having different levels of conversations, including some POCs. On the sales side, we talked earlier this year that there were a number of different roles we wanted to fill. At this point, I am excited to say we have filled the CRO role with Anuj, we filled the ops role, and we filled the sales development role. We have a strong build‑out of that team now. Analyst: Very good. Thank you. Gleb Budman: Thank you. Operator: And our next question comes from the line of Jeff Van Rhee with Craig‑Hallum. Your line is open. Jeff Van Rhee: Great. Thanks for taking my questions, guys. A couple. First, help me with the guide and the outlook. I am trying to understand the progression here. In the February 2024 call, you took roughly $4 million out relative to the consensus, and now we are putting $5 million back in. I am trying to understand: in the February 2024 call, was the May 1 price increase in B2 already contemplated in the guide? Marc Suidan: Hi, Jeff. No, that was not contemplated in the guide. In the $5 million increase we just did, half would be from the pricing and half would be from the organic momentum and health of the business we saw in Q1. The change is really a lot of it about this guidance philosophy we spoke about—just a lot more prudent going forward. That is what drove the change. Jeff Van Rhee: Did you, if you take the final month of the quarter, March, and then April, see substantial improvement in close rate? It sounds like you are saying your conviction is coming both from improved bookings as well as usage. I am trying to understand how January bookings were weakish and then all of a sudden April really killed it. I know you have made some process changes over time to sales, but it was such a quick snap. Maybe you can help me dial it in a little bit. Unknown Speaker: Jeff, this is Pavel. Maybe I will touch on it and Marc can also weigh in. We certainly had a more back‑ended quarter in Q1, and we started off Q2 strong. There is definitely enhanced feel from the numbers that we are seeing. We talked about the roughly $1 million deal that closed in 11 days that started and closed toward the end of the quarter, but it was not the only deal. The pipeline itself has been building strongly this April, and we are layering that on along with the execution we are doing on our own side. That is the conviction and momentum side of things based on the data and the execution. I will let Marc add on the guide side. Marc Suidan: Q4 bookings were good, but to hit 30% growth, we would have to be booking around $5 million a quarter. We were not at that rate yet, but it has been improving pretty much every quarter, and this latest Q1 is a further improvement and probably the closest we have gotten, frankly. The demand signals are really strong. We are feeling good about the outlook, but we are still guiding with that prudence. We will use some of that price change to also fund additional CapEx so we can have further capacity in place to handle that demand because we do not want to be in a position where we are declining any revenue opportunities. Jeff Van Rhee: Got it. And just to follow up on that last piece: in terms of the outlook for the year for CapEx for 2026, can you give us a number there? What are you expecting? And then also on the stock comp. Marc Suidan: On the CapEx side, we are probably going to be around mid‑thirties as a percent of revenue. I would say there are three factors. One, last quarter we spoke about that large customer we have to service next year, so we need to get that CapEx in place now. Two, all the strong demand signals. And three, the general equipment cost is 30% higher than it was on a per‑unit basis a year ago. For those three factors, we are beefing up our CapEx plan for this year, accelerating it from 2027 to this year. Jeff Van Rhee: Your thoughts on stock comp? Marc Suidan: I would say pretty stable. If you look at our headcount, generally speaking, year over year, our headcount is actually coming down, so we are continuing to drive more efficiency out of the business. Stock comp should be pretty stable in dollar terms, and as a percent of revenue it does improve over time. Gleb Budman: Since you bring up supply chain constraints, what is interesting is we have to buy the equipment, so we have to spend more on some of that. But we also get two tailwinds from the supply chain being constrained. On the GPU side, because the supply chain is constrained, customers need access to where the GPUs are available. We regularly talk with customers who say they have to have their data somewhere that they can send it to whichever Neocloud has the GPUs available. On the memory side, which is also heavily constrained, Neoclouds that offer cloud storage have often been building out on flash, and that becomes really expensive, especially now with the constraints. It is driving additional interest from the Neoclouds in working with us on that data lake tier. So on one hand, we have to pre‑buy on the equipment side for CapEx, but on the other hand, we have these two tailwinds to the business. Marc Suidan: Just to step back on stock comp: if you look at the statement of cash flows, Q1 stock comp is higher as we settle some of our annual bonuses in equity as well, but you will notice this year stock comp was actually lower than last year’s. Jeff Van Rhee: That is helpful. Great. Thanks. Congrats on the turn, guys. Gleb Budman: Thanks, Jeff. Operator: And our next question comes from the line of Jason Ader with William Blair. Your line is open. Jason Ader: Yes. Thanks. Good afternoon. I just wanted to get a better sense on the Neoclouds. What are the size of some of these deals? I know you talked about the eight‑figure deal that is coming in, I believe, next year. But maybe more detail on some of the other deals that you have landed or are in the pipeline? Are we talking about household cloud names that are contracting with you for potentially further eight‑figure deals? I think gauging how significant an impact you might have from these Neocloud opportunities would be helpful. Gleb Budman: Thanks, Jason. We estimate that our opportunity in the Neocloud market by 2030 is $14 billion, and that is just the data lake tier that we provide, not the entire storage footprint. The deals that we have signed—the six‑, seven‑, and eight‑figure deals—I will say two things. One, you would recognize them. They are companies that you would know. Two, all three of those are initial deals. All three are ways to start, not the total opportunity. I can see a path where the six‑ and seven‑figure deals could become eight‑figure deals themselves. The eight‑figure deal can certainly scale from where it is once it is ramped. The other conversations we are in, assuming they move forward, are of that same scale. Some conversations may start with a six‑ or seven‑figure deal, but many of them, given the scale of the opportunity, are eight figures at ramp. Jason Ader: Okay. Helpful. Thanks. And then just on the risk that the Neoclouds add a lower‑cost storage tier and then you guys are helping them for a little bit, but then they insource it. Gleb Budman: It is always possible, but it is a little bit like the question we were always asked for almost two decades: what happens if AWS lowers their price to match you? We are two decades in, and that has not happened. The challenge is it is not easy to build the type of IP that we have built over the last two decades. It requires scale and expertise and focus over a long period of time to get it really honed and right. For the Neoclouds, they have a lot of things they need to do: opportunities around GPUs and GPU scaling and optimization, making tooling better for inferencing, and many other things. Spending all their resources to try to replicate what we have built over the last two decades is probably not the best place for them to invest when time to value is so much faster by using Backblaze, Inc. Jason Ader: Great. And then, Marc, a couple of quick ones. With the higher CapEx, are you still guiding for free cash flow positivity this year? Marc Suidan: The second half of the year is still guided to be free cash flow positive. Q1 was minus $1.8 million. Q2 should be somewhere around neutral. For the whole year, net‑net, we should be neutral or around 1% of revenue free cash flow positive, despite the acceleration of the CapEx. Jason Ader: Okay. Great. And then on the gross margin, it was mid‑50s for a few years, and then last year was roughly 62—62% in Q1. Can you remind us what caused the significant increase in gross margin and then maybe some puts and takes going forward? Marc Suidan: About a year ago, we reviewed the estimated useful life of our fixed assets, and it turns out we are using our fixed assets for typically six years onwards, so we moved all the depreciation to six years. That drove a big benefit to gross margin. Second, all other lines—labor, payment fees, and everything else that fits into our cost of sales—we have managed tightly year over year, so they are kind of staying flat in absolute dollars and improve as a percent of revenue. We are looking at everything within our gross margin now to further drive optimization. Between the price increase, which benefits gross margin, and the accelerated CapEx, which will push our gross margin down, it should stay flat around where it is now. We are not guiding to any major changes in gross margin through the rest of the year. Jason Ader: Okay. Thank you very much. Thanks, guys. Operator: And our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open. Eric Martinuzzi: I was just curious about the timing of the price increase. I went back and looked it up. I guess it was October 2023 was the last time you raised the price on B2, and you really had not raised it since you rolled out the product back in 2015. So we are at about the two‑and‑a‑half‑year mark here with the price increase. Was this something that you felt like you are delivering more value and need to capture more value, or were there competitive issues where competitors were raising price and provided an umbrella for you to do the same? Gleb Budman: Thanks, Eric, for the question. We periodically reevaluate what the pricing and packaging of the offering should be. When we were looking at it, a few things came together. One is that we have been investing more into the performance of the platform. More of our customers are using us in these hot use cases where we are driving high throughput and high IOPS. We made egress free before, and one of the things that has enabled is not just that it is less expensive for the customers, but it allows them to run more frequent training of their models in the AI use cases. It is actually unlocking their ability to innovate, but while it is free for them, it costs us money to provide that. We have been working to increasingly provide more and more value to these higher‑performance, more active use cases, and we also wanted to simplify pricing by removing transaction fees. So the pricing and packaging combination, along with, as Marc said, the underlying costs of the components increasing, led us to decide this was the right time to do that. Eric Martinuzzi: With regard to competitors, historically you have said you are 80% cheaper than Amazon. You are raising—I think what I saw was about a 15%–16% per terabyte per month. Does that shrink that gap now, or do you still feel like there is a big delta? Gleb Budman: We are still dramatically more cost‑efficient than the alternatives out there. I was just talking to one of our account execs a couple of days ago who was talking about a customer who has been ramping on our platform. They moved over a lot of their data and are continuing to move over more of their data and use cases. On the one hand, we are more affordable on the storage side at the base level. But where they were getting hit dramatically with their prior provider was each time they egressed the data out to one of the other Neocloud providers, they were getting hit with massive egress fees, and the transaction fees were costing them three to four times more than the cost of the storage at the prior provider. When you put it all together, they were more than 5x more expensive at their prior provider, and they were literally wondering whether it was going to be affordable for them to stay in business. The total cost of ownership benefit we provide is still quite dramatic. Eric Martinuzzi: Got it. Thanks for taking my question. Gleb Budman: Thank you. Operator: And our final question comes from the line of Rustam Kanga with Citizens. Your line is open. Rustam Kanga: Great. Gleb, Marc, thanks for taking my question. Nice clean set of results here. Just one on B2 Neo. As workloads begin to shift more towards inferencing from training, will that lead to improving predictability and visibility? And then to that end, could you potentially share what percentage of Neo business on average or even directionally represents inference versus training workloads? Thanks. Gleb Budman: Sure. It is a good question. The first part of the answer is yes: as things move toward inferencing, it does make it easier to be more predictable. Today, more of the use cases that we are seeing are related to model building. That makes sense because a lot of the datasets right now that are very large and that need to be moved are related to model building, and we are a great service for that. In the GenAI media space, for example, a customer’s data flow is: they accumulate a lot of data, they store that data, they annotate that data, then they find a GPU provider that is available, and then they run iterative model building on different GPU products. They use us to store that large dataset, and as they acquire new datasets, they use us to store those efficiently and then send them quickly and for free to the GPU provider they want. As they do that, the other side of their business—the actual thing they offer and charge for—is generating videos. That is all the inferencing side. They are looking at us for the outputs of all that video because every single time a user generates new video, that video then gets stored basically forever, and each version and iteration gets stored forever. We become a great place to store that, and that inferencing side is a much more smooth and predictable side. So the short answer is yes, it will be more predictable as we get more inferencing. Today, the bigger workloads we see are related to model building because we are great for that, but we are seeing more inferencing start up on our platform. Rustam Kanga: Okay. Great. Thank you. Gleb Budman: Thanks, Rustam. Operator: That concludes our question and answer session. I will now turn the conference back over to Gleb Budman for closing remarks. Gleb Budman: Thank you, everybody. Q1 was a proof point. We beat on revenue, beat on EBITDA, B2 is growing 24%, deal size more than doubled, AI customers up 76% year over year. We are not just riding the AI wave. We are building the infrastructure that supports it. We are key for the Neoclouds, key for the AI builders. We have had nearly two decades of optimizing performance per dollar at scale, which makes us ideal for the needs of AI. We raised guidance, we are on track for our first full year of free cash flow positivity as a public company, and we are picking up steam. Thank you to our customers, our partners, and thank you to our amazing team that is making all this happen. Thanks for joining our Q1 call, and we look forward to connecting on the next one. Bye‑bye. Operator: Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to The Baldwin Insurance Group, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonnie Bishop, Executive Director, Investor Relations. Thank you, Ms. Bishop. You may begin. Bonnie Bishop: Thank you. Welcome to The Baldwin Insurance Group, Inc. First Quarter 2026 Earnings Call. Today’s call is being recorded. First quarter financial results, supplemental information, and the company’s Form 10-Q were issued earlier this afternoon and are available on the company’s website at ir.baldwin.com. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks, and uncertainties, including, for example, our strategy with respect to our capital allocation in the future. The company’s actual results may differ materially from those contemplated by such statements. For a more detailed discussion, please refer to the note regarding forward-looking statements in the company’s earnings release and our most recent Form 10-Q, both of which are available on The Baldwin Insurance Group, Inc. website. During the call today, the company may also discuss certain non-GAAP financial measures. For a more detailed discussion of these non-GAAP financial measures and historical reconciliation to the most closely comparable GAAP measures, please refer to the company’s earnings release and supplemental information, both of which have been posted on the company’s website at ir.baldwin.com. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of The Baldwin Insurance Group, Inc. Trevor Baldwin: Good afternoon, and thank you for joining us to discuss our first quarter results reported earlier today. I am joined by Bradford Lenzie Hale, Chief Financial Officer, and Bonnie Bishop, Executive Director of Investor Relations. We had a solid start to the year on the heels of closing our partnerships with CAC, Ovi, and Capstone in January. We delivered total revenue of $532 million, adjusted EBITDA of $137 million, adjusted EBITDA margin of 26%, and adjusted diluted earnings per share of $0.63. Overall, commission and fee organic revenue growth was 3%, and total organic revenue growth was 2%. Adjusting for the impact of the QBE builder book transition, which we lapped on May 1, continued softness in our Medicare business due to disruption in the Medicare marketplace, and the procedural change impacting the timing of revenue recognition in IAS, overall organic revenue growth would have been 5%. Layering in the impact of the March partnerships as if they had been owned by The Baldwin Insurance Group, Inc. in both comparable periods, overall organic revenue growth would have been 9%. Collectively, those three partnerships grew 27% over 2025—a remarkable start to the year. In Insurance Advisory Solutions, overall organic revenue growth was 4%, driven by sales velocity of 13% before layering in the results from CAC and Capstone, which compares to 14% in the prior year period. As a reminder, sales velocity is seasonally lowest in the first quarter as a result of a bulk of our employee benefits renewals booking on 1/1. The impact of rate and exposure in the quarter was a 70 basis point headwind. Including both CAC and Capstone as if those businesses had been owned in the prior year period, organic growth would have been 10%. Combined sales velocity, including the acquired businesses, was 24%. We are incredibly enthused by the early contributions from CAC and Capstone, which delivered the strongest quarterly results in each of their respective histories. CAC generated new business of $38 million in the first quarter, up 39% compared to the same period in the prior year, and total revenue was $92 million, representing growth of 27% in relation to 2025. CAC sales velocity in the quarter was 61% across all product lines, and 15% for recurring lines of business. Net growth of transaction-related product lines, which consist primarily of our transaction liability and certain project-specific construction lines of business, was 22%. Going forward, we will report sales velocity on an aggregate basis, as well as broken out for recurring lines of business. Separately, we will call out net growth in transaction-related product lines. These transaction-related product lines have some variability quarter to quarter due to the variable nature and timing of transactions and project starts. CAC’s strong growth in the quarter was driven by strong new business across key specialty industry groups, strength in the private equity and transaction liability practices, which supported several marquee transactions at the nexus of the AI infrastructure buildout across the U.S. and globally, as well as strong momentum from cross-sell opportunities between the legacy The Baldwin Insurance Group, Inc. and CAC teams. Our integration work is running ahead of schedule. Today, over $34 million in cost synergies have been actioned, representing nearly 80% of the three-year $43 million target we laid out on our last call. We expect these to materialize in the P&L throughout the balance of this year and in 2027. On the revenue side, in the quarter we realized $1 million of revenue synergies, and as of today that number has grown to nearly $3 million, with over $10 million in client cross-sell opportunities being actively worked. Four months in, we are tracking ahead of plan on every dimension of this powerful business combination, and the industrial logic we saw is pulling through more quickly and more significantly than we had anticipated. Moving to our Underwriting, Capacity and Technology Solutions segment, organic revenue growth was 3% in the quarter, with core commissions and fees growing by approximately 6%. Importantly, we recognized a large one-time contingent payment in our real estate investor program in 2025, normalizing for which UCTS’s organic growth would have been 9% for the quarter. The underlying momentum across the segment remains strong. Our multifamily business grew revenue 10% in the quarter, and Juniper Re grew over 90%, both reflecting the durable scale advantages of our proprietary capacity strategy. We did continue to see pressure in our E&S homeowners book; revenue was down roughly 30% in the quarter as we deliberately maintain underwriting discipline in a soft property environment. The transition of our builder book from QBE to Brev, our inaugural reciprocal insurance exchange, remains on track. Brev is now licensed in seven states and positioned to begin migration of business outside Texas in the back half of the year. Our second proprietary builder program with Hippo and Spinnaker remains on track to launch later this year. Over time, we expect this to materially increase our capture rate of Westwood’s builder business in new proprietary MSI programs from approximately 30% today—a meaningful multiyear growth opportunity for our MGA, and a meaningful expansion of vital insurance capacity for our builder partners and their homebuyer customers. Our Main Street Insurance Solutions segment organic revenue growth was down 5% in the quarter, driven primarily by continued year-over-year headwinds from the QBE commission rate reduction at Westwood and softness in our Medicare business. Normalizing for impacts of those two headwinds, overall organic revenue growth was 7%. We fully lapped the QBE impact on May 1 and expect organic growth in our MIS segment to begin ramping again from here. We are also seeing growing momentum in our embedded mortgage businesses, which went live in April with Fairway Independent Mortgage, a top-10 independent mortgage originator in the country. While Fairway has only been live on the platform for one month, early signs are very encouraging. The 3B30 Catalyst program is now fully underway. In the first quarter, we executed the first phase of role transformation within IAS and remain on track to deliver $3 million to $5 million in in-year savings. You can find additional information in the 3B30 Catalyst slide in our earnings supplement. Now, let me address the question of AI directly, because it is increasingly central to how we are running this business and how I expect us to outperform over time. We are leaning into AI with conviction. Over the past several quarters, we have been building our own proprietary AI orchestration layer that enables delivery of fully automated workflows. The early productivity gains from the tools we are deploying internally are running up to 80%. We are embedding AI directly into our operating platforms, including VIP, our proprietary operating system supporting the MGA, and we are using AI to elevate and enhance the work our colleagues do every day. Catalyst is the operational expression of this strategy—AI-enabled process redesign, bold transformation, and an accelerated path to operating leverage. Said simply, AI is a meaningful tailwind for our business, and we are investing aggressively to capture it. On the question of disintermediation, our thesis is unchanged and the underlying structural advantages have only strengthened. First, the clients we serve—middle market, upper middle market, and large organizations—have complex, multi-location, multifaceted risks that require deep and specialty advisory solutions, human judgment, and a multitude of risk transfer counterparties and vehicles in order to thoughtfully and effectively manage and finance risk. The CAC combination further shifts our center of gravity upmarket away from the account segments most exposed to AI commoditization. Second, our embedded distribution strategy places insurance at the point of major life and business transactions and workflows consumers are unlikely to bypass for a standalone insurance buying experience. Third, our UCTS business vertically integrates our platform across the entire value chain—owning the client relationship, advising on complex risk issues, building proprietary insurance products, and arranging the third-party risk capital that stands behind them. We are the disruptor in this marketplace. The combination of human expertise and judgment, embedded distribution, proprietary product and risk capital formation, and AI-driven productivity is the right architecture for the AI era. As we enter 2026, we are pleased with our first quarter results and confident in our positioning to accelerate performance ratably through the year and beyond. The underlying momentum across our segments is strong. The idiosyncratic headwinds we have discussed—the QBE commission change we have now lapped, the Medicare market disruption, and the IAS revenue recognition procedural change—will all be substantially behind us by the end of the second quarter. CAC is exceeding our expectations on both revenue and expense synergy execution. The Catalyst program is delivering, and we are deploying AI across our platform with real and measurable productivity gains. Quite simply, our business was built for this era. We are leaning in to accelerate our impact and our results. I want to extend our gratitude to our clients for their continued trust in us to provide strategic guidance, expert insights, and innovative solutions, and I want to thank our nearly 5 thousand colleagues for their dedication to helping our clients protect what is possible. I will now turn the call over to Bradford Lenzie Hale, who will detail our financial results. Bradford Lenzie Hale: Thanks, Trevor, and good afternoon, everyone. For the first quarter, we generated organic revenue growth of 2% and total revenue of $532.2 million. Looking at the segment level, organic revenue growth was up 4% in IAS, up 3% in UCTS, and down 5% in MIS. Adjusted for the three transitory items Trevor walked through, underlying organic revenue growth would have been 5%. We recorded GAAP net loss for the first quarter of $1.9 million, or GAAP diluted earnings per share of $0.20. Adjusted net income for the first quarter, which excludes share-based compensation, amortization, and other one-time expenses, was $89.3 million, or $0.63 per fully diluted share. A table reconciling GAAP net income attributable to The Baldwin Insurance Group, Inc. to adjusted net income can be found in our earnings release and our 10-Q filed with the SEC. Adjusted EBITDA for the first quarter was up 21% at $137.2 million compared to $113.8 million in the prior year period. Adjusted EBITDA margin declined approximately 170 basis points year over year to 25.8% for the quarter, compared to 27.5% in the prior year period. The approximately 170 basis point margin decline is fully explained by two items. First, the consolidation of CAC, which has different margin seasonality due to timing and mix of revenues, and second, the UCTS profit-sharing contract Trevor mentioned. Adjusted free cash flow for the first quarter was roughly flat compared to $26 million in Q1 2025. The decrease was driven by working capital timing, which resulted in a $60 million use of cash. More than half of the working capital headwind was from CAC, given a material payout of approximately $40 million in previously accrued cash bonuses and commissions, which The Baldwin Insurance Group, Inc. assumed in the opening balance sheet. As mentioned on the year-end call, we would expect CAC’s free cash flow conversion in the year to be better than legacy The Baldwin Insurance Group, Inc.’s rate. As such, we expect the timing headwind to reverse in quarters two through four. It is important to remember that Q1 is expected to be our lowest quarter of free cash flow conversion, given the payout of bonuses, as well as the substantial receivables that are built in our employee benefits business, the majority of which renew in January with payment monthly throughout the balance of the year. This was somewhat exacerbated in Q1 2026 because of approximately $15 million of CAC transaction costs, representing a material increase in one-time cash outlay. Our full-year cash flow trajectory remains on track for double-digit growth in 2026. We ended the quarter with net leverage at approximately 4.3 times, as we deployed approximately $50 million of our $250 million buyback authorization to repurchase 2.2 million shares. We will remain prudent in our share repurchase program as we assess overall market conditions and act on market dislocation opportunities relative to other capital allocation alternatives to drive shareholder returns. The January 2026 partnerships with CAC and Ovi generated a significant net deferred tax liability, which resulted in a benefit to income tax expense in Q1 of approximately $145 million from the reversal of the majority of our valuation allowance. As an offset to this benefit, we recorded an above-the-line operating expense to establish a liability associated with our tax receivable agreement of approximately $130 million. Note that the impact of each of these one-time transactions has been removed from adjusted EBITDA and adjusted EPS. We would expect income tax expense/benefit for the balance of 2026 to be minimal, and changes to the TRA liability will largely flow to the balance sheet going forward, with minimal further expected impact on the P&L. There will be no change to the manner in which we calculate the tax impact to adjusted net income in 2026. Looking ahead, our full-year consolidated guidance remains unchanged. Despite the challenging market backdrop, we remain confident in our ability to accelerate our total organic growth throughout the year. For the second quarter, we expect revenue of $485 million to $490 million and organic revenue growth in the mid-single digits. We anticipate adjusted EBITDA between $113 million and $118 million and adjusted diluted EPS of $0.44 to $0.48 per share. In summary, we are pleased with the quarter, encouraged by the strong contribution from our recent partnerships across both cost savings and revenue synergies, and by the early operational impact of our 3B30 Catalyst program. Organic growth momentum is building, and we continue to expect a clear inflection in financial results in 2026 as we fully lap the idiosyncratic headwinds of the past year. We remain focused on accelerating execution across our platform, fully integrating our recent partnerships into The Baldwin Insurance Group, Inc., and leveraging new and innovative technology and AI solutions to enhance our client impact and long-term shareholder value creation. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. The first question comes from the line of Charles Gregory Peters with Raymond James. Please go ahead. Charles Gregory Peters: Well, good afternoon, everyone. For my first question, I would like to focus on the organic revenue results and then briefly the comments you made about the revenue growth at CAC. The one area that caught me by surprise was the result in the UCTS line, which I think you called out there is a one-time item in there. Even on a pro forma basis, it seems like it is tracking lower than I might have envisioned for the year. So maybe you could provide some color there. And then related to your comments around growth, if you could go back and more slowly go through what seems to be some positive indications of growth coming out of CAC, that would be helpful. Trevor Baldwin: Yes. Hey, Greg, appreciate the question. Let us start with UCTS. I did mention there was a large one-time contingent item in the prior year period. Normalizing for that, you are looking at 9% organic in the quarter for UCTS. We continue to have very strong underlying momentum in the UCTS segment. Our multifamily portfolio grew double digits in the quarter. Juniper Re continues to have very strong momentum with growth of over 90%. As broader evidence of that underlying momentum, we expect organic growth to recover to high single digits for UCTS in Q2 and back into the teens in the back half of the year. We are seeing continued headwinds in our E&S home portfolio as a result of soft market dynamics. As we push through Q1, the impacts of that in the prior year were already fairly material and should have less of an impact. Specifically, our E&S home portfolio was down 30% in Q1; however, we expect it to be down high single digits for the full year, which should give you a sense of the recovery we expect over the balance of the year. At a high level, the underlying momentum at UCTS continues to be quite strong. It is a double-digit growth business, with a combination of a one-time item and an acute prior-year-period impact from the soft dynamics in E&S home normalizing through the balance of the year. Moving on to CAC, when we announced that partnership, we did it with conviction. We had that conviction because of the industrial logic of the combination, the quality of the people, the scarcity value of the capability set, and how that enables us to continue to grow and strengthen the impact we can deliver for our clients. I said the CAC team is a Ferrari; we were going to put them on the track and let them run. They have come out of the gate fast. We expected strong results, but the strength has pleasantly surprised us—both in speed and scale. On expense synergies of approximately $43 million, we have already actioned over $34 million, well ahead of plan. On revenue synergies, which typically have a fairly long sales cycle, we have already realized $1 million in the first quarter, and as of today, nearly $3 million, with more than $10 million of active cross-sell opportunities being worked by the combined teams. We are seeing strength not in any one pocket but broadly—industry practice groups, legacy middle market, and the transaction liability group, which is taking share. Combined with the legacy The Baldwin Insurance Group, Inc. teams, we are leveraging those capabilities to drive more significant impact for existing clients. It is all incredibly positive. Charles Gregory Peters: Great. I think I have to pivot from my follow-up question to the Catalyst program slide you put in your slide deck. You talk about this initiative in the context of the 3B30, getting to the 30% margin target. Can you walk us through the run-rate annualized savings and the positive payback? Does that get us to that 30% run rate that you are thinking about, or are there more levers you have to pull to get to your objective? Trevor Baldwin: I think this on a standalone basis does not fully get there, but regular-way operating leverage that is in the business, in combination with the Catalyst program, does. As I mentioned, the program is live, on track, and the early results are positive. You may have seen a press release around our expanded partnership with Anthropic’s Claude on an enterprise basis, as well as the work we have been doing to build out our proprietary orchestration layer, driving real productivity and efficiency into our operations. A recent example: our product team at DMGA came together to build and launch an admitted insurance product. Historically, creating an admitted product requires a series of competitive analyses, rate and product feature determinations, and filing creation tasks—a process that has historically taken months, three on average, with significant manual manipulation of documents and data. The product management team leveraged Claude on top of our proprietary data across each phase of the process and significantly compressed the timeline from months to three days. As you think about how that translates into the velocity of new products we can bring to market—whether the new builder products we expect later this year, a mortgage product we are working on, or a manufactured home program for a number of our property management software clients—the impact will be real and significant. We are excited about what we are seeing. Bradford Lenzie Hale: Greg, I would just add it is the combination of the Catalyst program and the meaningful investments we have made in the business, such as mortgage embedded, in addition to the products that Trevor highlighted. The maturity of those businesses is also a meaningful driver of margin expansion toward the 3B30 goal. Charles Gregory Peters: That makes sense. Thanks for the detail. Trevor Baldwin: Thanks, Greg. Operator: Thank you. Next question comes from the line of Thomas Patrick McJoynt-Griffith with KBW. Please go ahead. Thomas Patrick McJoynt-Griffith: Hey, good evening. You sounded optimistic about the early signs of success around cross-sell with the CAC Group. Could you give us some examples of where you are actually seeing success there? Is it finding new solutions or taking market share from other brokers? Maybe elaborate on that point. Trevor Baldwin: It is all of those things, and it is going both ways. A couple of examples: The CAC team has deep industry capabilities across natural resources, private equity, and real estate, and we have historically had deep capabilities across construction. One of the CAC colleagues brought forth an opportunity for a large general contractor prospect that historically they probably would not have pursued because they did not feel like they had all the capabilities to serve them at the level CAC seeks to serve clients. Because of the combination with our platform, they were able to bring in some of our construction professionals and, through an RFP process, we won that client. The incumbent was a top-five global broker, and our competition included both global brokers and large nationals. It was a standout win and brought momentum to the team. Similarly, at legacy The Baldwin Insurance Group, Inc., we have professionals with deep expertise and strong relationships across private equity and the M&A universe, and CAC has an incredibly deep bench of talent here, not only on transaction solutions but also broadly across portfolio solutions. The legacy The Baldwin Insurance Group, Inc. team had a client entering into a complex cross-border international M&A transaction. I cannot get into detail due to NDAs, but this was highly complex. The CAC team stepped in, delivered a set of solutions that helped facilitate a seamless signing, and it is a significant six-figure revenue opportunity for an existing client that otherwise likely would have gone to one of our global broker competitors. The pipeline is robust across construction, energy, data center, and power generation, as well as broad-based large upmarket complex opportunities. Momentum continues to build. Thomas Patrick McJoynt-Griffith: Thanks. Switching gears to one of the headwinds you have been calling out—the Medicare side. Can you remind us, is the cadence or seasonality such that the 2026 headwind has been baked in? Or is that more of a 2027 issue? Trevor Baldwin: We expect that headwind to largely resolve itself beginning next quarter. While we are not expecting a miraculous turnaround, we do not anticipate a meaningful headwind going forward there. Operator: Next question comes from the line of Charles William Lederer with BMO Capital Markets. Please go ahead. Charles William Lederer: Hey, thanks. I want to go back to UCTS for a second. I know you called out the headwind, but you also had a fairly nice tailwind in the earned premium line there. If I exclude that, you were down a little bit more in UCTS. Is that all E&S home and the real estate product? And what is going to drive the improvement over the rest of the year? Trevor Baldwin: That is right. We did benefit from continued growth in the multifamily earned premium in the captive, which we view as incremental economics on a high-performing overall program. The headwind was almost entirely the one-time contingent as well as the headwinds in the E&S business. We expect momentum to pick up across most, if not all, of our product sets over the balance of the year, as evidenced by our confidence in high single-digit organic growth in Q2 and returning to teens organic growth in the back half of the year. Momentum is strong, with nuances from last year both in where the E&S book stood and that one-time contingent. Charles William Lederer: Got it, thanks. Then on the buybacks, can you talk about how motivated you feel now to still buy back shares? Or now that the stock is closer to peers, maybe it is less of a priority? Bradford Lenzie Hale: Our capital allocation priorities remain intact: number one, organic investments; two, M&A; followed by buybacks; and then dividends or debt paydown. We are not an indiscriminate buyer. We are thoughtful about price as we deploy capital, and we continue to target the best risk-weighted return alternative. To the extent we see dislocation of price, we will continue to be active. Trevor Baldwin: Put differently, we can continue, even at these prices, to buy in our own shares at a meaningful discount to what smaller, lower-quality private agencies trade for today. We continue to find our stock price attractive. Operator: Thank you. Next question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead. Elyse Greenspan: Hi, thanks. I will continue on the buybacks. You did not raise the EPS guide for the year, but you obviously bought back in Q1, and it sounds like, Trevor, based on what you just said, you are open to continuing to buy back your shares. How come not raising the EPS guide? Or is the guidance assuming no additional buyback over the remaining three quarters? Trevor Baldwin: We are not going to assume how stock price performance goes. To the extent we have the opportunity to buy back shares at an attractive price, that could create some upside. To the extent we do not, that likely reflects recovery in trading dynamics. Elyse Greenspan: Thanks. My second question: you provided some figures on CAC highlighting strong new business growth and revenue growth in the first quarter. On the three deals, the revenue and EBITDA contributions you expect for 2026 have not changed, but it sounds like things are running ahead of expectations. Are you waiting to update that, or is it that some are running ahead and some are running below plan relative to the guidance you reaffirmed? Trevor Baldwin: Broadly, the three partnership businesses are running ahead of plan, but we are one quarter in, so it is early to fully extrapolate. As I mentioned, momentum at CAC is incredibly strong. Some of that momentum is in transaction liability solutions, where there can be variability quarter to quarter and year to year. The pipeline in that part of the business is at an all-time high, and we continue to take share. We feel good about the momentum but believe it is early in the year to extrapolate to full-year expectations. Elyse Greenspan: Lastly, on market impact, what are you seeing from an overall pricing perspective in the property market? We have heard about aggressive price declines. What are you embedding over the next three quarters? Trevor Baldwin: The property market is deeply soft. We are seeing pricing levels that have returned to circa 2017. For large shared and layered coastal placements, we are seeing rate decreases at times of 30% to 40%. While those may not make long-term sense, our clients certainly enjoy them. We expect a more significant rate and exposure headwind in the second quarter, which is the heaviest quarter for property renewals. Whereas we saw approximately 70 basis points of headwind in Q1, I expect that to be 400 to 500 basis points in Q2. As a result, we expect our legacy IAS segment to be roughly flat from an organic standpoint in the second quarter before returning to mid- to high-single-digit organic growth in the back half of the year as we fully lap the procedural accounting change headwinds. Based on what we are seeing today, rate and exposure headwinds in the back half of the year should be pretty close to flat—maybe a slight headwind in Q3 and a slight headwind or a tailwind in Q4. Overall, for the year, we expect rate and exposure to be a 100 to 200 basis point headwind, and that is fully incorporated into the expectations we have shared. Operator: Thank you. Next question comes from the line of Andrew Kligerman with TD Cowen. Please go ahead. Andrew Kligerman: Hey, thanks a lot. Good evening. I want to follow up on IAS organic growth. You had 4 points in the quarter of organic, and then CAC, if normalized, contributed 4 to the overall book. If IAS and CAC had been there for over a year, you are well into the double digits, which is fabulous. You noted transaction liability can be volatile, but typically when you do an acquisition you get a good year one and similar organic in year two. Extracting out the volatility of transaction liability, all else equal, you would probably be looking at high single into double digits potentially next year once you get a full year on board. Am I thinking about it right with regard to IAS? Trevor Baldwin: At a high level, yes. It is a double-digit organic growth business inclusive of CAC and results, which we think is a standout outcome in today’s market backdrop. Specific to 2027, it is too early for us to opine on organic growth next year. However, everything we are seeing from underlying trends and datasets is very positive. Pipelines are building, cross-sell opportunities are growing. We expect in the back half of the year legacy IAS organic to re-rate back up into the mid- to high-single digits. Considering CAC’s momentum, historical seasonality, and pipelines, it is incredibly strong. We are proud of the results—relative to peers, a standout in the quarter, inclusive of CAC and Capstone. They reflect the wisdom of the business combination and the combined strengths of the organization across industry and product segments, enabling us to solve clients’ challenges and deliver meaningful impact to help them manage risk and grow their enterprises. We feel really good about the momentum. Andrew Kligerman: Following up on capital management, it sounds like the intrinsic value of the stock is still attractive here, so I want to make sure I heard that right. With respect to leverage, which inched up to 4.3 times—partly due to the buyback—where do you see leverage toward the end of the year? Do you get to three to four times, or is the stock so attractive that you are willing to let it hover where it is? And does that imply limited major M&A near term? Bradford Lenzie Hale: We would continue to expect leverage to hover in the 4.0 to 4.5 times range over the intermediate term, particularly as we continue to execute on the buyback program. We are not price indiscriminate, so that can change, but that is our current view. Trevor Baldwin: We continue to believe that mechanically deleveraging six months earlier, while our equity trades at a material discount, is a destruction of shareholder value, not a creation of it. We are comfortable here, particularly if we can take advantage of market dislocation. On M&A, it is difficult for us to find a financially prudent way to structure a deal that makes sense based on where our equity trades today. That plus where leverage sits creates a hurdle. Historically, we have allocated capital to M&A in a way that has created value intrinsically, and while we are very early, we appear to be off to a great start with the 2026 class of partnerships. Within our financial leverage policy and objectives to delever over time, and subject to us having a currency that supports M&A in an accretive fashion, we think it is a very good use of capital over time. The circumstances today dictate a more narrow set of priorities. Andrew Kligerman: Super helpful. Thank you. Operator: Thank you. Next question comes from the line of Pablo Singzon with JPMorgan. Please go ahead. Pablo Singzon: Hi, thank you. First, can you unpack what is going on with the E&S homeowners business? I am a bit surprised. Given what other companies are reporting, pricing in homeowners is not experiencing the same pressure as in personal auto. Are you dealing with a different set of competitors in that business, and is that why you are a little more cautious? Trevor Baldwin: No. That may be homeowners broadly across admitted and E&S products, but E&S home specifically has seen rate come in 40% to 50% plus. Eighteen months ago, we were writing $1.314 billion of new premium a month, and over the past twelve months averaging 2 to 3. As we continue to tweak our product, we are rolling out multiple new E&S home product variants to better compete in pockets of the market we find attractive. We expect new business flow to go up. We saw that reflected in March with over $4 million of new E&S home premium booked, the highest new business month in the past twelve months. That is one month, not a trend, but we feel like we hit the bottom in Q1 and will march back up through prudent product design and pricing tweaks and rollout of incremental product variants to resume growth. Pablo Singzon: Thanks, Trevor. Second, could you talk about the Construction Risk Partners business you acquired some time ago? I think it is a decent-sized portion of IAS. Other brokers have spoken about activity related to data center construction. Are you getting benefit from that economic activity today? Trevor Baldwin: The CRP team—the Baldwin Construction practice, which reflects the historical Construction Risk Partners business—has the largest and strongest pipeline in our construction business’s history. That is a combination of an influx of new cross-sell opportunities from CAC and a breadth of opportunities at the nexus of the data center and AI infrastructure buildout. The construction market is a tale of two cities. Overall expectations for construction spend this year are roughly flat year over year, if not modestly down, buoyed by significant spending in data centers, offset by slowdowns in non–data center areas. That means results will be lumpier because data center opportunities are fewer but larger in scale. We have some wins under our belt and multiple very large multibillion-dollar opportunities in the near- to intermediate-term pipeline, and we feel good about taking more than our fair share. Operator: Thank you. Next question comes from the line of Joshua David Shanker with Bank of America. Please go ahead. Joshua David Shanker: Good evening, everybody. I want to point out that 90% growth in Juniper Re and 27% growth in the new partnerships are staggering numbers. But it also implies contraction in legacy businesses that are older in the portfolio. If someone wanted to argue that The Baldwin Insurance Group, Inc. has bought growth but not long-term runners, and is once again buying growth, what is the pushback on that thesis? Trevor Baldwin: The pushback is in the numbers and expectations we have shared. The headwinds have been well discussed—idiosyncratic drivers from Medicare to the IAS procedural accounting change to the QBE book roll transition to our reciprocal exchange. Normalizing for all three, you have a mid-single-digit growth business in the quarter and a business we expect to grow organically at double-digit rates exiting this year, before the impact of the three partnerships that grew 27% in the quarter. All businesses have ebbs and flows, and the market impacts are real across the industry. We are relatively uniquely positioned to accelerate to high single-digit and then double-digit growth by the fourth quarter, despite no expectation for market headwinds to meaningfully abate. Joshua David Shanker: So you still believe if the insurance distribution industry at year-end is growing mid- to low-single digits, The Baldwin Insurance Group, Inc. will be growing at high single digits, edging toward double digits? Bradford Lenzie Hale: That is correct. Joshua David Shanker: Okay. I wish you the best of luck there then. Very good. Bradford Lenzie Hale: Thanks, Josh. Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to hand the floor over to Trevor Baldwin, CEO, for closing comments. Trevor Baldwin: Thank you all for joining us this evening. As I noted at the open, we are pleased with our first quarter and confident in our trajectory through the balance of the year. The momentum here is real—our embedded distribution, our advisory businesses across our MGA platform, and as evidenced in the integration of our partnerships. It is the direct result of the work our colleagues are putting in every day. I want to thank our colleagues for how they show up in support of our clients, one another, and for the firm we are building together. To our clients and insurance company partners, thank you for your continued trust. To our shareholders, thank you for your engagement and support. We continue to deliver against our Catalyst 3B30 goals and objectives. We look forward to speaking with you again next quarter. Bonnie Bishop: Thank you. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Douglas Eu: Good day, everyone, and welcome to Grab's First Quarter 2026 Earnings Call. I'm Douglas Eu, Director of Investor Relations and Strategic Finance at Grab. And joining me today are Anthony Tan, Chief Executive Officer; Alex Hungate, President and Chief Operating Officer; and Peter Oey, Chief Financial Officer. During this call, we will be making forward-looking statements regarding future events including our business and financial performance. These statements are based on our current beliefs and expectations. Actual results could differ materially due to a number of risks and uncertainties as described on this earnings call in the earnings release and in our Form 20-F and our filings with the SEC. We do not undertake any duty to update any forward-looking statements. We will also be discussing non-IFRS financial measures on this call. These measures supplement but do not replace IFRS financial measures. Please refer to the earnings material for a reconciliation of non-IFRS to IFRS financial measures. For more information please refer to our earnings press release, remarks and supplemental presentation available on our IR website. For today's call, Anthony will deliver opening remarks, after which we will open the floor to questions. As a reminder, we are accepting questions via IR and e-mail at investorrelations@grab.com. Do submit your questions ahead of time, and we will add them to the Q&A queue. And with that, I'll hand it over to Anthony. Ping Yeow Tan: Great. Thanks, Doug. Good day, everyone, and thank you for joining us. We set out to start 2026 strongly, and we delivered against the backdrop of our seasonally softest quarter due to Ramadan and Chinese New Year, on-demand GMV growth accelerated to 24% year-on-year, while group MTUs increased to 52 million. In Financial Services, loan disbursals grew 67% to exceed $1 billion for the first time, and we remain on track for our Financial Services segment to achieve adjusted EBITDA breakeven in the second half of this year. We also delivered our 17th consecutive quarter of adjusted EBITDA growth, expanding our trailing 12-month adjusted free cash flow to $489 million. These results demonstrate the compounding nature of our strategy, which is increasingly being accelerated by our investments in AI. What truly sets our AI capabilities apart however, is the proprietary data foundation we spent the last 14 years building to power them. Today Grab operates as a system of record for local commerce across Southeast Asia. We capture highly localized real-time data on how over 50 million users and partners interact across 8 markets. Over the years, this has generated a proprietary data set of over 20 billion transactions. We feed these multimodal signals from hyper local mapping to in-store payment terminals into our AI Grab intelligence layer to optimize our own marketplace efficiency from dynamic pricing to last mile routing. Crucially, we paired this data advantage with our massive through physical fulfillment network. That closed loop system or ecosystem is our biggest competitive mode, which is why our AI investments translate directly into measurable financial outcomes. We are already seeing significant tangible returns on these initiatives. For instance, I'm pleased to share driver partners who adopted Turbo, our AI-powered driving mode in our Grab Driver app to optimize driver earnings and efficiency, saw a 23% uplift in earnings per online hour compared to driver partners who have not adopted a feature. This has contributed to Mobility transactions growth outpacing Mobility GMV growth with transactions up 28% year-on-year. Within a year of launch, our merchant AI Assistant, Mai has been adopted by approximately half of our active single store-merchant base, driving a 15% uplift in GMV for engaged users. This deepened engagement directly supports our ability to improve monetization with average advertiser spend growing 44% year-on-year as merchants see increasing measurable returns. Following the launch of 13 new AI-powered experiences at GrabX this year, we are turning external AI interfaces into our newest growth engines by acting as the essential fulfillment layer for Southeast Asia, we ensure that whenever customers use AI agents to navigate their day, those interactions, act as top-of-funnel leads that drive transaction directly back to Grab. We're also making steady progress on autonomous vehicles. In April, we successfully transitioned our private trials to full paying public operations. Our AIR service deployment partnership with WeRide is the first autonomous passenger service ever deployed within a Southeast Asian residential estate. The fleet has clocked over 40,000 kilometers and have safely served several thousand public rights. That said, the adoption of AVs in Southeast Asia remains nascent. We see governments and regulators taking a measured approach in implementing AVs, which we believe is the right approach for our region. We will continue to incorporate AVs in our platform at a pace that reflects the trust communities place in us and our emphasis on customer safety. To be clear, we do not expect anyone to be able to deploy impactful disruption to our human driver network in the near future. Yet we remain firm believers in the technology. This has shaped how we have made small investments ahead of the curve to forge international partnerships while doubling down on ensuring our Singapore pilot succeed. We intend to be the most experienced local hybrid AV and human operator in Southeast Asia, one able to amplify the efforts of any AV software player in bringing the smoothest, safest and most cost-efficient service when we eventually scale up in partnership with governments in this region. Now beyond AI and AVs, the structural health of our driver partner supply base remains our top priority. When fuel price volatility emerged in early March, we acted decisively to protect partner livelihoods by deploying targeted fuel rebates and proactively engage with regulators across our markets. In April, we also launched the digital earnings tracker to provide driver partners with greater transparency over their earnings. In 2025, partners earned over $15 billion on our platform, up 19% year-on-year. Looking ahead, our record start to the year is a testament to the resilience of our ecosystem. Whether we are leveraging AI to drive greater marketplace efficiencies today or piloting the autonomous networks of tomorrow, our focus remains on compounding sustainable growth and out serving our communities. Despite macroeconomic uncertainties particularly regarding inflation and fuel prices, our platform is structurally stronger than ever. Against that backdrop, we reiterate our 2026 full year guidance. Group revenue of $4.04 billion to $4.10 billion and adjusted EBITDA of $700 million to $720 million. Our first quarter provides us with a strong foundation. In March, we announced that we are advancing our buyback mandate with a $400 million accelerated share repurchase program. This is a reflection of our conviction in Grab's long-term value at these dislocated prices. Thank you so much. Let's open it up for questions. Douglas Eu: Thank you, Anthony. We will now transition to the Q&A session. [Operator Instructions] Our first and most apps question comes from the line of several analysts Divya at Morgan Stanley, Venu at Bernstein and Piyush of HSBC. As regard to the fuel crisis. So the question is, what's the impact of the ongoing Middle East conflict and higher fuel prices across your various operating countries? Has it started to impact business performance in the second quarter? And can you quantify the impact? And what is our strategy to manage long-term fuel risk? So this is a question for Alex. Alexander Charles Hungate: Thanks, Divya, Venu, Piyush. This is a critical topic. And as I said in my prepared remarks, Q1 results actually give us a good solid foundation entering the year. And as you saw from the slide pack, the demand trends in April have remained resilient. Our Mobility business in April has seen weekly average transaction volumes sustained at plus 32% year-on-year. And our deliveries business continues to see record high daily transacting users in April. So it's a good start to the year. The business, in fact, is in a structurally more resilient position today than it has been through our history. Product innovations we have made have really targeted affordability and reliability. Group orders, for example, has GMV up 74% year-on-year, and we launched group rides at GrabX last month, which is a similar concept for sharing rides to reduce pricing for individual consumers. And that's now available across all 6 of our core markets. GrabUnlimited, of course, is very good value for high-frequency customers, and it continues to account for 1/3 of our deliveries GMV. So all of these are highly affordable products, which keep the demand strong even when consumers are stretched. We're monitoring the fuel situation extremely closely. And of course, we will not hesitate to act further if needed. In the medium term, we are committed to accelerate the EV transition to reduce our driver partners exposure to fuel price volatility. So for example, in Thailand and Philippines, we have a drive-to-own program that connects our drivers with OEMs like BYD and GAC, where we have deals of up to 70,000 vehicles available across 6 markets with accessing to financing so they can own those more easily. In Vietnam, we have secured preferential charging rates also through our charging network partners, EBOOST and Charge+, which helps our drivers in the transition also. And finally, in Thailand, I am pleased to say that our total fleet supply has crossed 30,000 EVs on the platform and demand for those from consumers is also strong, where they can select that EV option, and that demand has grown by over 35% year-on-year. So this fuel crisis has become an opportunity in the sense that it helps us to accelerate that EV transition. Douglas Eu: Thank you, Alex. So move on to the next question. The next question is on financial services and comes from Zhiwei of Macquarie and Venu of Bernstein. So for the Financial Services segment, the loan portfolio showed a modest quarter-on-quarter growth, but there was a step improvement to your segment adjusted EBITDA. Could you describe the factors that led to these improvements? And what can we expect in coming quarters and how do you intend to drive that? So this is a question for Alex again. Alexander Charles Hungate: Thanks, Zhiwei, Venu. Yes, you're right. Strong EBITDA improvement in Financial Services, both quarter-on-quarter and year-on-year. So that is the operating leverage that we've been talking about starting to come through very strongly now as we scale up our loan portfolio. Revenue growth accelerated 43% year-on-year and 38% on a constant currency basis. And more than 1/3 of that incremental revenue dropped straight to the bottom line for Financial Services, demonstrating that operating leverage that we've been speaking about. The loan book growth is strong year-on-year. And importantly, the credit quality is improving alongside that. So loan disbursals grew 67% year-on-year to over $1 billion but the growth was modest. You're right, this quarter because of seasonal factors, and that's a normal factor for first quarter. The ECL as a percentage of our gross loan portfolio has improved year-on-year though. And that does show, I think the improving quality of our credit models. We've been proactive on risk management, though. So we've been tightening for some sectors. And in other sectors where conventional lenders have stepped away, we've seen more opportunity. In Q1, we applied those additional ECL overlays to account for that macroeconomic uncertainty with that selective tightening also part of our change in the risk appetite. Looking ahead, we do have some experience, of course, of managing these kinds of shocks to the macroeconomic situation. So our underwriting models have already been through the similar fuel price shock that we saw at the start of the Ukraine conflict, not to mention COVID as well. And in both instances, our credit quality remained within our risk appetite throughout. So we continue to monitor the portfolio performance super carefully. We aim to generate healthy returns on risk-adjusted returns for our loan portfolio and we are reiterating our second half 2026 breakeven target for financial services. Douglas Eu: Thank you, Alex. So the next question is also another highly asked question, and it comes from several analysts. So from Alicia from Citi, Divya from Morgan Stanley, Zhiwei from Macquarie, Jiong for Barclays and Piyush from HSBC. So regarding recent news in Indonesia. So an Indonesia's cap on rider commissions to 8%, can you clarify if that is applicable to 4-wheels? What are the levers available to cushion the key negative impact from lower rider commission? What's the likely impact of profitability due to the proposed change? And what's the impact in the delivery segment, if any, from the proposed change? And if you can help to quantify it. So this is a very long questions as well posed questions for Alex. Alexander Charles Hungate: Okay. Thank you to all of you, all 5 of you for the question. Let me see if I can cover section by section. Okay. So it does appear that the immediate regulatory exposure is highly specific. So the recent announcements are explicitly focused on O2O drivers, [indiscernible] online drivers, who are our 2-wheel ride hailing partners, so 2-wheel ride-hailing partners [indiscernible]. The 4-wheel drivers earn well above the minimum wage. And so we believe that they're less of a concern for government and regulators in Indonesia. That said, of course, we're engaging very proactively with the relevant ministries, and we try to seek absolute clarity and the technical aspects of how the decree will be implemented. It's essential we believe that, together with regulators, we shape a balanced implementation of these -- of this decree so that our Indonesia and mobility marketplace remains healthy and that driver partners earnings remain well supported. It's worth noting, as I mentioned in my prepared remarks, that 2-wheel mobility, so the O2O drivers that the decree referred to in Indonesia is less than 6% of our total mobility GMV. So O2O drivers in Singapore represent less than 6% of our total mobility GMV. So we are, therefore, reiterating our expectations for Mobility margins to stabilize within the historical range and not to go outside of that range. Douglas Eu: Thank you, Alex. So we'll move on to a related topic as well. This comes from the line of Venu from Bernstein, Sachin of DBS and Alicia of Citi. In relation to the 8% commission cap in Indonesia, is the likelihood of consolidation now looking higher in Indonesia as well. Does the shift in policy in Indonesia change your near- to medium-term investment or resource and capital allocation priorities. So just a question for Peter. Peter Oey: Sure, yes. Look, I want to comment on specific M&A speculation. And -- but I'll speak to how we view our position in this evolving landscape. Within M&A, we always take into account the regulatory environment, it's really critical. And we want to work with the relevant agencies there also, because there's always synergies and dissynergies that we could accrue from any transactions. And as we've -- I've always spoken in many, many quarter -- quarterly earnings, we always have a very high bar when it comes to M&A transaction itself. When specifically to Indonesia, and also just our M&A portfolio, we've always been taking a very diversified approach. And you see that in the lines of our businesses, and you see that our product continues to expand also broadly. We're entering our ninth market, which also shows our diversification also in terms of geographies. So the way we always position the lens that we take is diversification and that's really important. So specifically for Indonesia, as Alex just mentioned, it's really important that we have a very constructive and very healthy ecosystem both for our driver partners, consumers is also for our restaurants. So specifically to Indonesia, our strategy for Indonesia remains fundamentally unchanged despite what we've seen over the weekend and also the way we approach the strategies in Indonesia. Our Indonesian Mobility business continues to grow double digits year-over-year. Remains very, very -- remains stable quarter-on-quarter in spite of the seasonal headwinds. And as I'm always reiterating that we're very highly disciplined in our capital allocation. So when we evaluate any strategic opportunity, it's strictly through the lens of long-term shareholder value and also how can we diversify our Grab business. Douglas Eu: Thank you, Peter. So the next question comes from Alicia, Citi and Wei of Mizuho. So the question topic now moves back to the fuel crisis as well. Given the step-up in partner incentives to offset elevated fuel costs, how does this impact the demand elasticity and translated into revisions to your near-term financial outlook for mobility? Should we expect levels to remain elevated? Or do you see offsetting the levers such as EV adoption and cross-border rights that could bring incentives back down in the second half and support the sequential EBITDA ramp-up implied by your full year $700 million to $720 million guidance? Alexander Charles Hungate: Thanks, Alicia, Wei. Great question. So yes, Q1, you can see that driver incentives was elevated. Two specific drivers there. One is and most importantly was the confluence of Lunar New Year and Ramadan within the first quarter, both in the first quarter this year, creating acute supply pressures as usual during those 2 festive periods. So it's -- the second factor was, of course, the fuel crisis. So towards the end of the quarter during March, we started a deliberate decision to support our driver partners with the elevated fuel prices across some countries in the region. So as we move into the second quarter, of course, the festive-driven incentive pressure normalizes, but fuel does remain an important variable that we're watching very, very closely. The targeted earnings support was -- will continue through into the second quarter, but it no longer with the seasonal impact. We expect this first quarter to be a peak in the driver incentives. We are reiterating the full year guidance, therefore, of $700 million to $720 million for adjusted EBITDA, assuming that peak and not that it's a run rate, but it's more like a peak. But I would say we've got multiple levers available to us, including, if necessary, more emphasis on advertising and financial services monetization to defend the overall margin trajectory for the full year of those fuel pressures persist through the full year. In the medium term, if those elevated fuel prices continue, we would have to pass some more of the costs on to consumers. But of course, we'll do that very judiciously because we want to maintain demand for our driver partners through this difficult time. Finally, I think it's worth emphasizing, we saw that the impact of AI marketplace optimization this quarter was very powerful. And we did use it to manage, for example, incentive spend for consumers. You can see that the incentive spend for consumers became more efficient during this quarter. And so going into the full year, we will also have that powerful capability at our disposal to try and manage some of the volatility and incentive spend. Douglas Eu: Thank you, Alex. So the next question, the topic we'll now move into AI. This comes from Divya, Morgan Stanley and Wei at Mizuho. On AI monetization, are you building toward a merchant and driver SaaS revenue stream that sits outside the current commission rate structure or is going to be remaining bundled into the existing take rate? What AI tools are you investing in mainly into this quarter? So this is a question for Anthony. Ping Yeow Tan: Thanks so much, Divya and Wei. Appreciate the question. Look, our approach to tools like merchant AI and driver AI assistant coach has been to solve everyday promise that our drivers and merchant partners face. There's no reason why our partners should not have access to these tools that will enable them to grow their customers and earnings. If we get that right, the tools and the partnership right, we build something competitors can't easily replicate and it creates high loyalty, high engagement, which results in them choosing us as their primary platform, not just because of the tech, but because of the trust and, of course, growing earnings for them. This has translated into concrete results within our ecosystem. On a year-on-year basis, not only do we see the growth in a number of active merchant partners, but their earnings also grew 12% during the quarter. For our Mobility business, total active driver partners increased 4% quarter-on-quarter and 16% year-on-year to reach another all-time high in spite of macroeconomic uncertainty. So when we build these AI tools well and we may generally partner and outserve them, the economics tends to follow naturally. Douglas Eu: Thank you, Anthony. So another highly asked question is on regional corporate costs and also related to AI. So this comes from several analysts, Jiong at Barclays, Wei at Mizuho, Divya of Morgan Stanley and Ranjan of JPMorgan. So regional corporate costs increased year-on-year to $114 million for the first quarter. Can you help us understand how much of the step-up is AI infrastructure costs, whether it's tokenization of cloud versus general inflation as well as FX? And how should we expect the AI spend to start translating into measurable cost savings elsewhere in the P&L that can offset this higher regional corporate cost run rate. So this is a question for Peter. Ping Yeow Tan: Sure. Let me just start by saying that the step-up that you saw in the first quarter of regional corporate costs was a conscious decision. We made that decision as a management team to invest in the AI infrastructure that we've been talking about for many quarters. And Anthony just answered the question regarding AI and what we will be deploying to our partners as well as now we're starting to deploy to our consumers also at the same time. And that really underpins to the Grab intelligence layer that we spoke a lot about actually a few weeks ago, at the GrabX event regarding the new 13 new product AI experience features that we're rolling out. So we are investing in our -- in the AI specifically towards tokenization stack that we saw in the first quarter and the cloud capacity that needs to run that powers those tokenization at the same time. Now the early returns on those investments is critical also we can't discount because that's also showing up in the numbers. And Anthony just also shared some of those on the driver side and the merchant assist by where they're seeing the impact on earnings, which is really a critical part of that healthy ecosystem. If you look at the adoption of these driver system, which is now over 50%, and we generated over 1.25 million interaction in just 2 months since we rolled it out. We've seen also for merchants that are using the AI assistant, their GMV is also up double digits on a year-over-year basis. So they're thriving as a merchant, and we're benefiting also as a platform from that. And this is the type of things that we want to see more and more coming out from these AI rolloutS, which is really critical. Now if you strip it all these AI investments, and we saw some FX headwind also from the weaker USD, the U.S. dollar and our underlying cost base, which is really important remains lean and disciplined. And that's been a mandate that how we run Grab. So I'm not expecting any further step-ups from regional cooper costs. We expect the regional copper cost to stabilize around the levels that you saw in the first quarter for the rest of 2026. Douglas Eu: Thank you, Peter. So the next question now moves to the share repurchase, and this comes from Ranjan of JPMorgan and Divya from Morgan Stanley. So Grab has announced that acceleration to repurchase $400 million of shares at the end of March itself. Nonetheless, the basic and diluted shares have increased quarter-on-quarter. So what is the impact of dilution from stock-based compensation? And with regard to the share repurchase program, would you consider upsizing this given the current stock price? Peter Oey: Okay. So I'll take this one. If you step back, when we announced a $500 million buyback program earlier this year. And I announced also a $250 million accelerated share repurchase and an additional $150 million in contingent forward purchase on the 24th of March. So a total of $400 million has been accelerated, which means only in the market for 5 to 5 trading days in Q1 itself. So you can't look at it in isolation. Now both these programs are expected to be executed over the next 4 months. So I'll share a lot more in the next quarterly earnings when we look at the Q2 results. Now in terms of share count, it would have amount to roughly around 2% of our total share count, which will more than offset for the dilution from stock-based compensation. So that's how we're viewing it. As a reminder, there's still another $100 million left to go in the share buyback program, and we'll continue to have discussions around capital allocations with our Board. Douglas Eu: Thanks, Peter. So the next question now moves to groceries. This question comes from Wei of Mizuho. So regarding to grocery contribution, you've mentioned that GrabMart is only 10% of deliveries GMV, but growing 1.7x faster than food. When you look at the grocery TAM in Southeast Asia and the economics of the GrabMart model itself, where does GrabMart need to be to basically -- to contribute to delivery GMV by 2028 to underpin the $1.5 billion EBITDA target? And at what point does grocery become margin accretive to the segment rather than the drag to the blended deliveries economics? So this is a question for Alex. Alexander Charles Hungate: So GrabMart is an exciting segment. I mean, the TAM is very large, arguably larger than food delivery altogether. So we are doing a lot to accelerate the product innovation particularly the front end, the AI-powered shopping agent, which we think will transform the ease with which consumers can, for example, create a weekly shopping basket and then improve the targeting for Grab more cross-sell as well. And by the way, Grab more grew more than double-digit quarter-on-quarter. So I think very, very good signs for both of those things. Overall, as a result, the MTUs going into grocery at 2.6x the rate of food MTU growth on a year-on-year basis. So that shows you that it's really expanding the top of our funnel, which is extra important in the age of AI in terms of generating data and deepening the long-term value relationships that we have with our consumers. And then the order frequency that we saw were 1.8x higher than the food-only users, which illustrates that long-term value enhancement that I was speaking about. So over the long term, the North Star is very clear. We've got global peers, who have achieved like 20% to 40% mart penetration as a percentage of their deliveries business overall. So it's definitely the right model that we're pursuing. And with regards to the 3-year guidance that you asked about, we expect that GrabMart will maintain its current growth momentum and outpace delivers growth throughout and therefore the higher basket sizes, the engagement and the lifetime value we can achieve reinforce our conviction to achieve a long-term sustainable economics alongside it as part of a comprehensive super app LTV relationship customers powered by AI. So that's how we think about it rather than a stand-alone vertical by vertical. That's our -- the power of our approach and that power becomes enhanced in the AI world where our optimization across all those verticals to get to the right LTV customers is particularly powerful. Douglas Eu: Thanks, Alex. So the next question, we'll move to Financial Services. This comes from Ranjan of JPMorgan. So a 2-part question. So the first question is regarding the deposits. Deposits have remained flat quarter-on-quarter. The question is, what are the challenges that Grab is facing in growing it's deposit base. The second part of the question is on the loan book and securitization. So would Grab consider securitizing its loan book to free capital to grow the business forward as well. So perhaps the first question will be for Alex and deposits and Peter, a question on securitization. Alexander Charles Hungate: Okay. Well, first of all, we actually don't have any issue at all in raising deposits. We've been really gratified at the trust that consumers have in the Grab brand, the Grab ecosystem, our capabilities to protect their money. And if you look at the pricing of our deposits, we are never the most aggressive in the market. We're able to actually gather sufficient deposits to create the right shape of balance sheet. So there's no point having excess deposits, particularly in this yield curve environment. So what you're seeing is that's carefully managing the level of deposits to make sure that we optimize for P&L purposes. If we needed to raise more deposits, we're very confident that we can do that. Peter Oey: On the topic of securitization, it's a potential tool for us to be able to recapital recycle on a long-term basis, particularly as the loan book grows. Just to remind everyone, we have 2 parts of our lending book we have, the bank's piece also, which are backed by the customer deposits and then you've got also our Grab Financial Services nonbank side, which is on balance sheet equity-wise. If you look at our current priorities, really scaling the lending through our digital banks, we have deposits of roughly $1.6 billion. There's still a lot of headroom in terms of the loan-to-deposit ratio that we could deploy towards those loans. And we are still on target to get to the $2 billion loan book by the end of the year. So our priority now is to use -- make sure that our digital banks capital structure is efficient, and those deposits are an important component of that. But long term, there could be options for us to recycle. That's not an immediate priority right now. Douglas Eu: Thank you. So now we'll move on to the final question for today. This comes from Piyush of HSBC. So regarding to Foodpanda Taiwan recently announced acquisition, can you share the progress and what are the key milestones to watch and likely timings of those milestones? So final question for Alex. Alexander Charles Hungate: Well, maybe a very brief final answer then, Piyush, Thanks. So we're in the middle of the approval process to regulators. So no real updates today, but we'll make sure we provide updates as soon as we get any further feedback. Thank you. . Douglas Eu: Okay. So thanks, everyone, for the questions. So that concludes today's earnings call. Let me hand over the time to Peter to deliver the closing remarks. Peter Oey: Thanks, everybody. Look, great, there's a lot going on, typically in Southeast Asia and in Grab. Hope you got a flavor in terms of how our performance are. Q1 is off to a fantastic start for us across all the financial fundamentals of our business. A lot of questions around fuel prices, obviously, which we hope we've addressed that. We are leaning in. We want to make sure our driver community are also benefiting and also I will be helping them along the way. And people are continuing to make sure that EV acceleration also happens within Southeast Asia. It's a great catalyst for that for us to lean in on EV adoption. A lot of questions around Indonesia, also around the 8% commission. Just to reiterate, our demand or 2-wheels business for Indonesia is less than 6% of our GMV. We continue to reiterate our full year guidance for the rest of the year. What makes us confident is the traction that we're seeing across the portfolios of our businesses today. So all the hard work. Thank you very much for all the Grabbers. Thank you for all the support you gave us in the first quarter to all our driver partners, to all our merchants for all the things that we want to serve and help you also thrive. Thank you very much for the first quarter and also to our shareholders for our support. As usual, the IR team, Ken, Doug and I will be on the road over the next few weeks. We'll be in the U.S., We will be across Asia, Singapore, Hong Kong and also in Australia. Don't feel -- please reach out to us if you want to meet with us or have a chat, have a coffee. We're more than happy to sit down with you. See you all next quarter.
Operator: Greetings, and welcome to the Advanced Energy First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Edwin Mok, Senior Vice President of Strategic Marketing and Investor Relations. Please go ahead. Yeuk-Fai Mok: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy First Quarter 2026 Earnings Conference Call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. You can find today's press release and presentation on our website at ir.advancedenergy.com. Before we begin, let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, May 4, 2026, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Detailed reconciliation between our GAAP and non-GAAP results can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley. Stephen Kelley: Thanks, Edwin. Good afternoon, everyone and thanks for joining the call. First quarter revenue came in above the midpoint of guidance, driven by record data center revenue. Total revenue increased 26% year-on-year and gross margin exceeded 40%. In the second quarter, we expect to deliver record revenue, largely due to strength in semiconductor. Looking into the second half of 2026, we see increased demand in all of our markets. We are particularly well positioned to benefit from AI-related capacity investments in data centers and wafer fabs. We are also seeing steady improvement in the industrial medical market as evidenced by a 14% sequential increase in bookings, and a growing backlog. We delivered over 40% gross margin in the first quarter. The culmination of a multiyear effort to improve our manufacturing and efficiency and product differentiation. Our investments in leadership technology and world-class manufacturing are paying off. Looking forward, we believe that we can further increase gross margin as high-value products ramped to volume and manufacturing efficiency continues to improve. Given our progress over the last few years, we are confident that we can achieve the longer-term goal of greater than 43% gross margin. Given the strong demand environment, we are executing our capacity expansion plans in Malaysia, the Philippines and Mexico. Moving forward, we will focus on building out capacity at our new 500,000 square foot facility in Thailand. Qualification builds for semiconductor and data center products are kicking off this quarter, with initial production slated for late '26 or early '27. Exiting the year, we expect to have over $2.5 billion in revenue generating capacity. The addition of Thailand will bring total capacity to over $3.5 billion once it is fully built out. Now let me provide some color on each of our markets. Semiconductor revenue increased quarter-over-quarter and was flattish year-on-year. In the first quarter, customer forecast strengthened considerably which we believe will drive record performance in 2026 and continued growth in 2027. We are delighted by the widespread customer acceptance of our eVoS, eVerest and NavX plasma power technologies. These technologies enable significant improvements in throughput and yield at the leading edge and are expected to drive market share gains into the next decade. In addition, we are seeing wider adoption of these technologies across multiple generations of processes, and device types. We are also benefiting from an uptick in demand for our system power products, largely due to recent wins in test and wafer fab equipment applications. In data center computing, we delivered record revenue in the first quarter. Overall demand in the data center market remains very strong. Based on customer forecast, we expect second half revenue to be stronger than first half. We continue to make solid progress developing next-generation technology, including 800-volt solutions. We are working closely with multiple customers who view AE as a technology leader in this space. The attributes, which have fueled our success in the data center market, power density, efficiency, reliability and development speed will be equally critical to our success in next-generation platforms. In the first quarter, leveraging our technology expertise and product portfolio, we secured multiple new wins with second wave data center customers. Factory qualifications should be completed this year ahead of production ramps in 2027. Industrial & Medical revenue was up year-on-year but down sequentially. Although demand is improving, factory priorities in the first quarter limited our output. We expect to increase our factory output in the short term, which should enable I&M revenue to track bookings moving forward. In Medical, we secured multiple wins in therapeutic, diagnostic and life science applications. In Industrial, we won key designs in test and measurement, factory automation and battery backup applications. We secured many of these wins by adding custom features to best-in-class technology platforms. enabling us to meet customers' unique requirements. We have won a number of opportunities with new customers, many of whom discovered AE products on our website. Some of these wins have been quite large reinforcing our view that the new website is acting as a force multiplier in the I&M space. Telecom & Networking revenue grew to its highest level since 2023, driven by the production ramp of several AI-related wins in the networking space. Now I'd like to provide an update to our 2026 view. Based on strengthening demand and new product momentum, we are now expecting year-on-year revenue growth in the low to mid-20% range. This outlook represents the second consecutive year of greater than 20% growth for Advanced Energy. In semiconductor, we expect demand to start accelerating in the second quarter, supporting a stronger outlook for 2026. With some of our new products moving into high-volume production later this year, we believe that we are well positioned to drive further growth in 2027 and beyond. In data center, based on strong customer adoption of our high-power AI solutions, we are raising our full year revenue growth expectation to the mid-30% range. In the Industrial & Medical market, we expect sequential revenue growth over the next few quarters, supported by improved market conditions and their production ramps of several key design wins. Now for some closing thoughts. First, demand across all of our markets is strong, and we are raising our growth target for the year. While supply and cost challenges have begun to surface, we are well prepared to navigate a dynamic environment. Second, we continue to see strong pull for our new products across all target markets. Our design win pipeline is growing and is expected to drive higher revenue and profits in the coming years. Third, we're proud to have achieved 40% gross margin in the first quarter, but we are not done. We have line of sight to 43% and based on the success of our new products and efficiency gains. Finally, we have a solid pipeline of potential acquisitions and we'll continue to actively pursue opportunities, which make strategic and financial sense. Paul will now provide more detailed financial information. Paul Oldham: Thank you, Steve, and good afternoon, everyone. Overall, we executed well in the first quarter. Revenue of $511 million increased 26% year-over-year and was ahead of our guidance driven by strong data center computing revenue. Importantly, we achieved our initial milestone of gross margins of over 40% despite ongoing tariff expenses and less favorable market mix than we originally modeled. It is the highest level since the Artesyn acquisition in 2019, highlighting the structural improvements we've made in operational efficiency and our product portfolio. With solid operating leverage, we delivered record operating income of $98 million. As a result, first quarter earnings per share were $2.09, exceeding our guidance and up 70% year-over-year. Now let's review our first quarter financial results in more detail. First quarter semiconductor revenue of $219 million grew 4% sequentially, finishing just below our mid-cycle peak last year. Looking forward, our outlook is increasing based on stronger customer demand. Data center computing revenue was another record at $194 million, up 9% sequentially and 102% year-over-year. While demand remains high, we continue to experience frequent customer changes in demand mix due to various downstream constraints. While we expect this demand volatility to limit revenue in Q2, we anticipate the ramp of several programs to support a stronger second half. Industrial & Medical market revenue was $72 million, down 8% from last quarter, but up 12% from last year. We prioritized factory production to meet demand in other markets, impacting revenue for the quarter. On the other hand, demand is strengthening as bookings grew 14% sequentially, reaching the highest level since 2023. Distributor sell-through increased again and inventory levels further normalized. Telecom & Networking revenue increased 17% sequentially and 16% year-over-year to $25 million, ahead of expectations due to strength in AI-related networking programs. First quarter gross margin was 40.1%, up 40 basis points from last quarter and 220 basis points from last year. Gross margin was above our previous guidance, driven by better product mix and lower other cost of sales. Looking ahead, we expect to further expand gross margins on ramp-up of higher-margin new products, improved manufacturing efficiency and higher volume. Operating expenses of $107 million were down slightly from last quarter and at the low end of our target range. OpEx increased 9% year-over-year, well below half of our revenue growth rate of 26%. As a result, first quarter operating income reached $98 million and operating margin was 19.1%, up 560 basis points from last year. Depreciation was $10.5 million, and our adjusted EBITDA was $108 million, up 66% year-over-year and also a record. Other income was roughly breakeven versus $1 million in Q4 and mainly due to higher realized FX losses. For Q1, our non-GAAP tax rate was 14.5%, below our target, mainly due to timing of discrete tax items. First quarter earnings were $2.09 per share compared to $1.94 in the previous quarter and $1.23 a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the first quarter was $700 million with net cash of $131 million. During the quarter, we increased inventory by $48 million, mostly in critical piece parts to support growth and improve supply resiliency. As a result, inventory days increased 10 days to 135 with terms of about 2.7x. Correspondingly, DPO increased from 68 days in Q4 to 80 in Q1. DSO increased 6 days to 66 days in Q1 on higher revenue. As a result of the increased trade net working capital to support growth and the seasonal factors such as timing of incentive and tax payments, cash flow from continuing operations was an outflow of $6 million. During the first quarter, we spent $37 million in CapEx as we continue to invest in capacity and capability across our factory network. We paid $3.8 million in dividends, and we repurchased $300,000 of common stock at an average price of $209.36 per share. Turning now to our guidance. We are forecasting our second quarter revenue to be approximately $540 million, plus or minus $20 million. We expect the majority of the sequential growth to come from the semiconductor and industrial and medical markets while data center will moderate sequentially based on timing of customer deliveries. We expect Q2 gross margin to improve 20 to 50 basis points sequentially, driven by higher volumes and more favorable mix. We expect Q2 operating expenses to increase to $112 million to $114 million due primarily to investments in new products and annual merit increases. We expect other income to be approximately $1 million and the tax rate to remain within the 16% to 17% range. As a result, we expect Q2 non-GAAP earnings per share to be $2.18, plus or minus $0.25 on 40.6 million shares outstanding. For the full year 2026, we are raising our revenue growth target from the high teens to the low to mid-20s. The increased growth outlook contemplates solid customer demand as well as some tightening in supply and increasing input costs. In semiconductor, we expect revenue to accelerate in the second half with 2H revenues likely up over 30% from the prior year. In data center, despite a moderating Q2, we expect sequential growth in the second half and are raising our full year revenue growth outlook from over 30% to the mid-30s. In Industrial & Medical, we expect revenue growth throughout the year on higher demand and increased factory output. With continued improvement in gross margin and operating leverage in our model, we expect earnings to grow meaningfully faster than revenue for the year. Finally, we expect our 2026 CapEx will be in the $170 million to $180 million range up slightly from our previous outlook based on initial investments in the Thailand factory to support earlier customer qualifications. Despite higher capital spending, we are targeting 2026 free cash flow to be at or above '25 levels. Before opening it up for questions, I want to highlight a few points. Demand is strengthening across our markets. Our diversification strategy is paying dividends as we are benefiting from accelerating growth in semiconductor, increasing investments in data center and AI infrastructure and a recovering Industrial & Medical market. In addition to positive market trends, we expect our design win pipeline to contribute incremental revenue in '26 and to support more meaningful growth in 2027 and beyond. We are excited to have achieved gross margin of over 40% this quarter and expect to further improve our margins for the full year. Longer term, with higher value new products, ongoing improvements in factory efficiency, and higher volumes, we remain confident in our ability to achieve our long-term goal of over 43%. Finally, our balance sheet remains strong, enabling us to invest in capability and capacity to capture growth ahead while providing ample liquidity to pursue strategic acquisitions that create shareholder value. With that, we'll now take your questions. Operator? Operator: We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steve Barger with KeyBanc Capital Markets. Jacob Moore: This is Jacob Moore on for Steve, actually. First, I was hoping you could provide us some more detail on the uptake of the new semiconductor products. I mean, for leading edge, of course, but also for the opportunity at nodes larger than 2 nanometers that I think you were alluding to. How has qualification and uptake progressed since your last update, how do you expect it to progress through the rest of the year? And what milestones are you watching out for to determine different levels of success in that rollout? Stephen Kelley: Jacob, this is Steve. Yes, we're seeing quite a bit of uptake on our leading-edge technologies, namely eVerest, eVoS and NavX. And so what these technologies provide to fab operators or improved yield and improved throughput at the leading edge. So right now, that's where the battles are being fought at the leading edge, and we're winning every battle that we're engaged in. So we're in a very good spot. And so once these customers see the improvements we can bring at the leading edge, they want to see those same improvements at some of the other nodes they operate at. And we've also seen migration from one device type to other device types. So we think this is a good thing for the company ultimately because it will allow us to basically ramp our new product revenue faster than we originally expected. We expect to see most of the new product revenue become meaningful, starting late this year, but really into '27 and '28 as some of these node transitions occur. Jacob Moore: I appreciate that. That's helpful. And then second question from us. I actually wanted to focus on Industrial & Medical, which looks like it could represent either another leg of growth or help extend the growth profile beyond the next, call it, 12 to 18 months. So I guess, first, can you just speak to the split that you're seeing between market growth and share gains? And then maybe you could touch on the status of potential M&A, rehash what you're targeting and how that landscape has changed since you first began the hunt to expand there? Stephen Kelley: Sure. Yes. So I think the good news regarding Industrial & Medical is the market has recovered. So we just went through a painful 2-year inventory correction period after the COVID supply chain issues. So based on what we see today, as far as our increased bookings, increased backlog, we think we're in very good shape from a market standpoint. And we're seeing both the industrial and the medical markets pick up. And within those markets, test and measurement, aerospace and defense, factory automation, robotics and anything related to AI are leading the way. We think that the market share gain that we expect over the next 1.5 years is coming from new products. We have a number of significant design wins in our target segments. They're going to help us pull ahead of the competition essentially. So I think we're in very good shape in I&M. As far as M&A goes, and I've said many times that our primary focus is to increase our breadth in Industrial & Medical. And so we think this is a pretty fragmented market where we can in addition to our organic efforts, grow inorganically. So this will be an objective for us. And we think some of the valuation mismatch we've had in past years, those mismatches are starting to close and that will allow us to make an acquisition sometime in the not-too-distant future. Operator: Our next question is from Mehdi Hosseini with SIG. Mehdi Hosseini: Yes, it was on mute. Steve, just a clarification. You talked about 2 capacity expansion and talked about incremental revenue. Can you just tell me what your revenue would be once you're done with these capacity expansion projects? Stephen Kelley: Yes. So in my prepared remarks, I referred to the investments we're currently making in the Philippines, Malaysia and Mexico. And then we expect to be at a run rate or a capacity revenue run rate of over $2.5 billion. So this is our potential essentially after the investments in the current factory network are done. Second remark I made was on Thailand. So we are going to bring up Thailand earlier than we expected based on the strength we're seeing in data center in semiconductor. And so we think once Thailand is built out, that adds more than $1 billion of revenue-generating capacity. So in total, I think we'll be in a position to ship in excess of $3.5 billion with our current factory network plus Thailand. Mehdi Hosseini: Got you. And this capacity expansion projects, when would it materialize? Would that be in the next 1 or 2 quarters? Or would you need more time for the expansion? Stephen Kelley: Yes. So for the current factory network, it's -- the expansion effort is underway, and we'll have that in place in the second half of this year. So that's right around the corner. For Thailand, we'll start the investments late this year. So we're pulling in some of the spending we had expected to make in '27 into second half of '26 so that we can start up production lines for data center as well as production lines for semiconductor. And we're going to start that effort with large customers in with the higher volume products. Mehdi Hosseini: And the 43% margin target, is that inclusive of this capacity expansion projects? Stephen Kelley: It is. Yes. We comprehend the Thailand expansion in that number. really, that number is going to be driven by increasing new product mix. So as we introduce new products, they typically carry better margins than the older products. And secondly, we think we get better from a manufacturing efficiency standpoint. Mehdi Hosseini: Sure. May I squeeze 1 more follow-up. And that actually as a follow-up to this capacity expansion projects. And just strategically, why not focus on executing on these expansion projects, executing on expanding TAM, especially on the data center, why dilute your effort by having M&A on the side or in parallel? Stephen Kelley: Yes, I think it's possible to do both. I think we spent the last 3 years basically streamlining our manufacturing capacity. If you remember, we broke ground on Thailand in 2023. So this has been in the works for a while. I think at the same time, it's very difficult to reach our growth targets in I&M without acquisition. So this is why we think in I&M in particular, it makes sense to push forward organically and inorganically. Operator: Our next question is from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: Steve, first question is on the data centers. I understand there's like quarterly volatility in data center revenue. But if I take your first quarter and analyze it, it's almost like low 30% growth. You're guiding to mid 30% plus. I'm just wondering, is the data center growth this year inhibitor due to the fact that components are constrained? Or is there something else going on in terms of the build-outs or market share or something else? Stephen Kelley: Yes, I think that's a great question. And as we look forward into 2026, the forecast -- the unconstrained forecasts are quite strong, but our customers are dealing with downstream constraints. And so that's really tempering expectations for 2026. However, I think we think that some of these constraints will be addressed and so that would allow us to increase our forecast. So I'd say in data center, there's definitely a bias to the upside in our '26 forecast. But again, some of these constraints need to be knocked down and then we'll be able to take advantage of a better short-term SAM. I think you may have noticed that our inventory is going up. And much of that increase is us preparing to take advantage of these upsides that appear as our customers knock down these short-term constraints. So we are ready to respond if these constraints are addressed. And actually, there is some of that in the first quarter. We were able to outperform in data center in the first quarter largely because some of the constraints were addressed by our customers. Sreekrishnan Sankarnarayanan: Got you. And then a similar question on the semiconductor side. When I look at your full year revenue guide, let's say, mid-20% revenue growth, data center mid-30%. It looks like semis is probably under growing what your dep and etch customers are talking about for WFE in the high 20%. So I'm just curious like what's going on in the semiconductor side. Are you just being conservative? Or do you think that semi growth could be actually high 20s for you, too? Stephen Kelley: Yes. I think if you look over time, we had a good year last year, it was our second largest revenue year in our history. And so we came into 2026 pretty hot. And as you look forward in 2026, Actually, if you compare the second half of '26 to the second half of '25, our revenue in semiconductor will be up more than 30%. And so we're going to be going very hot into 2027. And so we're we are very happy with our backlog in semiconductor. And that's one of the reasons we're going to be opening in Thailand faster than we expected. Operator: Our next question is from Jim Ricchiuti with Needham & Company. James Ricchiuti: I just wanted to go back to the data center computing growth that the moderation you're anticipating in Q2. Was there any pull-in activity into Q1? And as you talk about growth accelerating again, is that something we should see as early as Q3? Or do you -- the constraints to your customers that they're facing, does that mean the growth pickup is more in Q4? Stephen Kelley: Yes, Jim, I wouldn't characterize the Q1 outperformance as a pull-in. I think it was us taking advantage of an opportunity that was created when our customers were able to address their supply constraints downstream. And so I think that's an indicator of what's going to happen in future quarters in '26. Very difficult to predict, but we know the demand mix is quite dynamic. We're trying to stay in a position where we can respond quickly to changes in demand from our customers. So I think that, again, there's upside potential in data center this year and we're positioning to take advantage of that. James Ricchiuti: Okay. When you talk about the factory priorities, limiting the I&M I'll put in Q1. Wondering if you could size that. And so maybe elaborate, were these resources shifted to other verticals. Can you talk about that? Stephen Kelley: Yes. Yes. So we build the I&M product in the same factories as we build the data center product. And so we had a surge in demand from data center in Q1, particularly in the last month of the quarter. And so our factories pivoted to data center. And unfortunately, we underperformed in Industrial & Medical. So I'm giving my personal attention to make sure we catch up to that demand over the next 2 quarters. So I think we'll solve this problem. The good news is we know what to build. Our backlog is robust now. So we're not taking a guess. We know exactly what the customers need and we're going to build it. James Ricchiuti: Okay. Do you expect to catch up in Q2 there? Stephen Kelley: Yes, it'd be Q2 and into Q3, and I think we'll be caught up. James Ricchiuti: And maybe one final question just for me is, are there semi device types in particular that you're gaining traction with the new products? Stephen Kelley: So you're talking about semiconductor processes and so forth, Jim? James Ricchiuti: Yes. Stephen Kelley: I think we've basically focused on the leading-edge processes, both in memory and in logic. And so we've been working with our customers are very closely for the past 3 years. And also, our customer's customers are also involved in the equation. So a lot of iteration going on. And what it's leading to is the realization that these technologies provide real benefits at the leading edge. And so that's why we're excited about the potential to grow share based on these new technologies, and we can grow share in both memory and in logic. James Ricchiuti: Are you willing to share any kind of revenue expectation for this year from the new products collectively? Paul Oldham: Yes. We haven't really guided to that, Jim. We said we made our goals last year. We expected to increase that significantly this year. But based on the timing of when these nodes start to ramp, we said that it'd be more significant growth in 2027. Operator: Our next question is from Scott Graham with Seaport Research Partners. Scott Graham: I have a couple of follow-ups on data centers and maybe I'll just ask it all at the same time. So your sales in the first quarter were above your thinking. And it looks like that's going to sort of stabilize kind of go a little bit the other way in the second quarter. And I understand it's a customer thing. But I guess my question is, why wouldn't customers -- I mean, data center demand is so dynamic right now, as you guys know. And it seems like these same customers faced some challenges yet we're able to kind of, for a lack of a better term, fix them in the first quarter. Why won't that happen in the second quarter? Stephen Kelley: Yes, it's possible, that happens. But I think we do tend to guide conservatively. We see what's in front of us. We take the forecast into account and we typically will not include the upside in our forecast. But again, we're trying to stay as flexible as we can so we can respond quickly to our customers' change in forecast. So I think if there is an upside, we can take advantage of it. Scott Graham: And I also know that your guidance for the quarter and the year in data centers was not including new customers. So I'm wondering if you have a flat period in 2Q, does that enable some revenues harvested from new customers to backfill? Stephen Kelley: I don't think so. So the position we're in right now with the second wave customers is that we've completed a number of qualifications in the first quarter, and we're working on additional ones this quarter. And those second wave customers are now qualifying our factories to produce those products. That's typically a 6- to 9-month process. So right now, we expect the second wave customers to begin contributing meaningfully on the revenue line in '27. But there is some potential to pull some of that revenue into the fourth quarter of '26. Scott Graham: And then I guess my last question is on the gross margin. So I think we -- in our conference call last quarter, you talked about, hey, we think we're going to hit a 40% gross margin this year, implying one of the quarters. So now it looks like you're going to not only hit it in the first quarter, but now you can hit it again in the second quarter off of your guidance. And I'm just wondering is now a 41% gross margin, a point higher doable for 1 of the next -- 1 of the 2 quarters in the second half? Paul Oldham: Yes. This is Paul. Yes, I think you're right about that. Clearly, we are a little bit ahead in Q1. We think we can build on that going forward because we are seeing traction on some of our new product mix. We're making progress in some of the factory optimization and other things. And in general, as we have higher volumes, we should get some benefit. So when we look forward, we see that we should be able to improve gross margins modestly each quarter, which could definitely mean that we could get to 41% by the end of the year. Operator: Our next question is from Elizabeth Sun with Citi. Yiling Sun: I guess my first question is on the 800-volt transition. Steve, you mentioned in your prepared remarks, you are working with multiple customers working on some solutions. So I was just wondering if you could double click into what kind of solutions you are working on and what kind of customers you're working with and the ramp -- the timing of the ramp in 800 volt, I think your competitor is talking about second half ramping actually. And also, what will be the puts and takes for AE's demand when the transition happens? Stephen Kelley: Yes. Thanks, Elizabeth. So right now, we're sampling our solutions to key customers and we have a number of different options. So we have developed some 800-volt to 50-volt modules that provide 4,000 watt power, 6,000 watt output power and 8,000 watt output power. So we have different options for our customers. What differentiates us is very high efficiency, around 98% efficiency, high-power density and high reliability. So these are very important to customers. And we've been told that we're leading from a technology standpoint. So we've got a number of customers that are very interested in technology. We're sampling it. We expect the initial production revenue, most of that will start next year. I think you'll see some small amount of revenue this year, but really, it starts in earnest in '27 and becomes more meaningful in '28. We think it's also good news for us because we think it increases our dollar content per rack. And generally speaking, these types of changes in technology are good for AE because we have a lot of the knowledge already in-house. So we're, I think, very well positioned as some of these data centers transition to 800 volts. Yiling Sun: Got it. And the follow-up on the second wave of customers in data center. First question is just a clarification. If the demand pulls in into the later half of this year, would that be incremental to the 35-ish percentage data center growth? And also like how should we think of the size of the ramp or like -- and the size of the volume potential. And also, if it pulls in, do you have enough capacity to support the ramp, if that pulls in early? Paul Oldham: Yes. Elizabeth, this is Paul. Yes, so we don't have any forecast for our second wave customers in our guidance for 2026. So any of that we're able to pull in would be upside to the 35% growth. And I think getting started on winning some of the designs and getting started on the actual manufacturing line qualification on that I think is pretty exciting for us because we're seeing, in general, that pull in. We haven't quantified what that is. These aren't going to be customers that are the same size as our kind of primary customers, but they could be meaningful, and there are several of them. So on balance, we see this as a pretty significant driver or supportive to growth in 2027 from data center as we essentially expand our penetration across a broader set of customers. Operator: Our next question is from Quinn Fredrickson with Baird. Quinn Fredrickson: Yes, thank you for the question. Just as we think about the data center outlook that you've outlined for 2Q and the back half, how should we think about supply constraints playing out from here? Or are you anticipating those sequentially ease at all or stay the same in order to hit the guide that you've discussed? Stephen Kelley: Yes. Quinn, the supply constraints I discussed so far have been downstream supply constraints. So they're really constraints our customers are dealing with. That's been the limiting factor, I think, in our forecast. So far, I think we're doing a pretty good job of managing our supply chain. That's not to say we won't run into issues. But so far, nothing has really stopped us from shipping product. So yes. I'm hopeful that our customers can knock down some of the supply chain issues later this year and we can increase our forecast. Quinn Fredrickson: That's helpful. And then Second, just on the new products. Curious if there's been any move forward in the timing of your dielectric etch wins converting to revenue at all? I know one of your larger customers is recently discussing a pull forward of NAND conversion spending? Is there a potential that could move up the timing of new equipment orders and your wins in dielectric etch at all? Stephen Kelley: Yes. So on dielectric etch, we haven't been too specific about wins, but I'm very confident that we'll be able to communicate wins later this year. I think that what we're doing probably has little connection to the NAND upgrade exercise, it has a lot to do with next-generation nodes in DRAM and logic. Operator: Our next question is from David Duley with Steelhead Securities. David Duley: I guess, first off, as far as the improvement in gross margins in the March quarter, that was done with the semi revenue being down, so I'm kind of curious if you could just elaborate on why the gross margin was better in Q1 given the semi mix was down. And I guess a second question I have is regarding your new growth rate for semi in the second half of accelerating, I think, by 30%. Do you think that's more driven by your products actually starting to ramp up or is it more driven by just 2-nanometer spending is broadening out definitely beyond TSMC as we've seen in the news lately with both Samsung and Intel kind of joining the party? Paul Oldham: Yes. Good question, David. I'll take the first one. Yes, margins were up in Q1. And I think the thing that we saw that was pretty encouraging was that at the product level, the mix was better. We're seeing a little better traction on our new products kind of across the portfolio, which carry better margins. And so even though as a proportion, data center was higher and semi was a little bit lower. At the product level, we saw improvement. I think that's encouraging because, as you know, we're counting on that being a driver of gross margins as we move towards our 43%. And frankly, we think that can carry on through the year, and we should get some benefit given the -- what we see accelerated growth in semiconductor right now. We also saw a little better, what I'll call other cost of sales, just a variety of things were a little bit better, including some cost of quality, made a little bit of progress on some of our ramp costs and efficiency. And we had a very modest pickup from tariffs. So on balance, we had a few things kind of go the right way, and that offset kind of more broadly our factory ramp costs and slightly higher material premiums. On balance, we feel good about the progress we're seeing. We think that can carry forward, which is why we've essentially modeled up slightly our gross margin outlook for the year. Stephen Kelley: Maybe I'll make a few comments on the revenue increase. I think as you look at our forecast for second half and the growth that we're forecasting is primarily due to growth in our flagship product revenue. When I say flagship, I mean the older products that have been designed in for a while. We're also being helped by wins in the system power space with semiconductor testers as well as wafer fab equipment. The new products become significant starting in Q4 this year, but they become a bigger factor in 2027. David Duley: Maybe you could comment a little bit on what your customers are saying about growth in 2027. And if the 2-nanometer kind of ramp is spilling over into 2027? I would think that your semi business would perhaps go faster in '27 than it grows in '26? Stephen Kelley: Yes. Yes, our customers in semiconductor are very enthusiastic about 2027. And I think one of the key factors is -- at the leading edge, there's a lot of new clean room space coming online in '27. And so they'll have a place to put all this new equipment. So again, if you combine that with new product revenue becoming more significant in '27 due to the node transitions, I think it's going to be a very good year for Advanced Energy in the semiconductor space. David Duley: Okay. Final thing for me, as you mentioned it twice in your prepared remarks and the Q&A here as the systems business for, I think, you said test semiconductor testers and other wafer fab equipment. Can you just kind of help me understand how that's different than the boxes you provided for your big OEM customers at this point? Stephen Kelley: Yes. Yes. So let me just explain that. We divided broadly into 2 categories. Plasma power is basically RF or pulse DC power we provide that's injected into a plasma chamber, and that's been our traditional business. Now when we talk about system power, we're talking about the power that the machine uses to operate. So this is -- think of it as between the wall and the machine, that's system power. And so that could also be relatively sophisticated because these machines are very complex. And we've made a push into this area over the last few years and they're starting to pay off for us. David Duley: How big a TAM do you think this is? Yeuk-Fai Mok: Dave, what we have said is that in aggregate, also our plasma power is over $1 billion market opportunity for us. That's what we disclosed in 2025 analyst event, and that's what we have said. Operator: Our next question is from Brian Chin with Stifel. Brian Chin: Maybe 2 questions from us. First, on the data center, definitely hear that the quarterly revenue progression in D.C. is more owed to timing and variability. But just thinking on a full year on your perspective, Increasing power content per rack wasn't a major tailwind last year. It should still be a tailwind, but would you say it might be less pronounced this year relative to last year? Stephen Kelley: I don't think so because we continue to develop solutions for increased power. It's just a continuous exercise for us. And so I would say this is one of our advantages because the basic challenge is to continue to increase the power density at the same time, don't sacrifice reliability or efficiency. So basically, you have the same amount of space, but you have to produce a lot more power. And to do that reliably and efficiently is a challenge from a design standpoint. And so that's one reason we've been able to be successful with our hyperscale customers, and we've been successful now with the second wave customers because we have that combination of technical features as well as good speed of development. And then finally, we've got the factory network to produce these boxes in high volume. Brian Chin: Okay. And then second question on semi cap. And answer this however you're comfortable addressing it, but in terms of that second half guide that you're providing. Do you think you're shipping in sync with customers or perhaps a little ahead given that multiyear visibility and outlook? And then kind of second part of that is from a supply chain perspective, given the duration of visibility certainly well into next year, has that given you a lot of confidence to go out and maybe be really proactive sourcing some of those components, maybe call it chips, other materials that can be issues as you get through like a multi-quarter growth period? Stephen Kelley: Okay, Brian. So on the customer demand being in sync with their requirements or are they putting in inventory essentially. Our view is that we're more or less in sync. I think what we've seen is across the customer set that we've received increased orders. And that's because of leading the edge primarily. So we know the end market demand is there. I think the constraint right now in semiconductor is really clean room space. And so if some of these clean rooms come on faster than expected, then that will increase demand and if they come on slower than expected, then we may create a little bit of inventory, but I don't think it will be much. Now as far as supply chain goes, it's a hot topic, right, especially after COVID when we had to deal with so many issues. So we have been leaning into the inventory so that we are able to have some reserve in case things get tighter, lead times go out. So I think we spent quite a bit of time on the supply chain topic. And one of the things we did during the COVID supply chain shortages was to develop more second sources, which we've done. So that gives us more flexibility and where we couldn't develop a second source, then we put in extra inventory. So I think we're going into this with our eyes wide open, and we're pretty aggressive on the inventory front. Operator: Our next question is from Jim Ricchiuti with Needham and Company. James Ricchiuti: Paul, you may have given this, I apologize if you did. But any color on OpEx as we look out over the balance of the year beyond Q2? Anything we should be thinking about? Paul Oldham: Yes, Jim, obviously, OpEx was down a little bit in the first quarter. So we've done a good job controlling spending there. But in the second quarter, we do have our annual salary or merit increases. So we've guided second quarter of $5 million to $7 million. We continue to expect that, that run rate will increase a little bit every quarter, kind of what we said before, as we invest in these new programs, primarily in engineering as well as some variable costs with higher volumes. So we would expect operating expenses to be in the $460 million range for the year and kind of graduating up kind of sequentially to basically at that level. Operator: Thank you. This concludes our question-and-answer session and our conference for today. We thank you again for your participation. 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