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Christie Masoner: Welcome to GoDaddy's First Quarter 2026 Earnings Call. Thank you for joining us. I'm Christie Masoner, VP of Investor Relations. And with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. [Operator Instructions] On today's call, we will be referencing both GAAP and non-GAAP financial measures and other operating and business metrics. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished with the SEC. Growth rates represent year-over-year comparisons unless otherwise noted. The matters we'll be discussing today include forward-looking statements, such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, April 30, 2026. And except to the extent required by law, we undertake no obligation to update these statements because of new information or future events. With that, I'm happy to introduce Aman. Amanpal Bhutani: Good afternoon, and thank you for joining us. At GoDaddy, our purpose is to make opportunity more inclusive for all. We serve over 20 million customers globally, helping them establish their identity, build their presence and grow their business. We do this through an integrated platform that brings these capabilities together in a seamless AI-powered experience helping customers move from their idea to execution quickly and at a compelling value. Starting with Q1 results. We delivered revenue growth of 6%. This performance, combined with continued operational execution and structural leverage drove meaningful expansion in normalized EBITDA margin to 33%, up over 200 basis points. This underscores the durability of our model and continued progress towards our financial North Star generating strong free cash flow growth of 15%, while remaining committed to delivering long-term shareholder returns. As AI-driven innovation accelerates, customer expectations for speed, simplicity and measurable outcomes are rising. Customers are increasingly using LLMs across their workflows and getting familiar with chat-based interfaces. We are leaning into this shift, positioning GoDaddy as the platform that helps entrepreneurs turn intent into action through AI-powered experiences and outcomes. Our AI transformation builds on our core strengths of a trusted global brand, leadership in domains, scaled infrastructure, proprietary data, strong engineering talent and a world-class care organization. Together, these form a differentiated platform that allows us to deliver a seamless one-stop shop solution for entrepreneurs. We are moving quickly and intentionally with focus on delivering measurable outcomes for entrepreneurs. The positive impact of our AI transformation is clear in 3 areas: first, the adoption and monetization of our AI-native products; second, the expansion of Agent Name Service as a new identity layer for the Agentic Open Internet; and third, the use of AI to drive operational efficiency. First, we are making strong progress on our AI-native products. Airo AI Builder introduced last quarter on Airo.ai is an AI-native experience that enables customers to move from idea to execution in minutes, automatically creating websites, applications and core business capabilities across identity, presence and commerce. I work directly with customers using Airo AI Builder on a weekly basis and the customer feedback is shaping our roadmap and accelerating development. Our customers are looking for simple, integrated solutions for their core jobs to be done, and we are delivering that through Airo AI Builder. It is delivering strong early adoption and monetization is already scaling with customers. This new Airo AI Builder product offering has rapidly scaled to $10 million plus in annualized bookings run rate within weeks of its beta launch. While still early, the pace of adoption and quality of customer interaction is strong. Customers are building, publishing and purchasing incremental credits as they deepen their use of the product. Momentum continues to build week after week as we expand Airo AI Builder's functionality and distribution. We are expanding distribution of Airo AI Builder on godaddy.com and have begun selling it through Care. In Care, we drive higher adoption of premium plans compared to our online channels and receive direct customer feedback, both positive and constructive to improve the product. As a next step, we are ramping targeted paid marketing in May, funded through efficiencies elsewhere in the business. We are thoughtfully monitoring the mix between new and existing products as we scale, with a focus on optimizing overall customer value and maintaining margin discipline. The second major product initiative we introduced last quarter is the upgrade of Websites + Marketing, bringing AI-native capabilities into the product, while maintaining strong cost discipline for both customers and GoDaddy. This upgrade combines AI-driven capabilities with a powerful editor enabling customers to create and manage their presence more efficiently. The domains funnel remains our largest distribution lever for new customers. And in this quarter, we tested the upgraded product within that path. Early results exceeded our expectations and validated the direction of the product. We are excited to get the upgraded functionality in front of all our customers and are using experimentation to inform improvements on the experience. Our teams have embraced an AI-native approach across our customer products, and we are making meaningful progress delivering customer value. We are expanding these capabilities at a rapid pace, while maintaining disciplined investment as we scale distribution and marketing, we are confident in our ability to compete effectively. The second component of our AI transformation is Agent Name Service or ANS. We are working with large players and seeing continued interest in this technology. ANS extends the role of domains as a digital identity provider in an Agentic Open Web. We signed a couple of partnerships over the last quarter with real-world use cases and are working hard on aligning key players on the open standard and the use of Domain Name Service or DNS for agent identity and discovery. Championing the open standard and partnerships are key to getting to critical mass of support of the open standard and we are encouraged by early results. Non-GoDaddy agents in GoDaddy's ANS implementation now number in the thousands. DNS is the foundation of identity on today's Internet, and domains are uniquely positioned to play a role in agent identity and trust extending domain relevance into the future. Third, we are transforming GoDaddy into an AI-native company by deploying AI across our operations to improve speed, efficiency and customer outcomes. We are driving the most immediate impact in software development where AI is enabling the rapid creation of customer-facing applications with fewer dedicated teams. We are also testing the replacement of smaller third-party SaaS tools with internally built solutions on Airo AI Builder, particularly across corporate functions with the goal of reducing both cost and operational complexity. In Care, we are advancing to the next phase of AI-powered automation. In Q1, we achieved key proof points across both support and sales. On the support side, we launched Airo Care, a new AI-native support technology across voice and chat that handles a wide range of customer queries. We validated it against our existing offering, delivering strong improvements in resolution rates. Our first test improved resolution rate by approximately 50%. Subsequent tests demonstrated that Airo Care can equalize the resolution rates between English and non-English markets improving performance in non-English markets by over 150% and strengthening Care as a global competitive advantage. Airo Care is now rolled out to more than 50 markets and 20 languages. We will continue to expand use cases each month, while maintaining a strong focus on customer satisfaction, resolution rate, sales and cost. On the sales side, our AI-native commerce Airo sales agent makes voice calls and handles the entire commerce sales experience without human intervention. We have optimized the agent over the last few months and last quarter, it delivered conversion rates comparable to human-assisted sales for smaller leads. These are exciting milestones, and we plan to scale these capabilities throughout the year. Alongside these AI transformation initiatives, we continue to execute on pricing and bundling, seamless experience and commerce. These programs continue to drive improvements in conversion, attach and renewal rates. I want to briefly revisit the promotional offer we discussed last quarter. We refined the program to better balance customer acquisition and bookings, and these efforts are delivering results. the promotions drove strong gross customer adds and resulted in new domain registrations accelerating by 6% for independent and partner customer populations. Our strategy remains consistent. We are focused on attracting high-intent customers who attach, convert and grow over time, optimizing for long-term value. Towards this end, we also took the opportunity to remove a lower-value product offering this quarter. This partially offset the customer growth from the promotional offer, but did not materially impact bookings. In closing, we are operating in a dynamic environment with rapid change and leaning into our strengths. We serve more than 20 million customers globally, our domains business and our unwavering focus on microbusiness customers remains foundational, supported by our scaled integrated platform that connects identity, presence and commerce. This combination of global reach, proprietary data, seamless technology and our Care organization creates deep customer insight and consistent execution. Our model is built around attracting high-intent customers and helping entrepreneurs start and grow their ventures over time. This drives durable growth and expanding margin and strong compounding free cash flow. We continue to execute with discipline. And as we look ahead, our path forward is clear. We have a large market opportunity, a strong competitive position and the financial flexibility to continue investing to deliver enduring shareholder value. With that, here's Mark. Mark McCaffrey: Thanks, Aman, and good afternoon, everyone. In the first quarter, our model continued to demonstrate its durability, driving operating leverage, expanding margin and generating attractive, compounding free cash flow. Supported by a strong balance sheet, we had the flexibility to invest in innovation, while still maintaining a disciplined capital allocation framework. We delivered revenue at the high end of our guidance, while expanding our normalized EBITDA margin by over 200 basis points. At the same time, we generated strong free cash flow of $474 million, bringing our trailing 12-month free cash flow to $1.68 billion. We deployed capital through share repurchases, reducing fully diluted shares outstanding to 133 million. Our focus remains on consistent execution and delivering solid financial results as we continue to advance our AI transformation. For the quarter, total revenue grew 6% on both a reported and constant currency basis to $1.3 billion, and ARR grew 6% to $4.3 billion. International revenue grew 7% to $416 million. For our high-margin A&C segment, we drove 12% growth in revenue to $0.5 billion on continued solid attach of our subscription-based solutions. A&C ARR grew 10%, and this segment now represents approximately 40% of our total business. Segment EBITDA margin improved 110 basis points to 45% on product mix. Our Core Platform segment delivered revenue growth of 3% to $769 million, on 5% growth in primary domains with a stronger mix towards higher-priced non-.com TLDs. This was partially offset by softness in non-core GoDaddy hosting. The .CO registry contract expiration and tougher compares in aftermarket. Segment EBITDA margin expanded 150 basis points to 33% on product mix. Total bookings grew 3% to $1.5 billion, reflecting a few points of impact from our promotional offer we shared last quarter, the .CO registry contract expiration and lapping of prior year aftermarket strength. A&C bookings grew 9% and Core Platform bookings declined 1%. As we outlined in February, this quarter reflects the peak impact of both these dynamics, and excluding any FX impact, we expect bookings and revenue growth rates to be at or above parity for the remainder of the year. Our focus on attracting and growing high-intent customers combined with conversion improvements is driving durable growth and higher customer quality. We are driving increased conversion into primary domains and higher attach through Airo. At the same time, we continue to deliberately manage our product portfolio, exiting lower-value offerings and reallocating resources towards higher value opportunities. And our newer Airo cohorts are demonstrating that higher value with second product attach accelerating 30% faster relative to non-Airo cohorts. These cohorts are contributing to the increase in the number of customers spending more than $500 annually, which represents approximately 10% of our customer base. Higher attach and retention rates above 85% drove ARPU growth of 9% to $246. As we look ahead, Airo AI Builder is beginning to contribute directly to bookings. As Aman noted, this offering is already generating millions of dollars in annualized run rate organically and without dedicated marketing support. In parallel, ANS extends our leadership in a digital identity, positioning us to participate in the next evolution of the Internet infrastructure. As the architecture of the Internet evolves, our current strengths remain as relevant as ever, and our AI transformation positions us to consistently deliver profitable growth and capture value going forward. Turning to margins and free cash flow. Normalized EBITDA grew 13% to $414 million, delivering 210 basis points of margin expansion to 33% and exceeding our guide for the quarter. Operational execution, supported by AI-driven efficiencies and favorable product mix continues to drive margin expansion. Our expanded margin reflects the efficiency of our model and gives us the flexibility to invest in our AI transformation, while maintaining a strong balance sheet and a durable free cash flow profile. Free cash flow grew 15% to $474 million, with a normalized EBITDA to free cash flow conversion of greater than 1:1. We exited the quarter with $1.3 billion in cash and total liquidity of $2.3 billion. Net debt was $2.6 billion representing net leverage of 1.4x on a trailing 12-month basis and within our target range. On shareholder returns, we repurchased 3 million shares during the quarter, totaling $280 million. Since 2022, our share repurchase programs have resulted in a gross reduction in fully diluted shares outstanding of over 31%. And we ended the quarter with 133 million shares outstanding. Turning to outlook. We are reaffirming our full year 2026 guidance provided in February and expect total revenue to be within a range of $5.195 billion to $5.275 billion, representing growth of 6% at the midpoint of the range. As a reminder, our full year revenue guide incorporates just over 200 basis points of cumulative impact from the expiration of the .CO registry contract, our consistent exclusion of high-value aftermarket transactions and the impacts of our product evolution and our promotional offer. For Q2, we are targeting total revenue of $1.285 billion to $1.305 billion, representing 6% growth at the midpoint of the range. For both the second quarter and the full year, we expect A&C revenue growth in the low double digits and Core Platform growth in the low single digits. For Q2, we are projecting a normalized EBITDA margin of approximately 33%, and we are reaffirming our target of over 33% for the full year. This reflects our ability to drive continued operational leverage and AI-driven productivity gains, while increasing our investments in our AI-native products, marketing and compute costs. For the full year, we expect normalized EBITDA to maintain a greater than 1:1 conversion to free cash flow, and we reaffirm our full year free cash flow target of approximately $1.8 billion. We continue to be on track to exceed our free cash flow North Star CAGR of 20%. On capital allocation. We operate within a disciplined, return-based framework and have deployed greater than 95% of our free cash flow over the last 4 years towards share repurchases. Our continued commitment to returning capital is a clear expression of confidence and the strength of our cash flow and the long-term value we are creating. We remain focused on allocating capital to its highest value uses with a priority on driving long-term shareholder returns. In closing, the fundamentals of our business remain strong with consistent engagement and durable drivers of ARPU, supporting our long-term trajectory. As we move forward, we remain focused on disciplined execution and continued progress toward our North Star. We look forward to talking about these and other updates at our investor event later this year. I'll now turn it over to Christie to open the line up for questions. Thank you. Christie Masoner: [Operator Instructions] Our first question comes from the line of Vik Kesavabhotla from Baird. Vikram Kesavabhotla: Can you hear me okay? Christie Masoner: We can. Amanpal Bhutani: Yes. Vikram Kesavabhotla: Great. So my first one is on the customer base. And I'm curious, as you navigate all these changes in the product portfolio and in your go-to-market strategy, how do you ensure that you're attracting the right type of customer to the platform? And I think you mentioned in the prepared remarks that customer quality is increasing. Be great if you could elaborate some more on how you measure customer quality and what you're observing in the behavior of some of these recent cohorts that's informing your confidence in the strategy right now? And then separate from that, my second question is on, you talked about all these ways that you're using AI internally across the company's operations and some of the proof points that you're seeing already. As you continue to scale those initiatives, how should we think about the opportunity for those efficiencies to flow through to EBITDA and free cash flow in the near term versus being reinvested back into the business to support your product and marketing needs. And I realize it's probably a tough question to answer in a ton of detail quantitatively, but it'd be great to hear your philosophy around how you're balancing those dynamics during what seems like a pretty significant period of change for the business. Amanpal Bhutani: Vik, let me take the first one, and Mark can take the second. On the cohorts that we're attracting, look, our strategy is to attract high-intent customers. And the way we define high intent is looking at the traffic coming in by channel and then looking at the activation and attach of other products. And what we know from years and years of data across our 20 million customers, is that if we see that activation and attach of other products, we are going to see good renewal at the end of the 1-year term. So that's what really gives us confidence. That's what we're looking for. And when we make these trade-offs and the decision in the business, to attract new customers with end-of-life certain products or retire certain cohorts. What we're looking for is the quality of those, the intent of those customers and measuring it through the activation of the other products that they have. And then on the operations, Mark? Mark McCaffrey: Yes. On the operations, we are balancing several different factors here. One, we have the ability to expand our margins, we have for the past few years. We're continuing to see operational efficiencies by the adoption of AI internally. And then we're playing the -- or paying our attention to the disciplined approach we've had in the past around investing in innovation, but using data points that show our path to return on those data points before we invest. So we're taking a very disciplined framework approach. And I would say we're balancing it with what we think the long-term return is going to be when we make those investments. For example, we have talked about we were going to increase marketing around AI Builder through the remainder of the year is because we are seeing the data points that are showing that return. And while those returns will be immaterial for the current year, we do know the potential to drive future growth for us is there and that makes that return appropriate. Amanpal Bhutani: Yes. I think maybe just to add, the areas that we're looking at, whether it's software development or Care or our use of applications or marketing, all of these areas are accelerated with AI and we see great opportunity to deliver a better outcome for our customers at a lower cost this year and into the future. Christie Masoner: Our next question comes from the line of Ken Wong from Oppenheimer. Hoi-Fung Wong: Can you guys hear me? Christie Masoner: Yes. Amanpal Bhutani: Yes. Hoi-Fung Wong: Fantastic. First question, on the $10 million plus of Airo Builder ARR a lot of your kind of stand-alone AI Builder platform, we've seen them scale up extremely fast. And I realize it's super early, but what's the right way to think about kind of what this business or this product could potentially grow to? Amanpal Bhutani: Yes. Ken, when we talk about the $10 million run rate, what we're really talking about is annualized bookings. And you're right, it's very early data. This includes both subscriptions and credits or tokens. And what we see is customers come in by a subscription, engage with the product, love the product, and they keep coming back and improving the website or whatever actions, whatever job they're trying to complete with the AI Builder. I am directly engaged with a few customers. I actually work with customers every week now, sessions with live customers. And what's magical about the Airo AI Builder and our customers is that our customers have lots of ideas, but it's very hard for them to go through menus and templates and figure it out. So if they can just in natural language explain or just say, I would like this, Airo AI Builder goes and does it for them and it's sort of a magical amazing experience for that. So what happens is the same subscriber ends up using it more and more publishing, republishing and buying more credits. And that's the run rate we're looking at. In terms of what it could be, it's super early. We're very excited about this early adoption, as I shared in the prepared remarks. We just started selling it in Care. We're going to add paid marketing to it starting this month. So there's a lot of things for us to do. And of course, we have the giant funnels, we have with domains or website paths, which we haven't touched yet either. So there is a lot to do to get to what we think the long-term run rate can be, but we're excited about where we started. And we're also keeping an eye on how customers use this product. And does it change how they use our other products because that mix is going to be important for us, too. Hoi-Fung Wong: I appreciate the color there. And then just a follow-up also on AI opportunities. You mentioned ANS opening new infrastructure opportunities. And now with Airo AI Builder pushed in your back end beyond websites, is there the potential to potentially utilize GoDaddy's hosting capacity for additional workload, AI workloads, given the market scarcity there. I mean we're sort of having a moment in hosting all of a sudden. And it seems like that's an area you guys could potentially capitalize on? Amanpal Bhutani: Yes. Actually, Airo AI Builder does use GoDaddy hosting. It's one of our competitive differentiators. We can provide a hosting at scale, that's secure, that's at a great cost. And so there's definitely sort of excitement from our side to be able to take something like Airo AI Builder and power it with our hosting solution. We also have some plans to do more with hosting directly in our -- for our customers, but we're not looking to go out and do something that's for enterprises or something like that. We are very focused on our customer base, the solutions that our customers need. We feel that we serve a unique customer, a lot of the new entrants in the AI space are serving enterprises, and we have this unique relationship with this type of customer. So we're really leaning into that relationship and the needs of that customer. Christie Masoner: Our next question comes from the line of Trevor Young from Barclays. Trevor Young: Great. First one for Mark. On your comments on bookings growth at or above parity with rev growth or the balance of the year, is there a particular shape of the bookings curve to be mindful of? 1Q implicitly the low point, but will 2Q step all the way back up to where rev growth is and 2H bookings a bit above that? Or is 2Q going to be maybe a tad ahead because it has an easier compare? And then second one on capital allocation, buybacks here in 1Q well below free cash flow generation and the 95% payout stat that you've given. Meanwhile, cash at kind of the highest level since middle of '21, if I'm not mistaken. Just any updated thoughts on capital allocation and buyback appetite with the stock at current levels? And in lieu of buybacks, any updated thoughts on M&A? Mark McCaffrey: Right. Thanks, Trevor. On the first, on the bookings, growth rates should be on par or above. We're looking in that both the quarter and on an annual basis for the remainder of the 9 months. So it should give you a sense of the momentum we're starting to gain as we go out throughout the year. On capital allocation, what I always say is don't look at any particular quarter look at our history, our history is a good indicator of how we approach this. We look at the quarter going forward, we make determinations and buybacks are still a strong way or a strong lever for us to return value to our shareholders. So again, look at our track record, our history of what we've done. And it will give you a good idea of how we continue to approach it and the way we look at it hasn't changed. Christie Masoner: Our next question comes from the line of Mark Zgutowicz from Benchmark. Mark Zgutowicz: You just closed $10 million in annualized bookings, the run rate for Airo AI Builder within -- it sounds like weeks of beta. Could you break down the unit economics there? Like what's the average transaction size? How much of that earn rate is coming from credit top-ups versus the initial plan purchase. And what's the margin profile relative to legacy W+M? Amanpal Bhutani: Yes, Mark, overall, we remain committed to what we have shared in the past that we are building a product that serves our customer, but comes at a gross margin and a price point that works for our customer and for GoDaddy. So from the very first day, we have continued to look at this product as a gross margin positive product, as a product that can continue to grow and deliver the economics for the company. In terms of what is subscription and what is credit. We're so early like this has to bake, this has to grow, there are going to be, I think, so many ups and downs as we enter marketing, as we open the channels, as we drive more traffic even from godaddy.com to this product. So it's too early to talk about sort of the more detailed pieces of how -- of what's happening here. In terms of the comparison to Websites + Marketing, as we had shared in the prepared remarks and last quarter as well, we haven't upgraded our Websites + Marketing going out this year. That product focuses more on exactly that need for that customer and the economics that would be needed to make it successful. We did test that product, and it all works together. It's all together with Airo. It's not like going to be something different when it comes out. When we tested that experience, and it did quite well in the test. But as I said last quarter, Websites + Marketing, the current version is an established champion, it is going to take a little while to test their challenger, Websites + Marketing the new version, and we expect to do that this year as we roll through the year, we're going to test sort of the new product, new version a couple of times, and we expect it to win sometime this year. Mark Zgutowicz: Got it. And maybe a follow-up then on the upgrade -- the W+M upgrade, being tested now in the domains funnel, and it sounds like you're having some really solid early results there. Just curious when we should expect pricing to be reimplemented at Websites + Marketing, specifically, and whether you can quantify how much of the historical ARPU accretion that you've witnessed from pricing and bundling has been attributable to W+M versus other products? Amanpal Bhutani: Yes, I can take the first part, and Mark, if you can take the second. On the pricing initiative around Websites + Marketing, because this is a very significant upgrade and there's a lot of moving parts. We're moving from a solution that is template first and uses AI to a solution that balances editor capabilities and AI capabilities. And frankly, it just comes with a different set of COGS and profile that we're working with. Any sort of pricing change would have to wait until we get to parity on the customer experience and metrics like published rates. So that we can be certain that the product is -- the new version is delivering what customers expect. And once we've done that, then we can look at any sort of pricing initiative. Mark McCaffrey: Yes. And on the contribution to ARPU, we don't get into distinguishing between products because it gets very difficult with the concept of bundling because multiple products are involved. But I will highlight that the pricing that we talked about is specific to this area and not to the other bundling aspects that we've had. So there's still contribution in our ARPU related to our pricing and bundling is just not to this one specifically. Christie Masoner: Our next question comes from the line of Arjun Bhatia from William Blair. Willow Miller: I'm Willow on for Arjun Bhatia. Can you unpack A&C bookings growth? Was it largely impacted from the recent promotional activity in the quarter? Or is there anything else to call out? I'm just trying to appreciate the decel and the timeline to inflected growth from initiatives like Airo and then pricing bundling historically. Mark McCaffrey: Yes. Thanks, Willow. Nothing to call out different than what we talked about last quarter. There are various aspects across our bookings that were impacted. The 2 specific to A&C are the go-to-market offer. There is an allocation element when we bundle products together in the initial order that will impact A&C. And then what we're just talking about on the pricing aspect, the pricing and bundling related to the upgrade to the Websites + Marketing product. Those are the 2 impacts on A&C bookings. And obviously, as we go throughout the year, we expect some of that to pass. Now on revenue, it's more evened out because of the subscription nature of what we do. But on bookings, that was mostly peaked in Q1. Christie Masoner: Our next question comes from the line of John Byun on for Brent Thill at Jefferies. Sang-Jin Byun: Can you hear me? Christie Masoner: Yes, we can hear you. Sang-Jin Byun: Just 2 questions. Again, on the Airo AI Builder. In terms of monetization, is it just the subs and the AI credit with the product itself? Or are you starting to generate anything from upsell or cross-sell by the GoDaddy products? And then a follow-up would be international revenue growth seemed to slow a little bit to 7% from, I think, last year was mostly within 10% to 14% range. I don't know if there's anything you can call out there. Amanpal Bhutani: Yes. Thanks, John. On the run rate for Airo AI Builder, that's just the subscription and credits for Airo AI Builder. We have not baked in sort of attach or other products into that yet. All of that is to come. You will see over the next few weeks this product sort of become a bigger, bigger part of the GoDaddy ecosystem. And as it does that, then we can have additional bookings that relate to those customers. But for now, we're just trying to give you the cleanest picture of this new product so that folks can understand the overall AI story at GoDaddy. Mark McCaffrey: And on the international revenue, the only thing to call out is aftermarket last year was with some of the larger transactions hit the aftermarket and contributed to the growth rate overall. We didn't see those type of transactions in Q1, the larger ones. So it's just a tougher compare from aftermarket for Q1. Christie Masoner: Our next question comes from the line of Ella Smith on for Alexei Gogolev at JPMorgan. Eleanor Smith: So first, I was hoping to ask about the ANS. What do you think is GoDaddy's competitive advantage or right to win as it comes to the ANS, especially versus larger competitors? Amanpal Bhutani: So the biggest thing about ANS is that we have put to the world that agents that we believe will be roaming the Internet and were larger in terms of traffic than human traffic soon should be registered on the Internet. And large destinations, whether those are websites, systems, platforms, other organizational enterprises should recognize agents that are registered because if they're not registered it is going to be very difficult to trust agents. It's going to be very difficult to transact with agent, it's going to be very difficult. You just know which agents are real and which are fake and we think we can avoid all of that by registering agents using Agent Name Service, which again is backed by an open standard. The reason GoDaddy has huge right to win here is because within the Agent Name Service open standard, we say that while people should register agents with ANS, they should be -- those agents should be discovered using DNS, which is Domain Name Service. Domain Name Service is a directory on the Internet that everybody uses. It's one directory. It replicates everywhere. Agent registries are popping up in every company. So how do you bring that together? You bring that together by connecting those registries to the one directory. And if we connect it to the one directory and in that directory, put the agents under the domain name then the domain name becomes core to the identity and trust relationship that agents have now and into the future, which as the world's largest domain registrar, it's obviously good for us if domains plays that role. And what we're excited about and we're seeing good reaction from the large players. And of course, they want to take their time to understand things. But what we're really offering to the world here as an open standard is a beautifully elegant, scalable solution, and it already exists. Nobody has to recreate it. So hopefully, that helps a little bit to understand why Agent Name Service is so important and why it links back to GoDaddy as the world's largest domain registrar. Eleanor Smith: That's very clear, Aman. And if I may, a follow-up for the Domain business. We're hoping to ask some question -- or a question about your strategic objectives for the Domain business. Is your intention to maintain or gain share? Or would you be willing to let some lower LTV domain customers go at the expense of your market share? Amanpal Bhutani: So I think we've said that we will let low LTV customers go because our focus is high-intent customers. And if I step back and look at the Domains business, we continue to be the world's largest domain registrar by far. Over the last 30 years, all kinds of competition has come into the world, right? We have seen very low-priced domain registrars. We've seen people use domain as loss leaders. We've seen people who give them for free. We've seen blockchain and the list goes on. And now the new normal includes LLM, some app builders and lots of things. So we are coming to that world with a lot of experience in competing in this business and a lot of tools to compete in this business. But what we have consistently found is that the value is in the high intent customer. The value is in the customer that has good intent, buys a domain and then does other things with it. And by doing those other things, that's what drives LTV for GoDaddy, that's what drives our business. Christie Masoner: Our next question comes from the line of Naved Khan from B. Riley. Naved Khan: I'm curious, Aman, how much of the traffic are you exposing to the website -- to the Airo Website Builder? Is this still something you are testing and iterating or you already kind of rolled it out broadly? So that's one question. The other is just on the App Builder. You said, I think the plan is to put some marketing dollars behind it, maybe you're already doing it. How significant is that? And what will it take for you to go from going from sort of testing the waters or kind of putting more or increasing the allocation that you have on marketing trend behind this? Amanpal Bhutani: Yes. On the first, Naved, from godaddy.com, we are still sending only a small amount of traffic into this new experience. Our largest funnels on godaddy.com are our domains path and they are our create path, which is the website path. And both those paths currently go into the existing champion version of Websites + Marketing. Over this year, we expect that to evolve, but as that evolves, more and more traffic will go to the new products, and I'm super excited about them, and it will definitely grow the usage of the products, the units on the products and the dollars associated with that. So when we look at godaddy.com, it is still a small amount of traffic, and we have ways to go in terms of being able to drive more traffic to it. In terms of the marketing plan for Airo Builder, we expect to spend a significant number of dollars this year, and we are starting in Q2 this year towards that. Now we're going to fund that -- those dollars with other efficiencies in the business. So Mark, he doesn't have to change any of his plans. But when we look at that, it's the same disciplined approach that we have done in the past. When we look at what we are spending, what the return is and then we increase it and we improve it. And this is core to our evidence-based decision-making culture. You'll start to see us spend more in marketing. And what we're looking for is traffic coming to the product, the engagement with the product, they sign up with the product, people buying it, people publishing sites and then people coming back and engaging with their own buying credits. So that's the whole chain we're looking at. And over the next 2 or 3 quarters, our expectation is to ramp that up. Mark McCaffrey: Yes. And just to reiterate, there's no change in the framework of how we approach this. We'll use the data. And when we see the returns, we'll continue to invest into the marketing. Naved Khan: And maybe just to kind of follow up on that on the AI App Builder, how is pricing evolving? Is it something that's set in stone? Or is that something that you're testing and might change? Give us your thoughts then on that. Amanpal Bhutani: We did test a couple of different plans, Naved, and we're happy with the plan we have settled with. That's one of the gates in terms of ramping up marketing spend. So we are happy with the current plans. The current plans include a starter plan that you can get started with for free with a few credits or just free plan and then a starter and a professional and an ultimate plan and it has a subscription and a credit system with it. So we think we have a good setup here and for the foreseeable future, we're going to stick to it. And there are levers that we can pull over time. But for now, we're just going to focus on scaling it as fast as possible. Christie Masoner: Our next question comes from the line of Jack Halpert on for Deepak Mathivanan from Cantor Fitzgerald. Jack, I think you're muted. John Halpert: There we go. You guys hear me now? Christie Masoner: Yes, we can. John Halpert: Just one for me. You guys mentioned removing a lower value product offering this quarter. Can you just give us some more color on what exactly that product was and maybe how much it impacted customer count, revenue and if there are any other lower value products that you're evaluating in the portfolio? Amanpal Bhutani: Yes. Let me take that, and then Mark can jump in. As we talked last quarter, we have taken bold steps in terms of our promotional offers because we are in a dynamic environment, and we need to test faster. We need to move faster. And as part of those promotions, what you saw from us last quarter is we actually saw a significant gain in customer gross adds. In fact, the promotions that we did moved gross adds over 100,000. It brought us over 100,000 new customers. It's a very, very large number for us with a set of promotions. But when we saw those promos and of course, we optimize -- we decided to optimize those promotions to balance bookings and customer growth because we want to stay with a high intent customer. When we look forward, we're really excited about our ability to do that. But when we bring in that many number of customers, we also take the opportunity to make tough decisions on products that we're going to retire. And that's what we did in this last quarter. The promos that we had did very well in attracting customers. We -- what we did is we decided to tune them to balance bookings and customer count, and then we took the opportunity to retire an old product that actually had an impact on customer count, but I think Mark can confirm little to no impact on bookings. Mark McCaffrey: Yes, that's right. And this is the case of a product that we offered in prior years. It wasn't really generating the value that we needed. So we're just not going to support it anymore, and we're going to reallocate those resources, but it didn't have any impact on bookings and did have a slight impact on churn within our customer group. But again, I would look at this, we will continue to evaluate our portfolio because our goal is to optimize for our higher-value offerings and in certain cases, make the choices between that and a lower value offering that may not be getting the return anymore that we need. Christie Masoner: Our next question comes from the line of Kishan Patel on for Josh Beck at Raymond James. Kishan Patel: This is Kishan Patel on for Josh Beck. As chat bots, AI mode and other AI-native discovery surface continue to gain scale. Have you observed any notable changes in top of funnel traffic patterns, customer acquisition behavior or conversion paths. And how are you thinking about GoDaddy's positioning if more customer journeys begin inside AI interfaces rather than traditional search? Amanpal Bhutani: Yes. On the traffic coming to the top of the funnel, I think consistent in the last quarter in terms of what we've talked about before, I think we had shared that we do see some impact to traffic in search because of the move to AI mode, but we were able to offset that impacted traffic by improving conversion on our side. So that same relationship has continued. We haven't seen any further change in that or the trajectory of that versus what we saw in previous quarters. In terms of customer journey starting in AI bots or there's lots of new interfaces and sort of new things that we're looking at. The way I look at it is what we are looking for is wherever customers are starting their journey how can we provide them the value that we have. And when we provide them the value, is there an exchange of value for us. Like are we able to build on it. And the simple example of that is that if people, let's say, if we get to a world where everybody has an agent and that agent goes out and does things, we want to make sure that we have the APIs. We have the offering where those agents can work with GoDaddy as successfully as with anybody else. Because we would slowly developing as the new normal, and that's what we have to compete with. And we've competed over 30 years with lots of companies, with lots of business models, and this is a new one, and we think AI is here to stay. So we're actually excited in organizing our teams to compete in that world. Christie Masoner: Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Kathleen Alexis Keyser: Awesome. This is Katie Keyser for Elizabeth. Just with Airo Care now being rolled out to multiple markets, multiple languages, highlighting kind of improved resolution in those non-English-speaking markets. Does that change your kind of international growth opportunity at all? And I guess, just broadly, how does AI-enabled multilingual Care kind of change or accelerate the approach to entering markets that maybe previously were less attractive because of support or kind of localization costs. Amanpal Bhutani: Yes. As you know, Care is so core to our competitive differentiation and so core for the customer. We know our customer needs that support, whether it's through voice or chat that we provide that capability in many markets in 22 languages all over the world, and whether just our core languages and translate it in even more. So having Airo Care, which natively provides our ability is definitely going to allow us to compete much better in international markets. And we're really, really excited about this first data point where by taking AI or Airo Care and using it within our messaging system, actually, that's the test that I talked about in the prepared remarks. That test being able to perform almost equally globally is great news for us because it's so difficult for us to provide that high level of service that we have that huge NPS that we have in smaller markets, in Asian markets where we may not have a big presence. If we can do that with Airo Care, we can definitely be more aggressive in those markets. So we're looking forward to that. And I think it's an exciting opportunity for the future for us. Christie Masoner: I'll turn the call back over to Aman for closing remarks. Amanpal Bhutani: Thank you, Christie. Thank you all for joining. Super excited to be where we are and a great journey in front of us. A big thank you to all GoDaddy employees for a great quarter, and I'll see you next quarter.
Operator: Hello, everyone. Thank you for joining us, and welcome to Cable One's First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Jordan Morkert, Vice President of Investor Relations. Please go ahead. Jordan Morkert: Good afternoon, and welcome to Cable One's First Quarter 2026 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties, including statements regarding future revenue, customer growth, connects, churn rates and ARPU, the future competitive structure of our markets, the anticipated benefits of our mobile service offering, new product rollouts, future customer retention trends, anticipated cost savings and other benefits to be derived from our billing system migration and our other investments in growth enablement platforms, our plans to expand our multi-gig capabilities in more markets, future cash flow and capital expenditures, potential uses for our cash flow, the upcoming MBI transaction, including the purchase price, MBI's future debt levels, integration timing, anticipated cost and tax efficiencies, combined leverage ratios and closing date, the anticipated timing for closing of the merger of Point Broadband with Clearwave Fiber and expected benefits from that transaction, future tax savings and our future financial performance, capital allocation policy, leverage ratios and financing plans. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call in today's earnings release and in our SEC filings, including our 2025 annual report on Form 10-K and our forthcoming first quarter 2026 quarterly report on Form 10-Q. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles or GAAP. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net. Joining me on today's call is our CEO, Jim Holanda; and CFO, Todd Koetje. With that, I'll turn the call over to Jim. James Holanda: Thanks, Jordan, and good afternoon, everyone. We really appreciate you joining us today. I've now been in the role for a little over 70 days, which has given me the opportunity to spend meaningful time with our teams, get closer to our markets and develop a clear view of where we are performing well and where we need to improve. At a high level, I'd say the work underway across the business is moving in the right direction, but those efforts are not yet showing up consistently in the results. Today, I want to spend my time on 3 things: what we're seeing in the business, what I've learned since stepping into the role and our focus and priorities going forward. Starting with the quarter, we're not yet seeing the full benefit of the changes we are making in the business. Results reflect the broader economic backdrop and continued pressure in our more competitive markets, particularly in customer retention. While we have already begun to make changes in these areas, it remains early and those efforts are not yet meaningfully reflected in our results. At the same time, first quarter connects improved year-over-year, which we view as an early indication that elements of our strategy are beginning to gain traction. In addition, we are roughly 2 months into our MSO-wide mobile launch. And while it is too early to draw conclusions around retention or lifetime value, initial customer response has been encouraging. We continue to believe mobile can become an important component of the broader relationship over time. Even with these challenges, the business is generating substantial free cash flow, reinforcing both the durability of the model and our ability to continue to execute on our debt reduction, strengthen the balance sheet and create long-term shareholder value. In the first quarter, we generated approximately $115 million of free cash flow and $500 million over the past 4 quarters, providing meaningful flexibility to allocate capital in a disciplined manner. Turning to residential services. I want to spend a bit more time on what we're seeing in the business. In the first quarter, we reported 12,600 net residential broadband customer losses on a sequential basis. While this reflects continued pressure in certain areas of the business, there are several underlying dynamics that help frame how we are thinking about the trajectory going forward. Over the course of my career, I've seen firsthand what has and has not worked in operating environments like this, and those lessons are shaping how we are approaching the business today. First, churn was elevated in the quarter, but remained primarily concentrated within our more competitive markets, which allow us to concentrate our retention efforts where they can have the greatest impact. At the same time, new connects improved year-over-year, driven in part by value-conscious customer segments. These customers represent an important part of our segmentation strategy and remain focused on adding them in an accretive way. We also saw year-over-year improvement across certain go-to-market channels, including e-commerce and direct sales, reinforcing our focus on meeting customers where they prefer to engage and expanding on our connect opportunities. From a retention standpoint, we are implementing targeted initiatives to better identify and engage at-risk customers. These include speed upgrades, more gradual stepped promotional roll-offs, AI-driven tools and a new CRM platform expected to go live later this year. We are also deepening multiproduct customer relationships through offerings such as mobile, Whole-Home WiFi, enhanced online security and comprehensive technical support for the connected home, all while continuing to invest in the network to further strengthen the consistent, reliable experience our customers expect. While still early, these are the types of operational actions we believe can improve retention trends over time. Looking at ARPU, results in the quarter reflected downward pressure from go-to-market initiatives and targeted retention offers, partially offset by continued selling to higher speed tiers and the broader multiproduct offerings just mentioned. While we may see some variability from quarter-to-quarter, we continue to expect ARPU trends to remain broadly stable for the year. Taken together, while retention remains the primary challenge, we believe the underlying trends in connects and multiproduct offerings provide a constructive foundation as we work to improve customer outcomes and drive more consistent performance. Turning to business services. Overall performance showed improvements through the back half of the quarter. Under Edwin Butler's leadership since early January of this year, the business services organization has moved quickly from assessment into execution. Targeted investments in sales enablement, go-to-market discipline and a new sales training program drove improved results across our fiber, carrier and enterprise channels. While still early, these trends are encouraging and reinforce our confidence in the actions underway. Todd will address some discrete items in the quarter in more detail. Clearly, competitive intensity persists. However, we believe our network capacity, reliability and local operating presence position us well, and we continue to invest for improved performance. Today, approximately 53% of our markets are multi-gig capable, and we expect to expand that capability to most markets by year-end, reinforcing our ability to meet growing customer demand across the footprint. Against that backdrop, over the past several weeks, it has become clear that our biggest opportunity is improving the consistency of execution across the footprint. Many of the underlying dynamics are consistent with patterns I've seen in prior operating environments. As a leadership team, we've aligned around a focused set of priorities where disciplined execution can drive the most meaningful improvement. These priorities center on strengthening retention and conversion, simplifying our product set and ensuring greater consistency in how we go to market across the footprint. We've already begun to take action in each of these areas with the objectives of improving the customer experience, the price value equation and therefore, the customer trends and the financial performance over time. The work we're doing today will still take some time to show up in our results, and we would not expect it to fully translate into the numbers within a single quarter. Our focus right now is on improving overall execution of the array of operating strategies at our disposal and continuing to strengthen the balance sheet. Stepping back, I remain confident in our long-term opportunity. The durability of our cash flow allows us to continue prioritizing debt reduction while maintaining the flexibility to invest in the business and support long-term shareholder value creation. That confidence is grounded in the strength and the capacity of our network as well as the clear opportunity we see to improve execution within our existing footprint. And with that, I'll turn it over to Todd, who will provide a recap of our financial performance. Todd Koetje: Thanks, Jim. Starting with the top line. Total revenues for the first quarter of 2026 were $353 million versus $380.6 million in the first quarter of 2025, with the year-over-year decrease driven primarily by lower residential video and residential data revenues. Residential video accounted for approximately $10 million of the decrease. Residential data revenues decreased $11.6 million or 5.1% year-over-year due primarily to a 6.1% decline in subscribers. Business data revenues decreased $1 million or 1.8% year-over-year. Operating expenses of $93.9 million for the first quarter of 2026 decreased 6% compared to the first quarter of last year, due primarily to a reduction in programming costs associated with our video business. OpEx was 26.6% and 26.2% of revenues in Q1 of 2026 and Q1 of 2025, respectively. Selling, general and administrative expenses totaled $87.2 million or 24.7% of revenues in the first quarter of 2026 compared to $95.4 million or 25.1% in the first quarter last year. The decrease in SG&A was driven by lower labor costs and a reduction in billing system conversion costs. Adjusted EBITDA for Q1 of 2026 was $183.3 million or 51.9% of revenues compared to $202.7 million or 53.3% of revenues in Q1 of 2025. Capital expenditures were $68.4 million in the first quarter, a decrease of 3.8% year-over-year. During the quarter, we invested $5.1 million of CapEx for new market expansion projects. We continue to track towards 2025 levels for full year CapEx. Adjusted EBITDA less capital expenditures totaled $114.9 million for Q1 of 2026 compared to $131.6 million in Q1 of last year. In March, our $575 million convertible notes matured and were repaid in full with a $575 million revolver draw. Throughout the quarter, we paid down a total of $90.6 million of debt, of which $86.1 million was voluntary. We opportunistically paid down our senior notes by $33.7 million and term loans by $27.4 million at very attractive discounts, along with a $25 million repayment under our revolver at quarter end. Such payments demonstrate our continued commitment to debt reduction. As of March 31, we had $165.6 million of cash and equivalents on hand, and our total debt balance was approximately $3.1 billion, consisting of approximately $1.7 billion of term loans, $550 million of revolver draws, $548 million of unsecured notes, $345 million of convertible notes and $3 million of finance lease liabilities. We also had $700 million of undrawn capacity under our $1.25 billion revolving credit facility at quarter end, providing us additional committed capital. Our net leverage ratio on a last quarter annualized basis was 4x. As Jim mentioned, we are focused on strengthening our balance sheet. While we have the committed capital in place and sufficient excess operating liquidity to affect the MBI acquisition at closing in Q4 2026, as we have stated before, we will remain proactive in our balance sheet management initiatives and continue to evaluate the markets with a focus on optimizing our longer-term capital solutions. Turning to our investment partnerships. We posted updated information about our unconsolidated investments on our Investor Relations website. For the fourth quarter of 2025, these businesses generated approximately $542 million of LQA revenue and $262 million of LQA adjusted EBITDA, representing year-over-year growth of roughly 17% and 36%, respectively. These businesses also grew broadband customers by approximately 22,900 or 7.9% and added over 80,000 new fiber passings during the year. This summary excludes the financial results of MBI as we provide additional detail within our quarterly filings. Additionally, CTI Towers, Ziply and Metronet are no longer reflected in this table following the monetization of those investments, each of which generated attractive returns. We believe these outcomes, including both the operating performance of these businesses and the monetization of certain investments reflect the strength of these assets and the value created over time. And finally, I'll touch on a couple of items related to a recent transaction, along with an update on a pending one. In mid-March, we completed the sale of certain fiber-to-the-tower contract rights for $42 million in cash. We recognized a $26.6 million gain on the sale. Such contracts generated $9 million of business data revenues in 2025 and $2.1 million in Q1, and the sale reduced first quarter business data revenue by approximately $300,000. Results were also modestly impacted by lower revenue from EchoStar as they continue to decommission portions of their 5G network build-out, representing approximately $50,000 in the quarter and roughly $200,000 on an annualized basis, which we believe represents substantially all of our remaining exposure to this activity. Meanwhile, the merger of our Point Broadband and Clearwave Fiber strategic investments remains on track to close during Q2, subject to customary closing conditions. And we continue to work proactively on our pending acquisition of MBI. The Cable One and MBI teams are preparing for an efficient integration of MBI's operations when the transaction closes, which is expected at the beginning of Q4. Before we open it up for questions, I'd reiterate that while the current environment remains competitive, the business continues to generate strong cash flow, and we remain focused on disciplined execution and capital allocation. We are continuing to prioritize debt repayment while investing thoughtfully in the business, and we believe the changes underway position us to deliver improved performance over time. With that, we are ready to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Sebastiano Petti with JPMorgan. Sebastiano Petti: And real quick, I guess just trying to think about the connects being up year-over-year. I think, Jim, you talked about contribution from the value-conscious segment. Maybe help us think about how much of that -- I mean, maybe a little bit of a difficult question to answer, but how much of that is from just improved offer strategy or maybe improvements or expansion of your distribution channels? And then relatedly, as you, I think, talked about defending the base last quarter, help us think about maybe how much ARPU or was there perhaps some dilution in the quarter relative to win back retention efforts that I think, yes, other -- some of your peers are also kind of enacting to try to defend the base? James Holanda: Sebastiano, thank you for the questions. Appreciate it. This is Jim Holanda, everyone. And yes, connects, I think it's kind of twofold, both to your points. The expansion of the direct sales channel and the improvement in the e-commerce channel results, I think, certainly contributed to that, along with, again, our now very targeted segmented offers across how we've chosen to segment the base and being more aggressive and not afraid to be doing price locks in especially those hypercompetitive markets that we find ourselves in, in 15% of the footprint. So I think all of that helped contribute to it. And I think there's still a lot of meaningful room for improvement in regards to executing across all of those channels and all of those strategies. And yes, certainly, on the ARPU side, along with more aggressive go-to-market offers as certain areas get more competitive. Certainly, being more aggressive on the retention side where we feel those competitive pressures has been a focus. Again, I think we're still early on. We saw a little bit of those results then impacting the ARPU numbers in Q1. Operator: Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: As you're looking for -- to save customers and so forth and that kind of activity, what kind of pressure do you expect on ARPU in your back book? And then can you give us some color on how MBI is tracking from subscribers and a financial perspective? And I assume there's -- that might impact the price. Do you expect that to be any materially different from what you've kind of signaled is going to be the cost when you close? James Holanda: Well, I'll let Todd go ahead and answer the MBI question real quick. Todd Koetje: Frank, on MBI, so their first quarter, which we put in the Q, net adds were south of 2,000. So they lost 2,000, but that's a meaningful improvement from the run rate at which they were last year. And there are some timing-related adjustments in the first quarter for MBI. But I think if I understood your question correctly, there are not adjustments in the purchase consideration. That is a locked in and disclosed number at $480 as we talked about last quarter. And so that's currently the plan. We did adjust just to address it, the anticipated debt that we will assume or be looking to refinance in conjunction with it into a new range of $895 million to $925 million. So it's slightly higher than what we had as a range before just due to the impacts of their performance last year and slightly lower free cash flow between now and closing. James Holanda: And then on the ARPU pressure piece, Frank, yes, clearly, bringing in customers at lower promotional rates and seeing continued kind of elevated churn in the back book continues to put pressure on ARPU. Certainly, my read of the analyst community from our last earnings call is such that, that's a good thing. In terms of that, again, we do have targeted retention offers in our more competitive markets at lower rates, but we're also simultaneously focused, as we've talked about on adding a ton of value in terms of those higher ARPU existing customers. And again, whether that's with TechAssist, whether that's been with eero's, whether that's been with security product, we now have mobile in our arsenal as it relates to that as well as continuing to give people more speed at no incremental cost in terms of the network capabilities. So those are all things we continue to be very focused on and get out there, quite frankly, as quickly as possible. Frank Louthan: How much of your back book do you think you're going to need to adjust and kind of lower the pricing when it's all said and done? James Holanda: Well, all said and done is a very wide question. I don't know if you're meaning by the end of this year, the end of a 3- or 5-year cycle. Frank Louthan: Well, multiyear. I mean, ultimately, to get kind of competitive parity, your back book is pretty high. What would you expect that to have to adjust to? James Holanda: I think overall, in the $2 to $5 range over time. And I think is realistic and doable given the value adds that we have at our disposal for our existing customer base. Todd Koetje: And Frank, it's Todd, I'll jump in just real quick, too. Keep in mind, if you think about the history of CABO, it was very one size fits all. It wasn't this deeply discounted promo with a high step-up that would result in a wide variation of front book, back book as you're referring to it. So when you think about -- I think you said the back book is really high, which we don't disclose that. It's not a major delta to what we're looking at from new selling. Operator: Your next question comes from the line of Greg Williams with TD Cowen. Gregory Williams: First one is just on satellite broadband. We're hearing a couple of big announcements in the last few weeks. I'm just curious how you view the satellite competition, particularly in your rural areas. And second question, Todd, you mentioned a little bit about refis and you just paid down the converts. I'm curious about next steps on the balance sheet and when you'd be looking to the debt markets and eventually turn that out. James Holanda: Yes. I'll go ahead and take the satellite and then turn it over to Todd. Obviously, we're an avid user of OpenSignal and have pretty accurate and telling data in regards to the competitive landscape of our footprint across the United States. And while satellite shows up in very low circumstances and quantities, it certainly continues to go up. We keep our eye on it very closely. We're not going to let what happened kind of with FWA happen on the satellite front or even going back to my Dish and DIRECTV days back in the early '90s. I think they are formidable competitors that could flush out over time, yet to be determined. And there is no consistency from at least the 2.5 months that I've been here in terms of their offers and their installation costs and their monthly pricing is widely varied territory to territory, market to market. And we have not seen any consistency yet across our footprint in terms of their go-to-market strategy, which I think they will figure out a technological way to overcome at some point in the future, should they choose to allocate their resources and bandwidth there. So we'll continue to keep an eye on it. But at the same time, as you're fighting off 1, 2 or 3 FWA carriers and fiberized LECs and in 15% of the footprint, fiber overbuilders, we feel we have a good playbook to run in order to defend the base that we have and to figure out how we continue to grow the connect side of our business simultaneously. Todd Koetje: And then, Greg, on the balance sheet side, as Jim alluded to, and I commented also in my prepared remarks, meaningful repayments have continued as we attack the numerator. That was over $400 million in 2025, $90 million here this last quarter. Most of those were voluntary and repurchases at attractive discounts on both our term loans and our unsecured notes. And that's an intentional approach as it relates to how we want to think about the balance of the capital structure. As I've mentioned several times, diversity of duration because we are actively evaluating longer-term capital solutions and optimizing the balance sheet to ensure we have the flexibility to continue to reinvest in the business, but also the flexibility to continue to repay debt at attractive levels going forward. But we're also very focused on the diversity of the structure and ensuring that we have both secured that's more attractively prepayable as well as more foundational capital on the unsecured side. And then as it relates to preparation, I think you even asked about timing. I've kind of been pretty consistent for the last few quarters, but we do have our contingency plan in place, but that's not a primary plan. And so we actively evaluate the markets. We're looking at it through the lens of ensuring we have the right disclosures in place. So we started putting more disclosures on MBI as that acquisition will be affected in early Q4 of this year. And we are aware of, obviously, the refinancing that we need to do over the course of the next 2 to 3 years and very actively planning around how we address that. Operator: Your next question comes from the line of Brandon Nispel with KeyBanc. Brandon Nispel: A couple, if I could. It seems like a pretty consistent theme we're seeing across the space is that there's an inverse correlation between ARPUs and subscriber growth. So I'm curious how you guys are expecting to get better performance on the subscriber side while keeping ARPU flat this year. And then if I remember right, historically, your guys' footprint tends to perform best seasonally in the first quarter from a connect standpoint in the third quarter, and if we're looking at trends getting worse in the first quarter here, how should we be thinking about sort of second quarter from a net add standpoint? James Holanda: I'll start, and I'm new, so I can't speak to historical Q1s. I know my experience in my other locations is nothing historical patterns upheld through the pandemic and going forward in a new competitive environment, generally speaking. So that one is probably harder to gauge. Having said that, I think we were pretty clear on last quarter's earnings call that in the third quarter of '25, we saw the spike associated with some very large work done in the back office and with our systems in terms of a billing system consolidation across the family brands that made up Cable One that really put pressure there. We're not going to have those pressures at all this year. And so I think that becomes an opportunity. And like I say, I think the opportunities in terms of all the go-to-market strategies that we've been talking about on these last 2 calls are really the things that can help start to change what have been otherwise historical trends there. And as we think about kind of ARPU versus sub growth, the interesting thing about Cable One and one of the reasons I came here is 40% of our footprint, we're still the only gig provider. And there's not a lot of cable operators out there that can say that. And while we certainly expect that intensity to grow over time and have modeled that out and are thinking in those terms, we also have clear visibility in terms of as ILECs start to fiberize or third-party overbuilders start to come in with a fiber build. We see that coming well in advance, and we think we've built a pretty good playbook in terms of how to defend against that. And so I don't think as you compare us to others, I think we have just a little bit more flexibility in terms of our timing. And I think we have a little bit more opportunity in terms of, again, getting higher speeds and getting a whole host of value-added services into our customers' kitchens and living room to help us as we go forward across those retention pressures. Brandon Nispel: Got it. Todd, if I could just follow up with one for you. I don't think you provided it or an update here, but with the higher debt that you guys are planning to take on with Mega, the trends there and then the EBITDA trends that you guys are seeing, is there an updated thoughts on your closing leverage target once you do close Mega? Todd Koetje: Yes, Brandon, yes, the range is pretty modest relative to the overall debt stack. So that doesn't move that much. But obviously, with the trends from 2025 for both CABO and MBI on a customer basis and how those translate into the effective denominator of that leverage ratio and EBITDA that will be higher than what we previously stated, which was in and around 4x, but still very manageable in our opinion, as it relates to where we close and how quickly we can get that down relative to the ongoing initiatives to focus on debt repayment as well as, of course, stabilize and change the trajectory of the EBITDA base. Operator: Your next question comes from the line of Sam McHugh with BNP Paribas. Samuel McHugh: Two questions, if I can. One on the gross add connect side. Do you have a sense of how many of your gross adds are coming from DSL? And then as DSL kind of just disappears in the next few years, kind of what's the plan to make up that gap? And then secondly, on the tower divestment, Todd, you've given us the revenue number. I wonder if you could give us an EBITDA number of how much that might just take out EBITDA for this year. James Holanda: Yes. Thank you for those questions. On the -- in terms of the connect side, how many are coming from DSL, again, with only 40% of the footprint left that -- where the ILECs are unupgraded, you'll over-index slightly in terms of that connect performance. So if it's 40% of the potential and 50% of the connects, I think that's a pretty consistent rule in terms of the OpenSignal data that helps us kind of support that structure and thought. And having said that, it's interesting, you brought that up because I think that is an opportunity for us to exploit that even further. And given these bigger announced acquisitions by the ILECs and the integration work that they have to do and so forth, I think that gives us a window to hopefully potentially take advantage of that in a bigger way going forward. Todd Koetje: And Sam, I'll just say, of course, as we've talked about in the past, where the LEC has not upgraded to fiber and especially where that LEC has a fixed wireless access product for home broadband. They've been very aggressive on attempting to keep the customers they already have as their initiatives are not only focused on the customer side, but decommissioning that high-cost copper. So that has moved that DSL population down at a more accelerated pace than what it was naturally because of those fixed wireless saves. As it relates to the fiber-to-the-tower contract sale that we affected in the first quarter, it was $42 million of gross proceeds, pretty comparable because of the tax efficiencies that we had from a net proceeds perspective. We used those proceeds to accelerate our debt reduction. The revenue, we did disclose, as you alluded to, that's a high single-digit multiple and margins that are slightly higher than what you see from an enterprise side of the equation. So that should get you to a pretty directionally accurate cash flow number as that rolls through on a GAAP basis throughout this year. Operator: Your final question comes from the line of Julie Zhu with MoffettNathanson. Julie Zhu: Team, last quarter, you had mentioned approaching an equilibrium on fixed wireless competition. I was wondering if you could comment on any updated thoughts there. I know that we saw that Verizon's fixed wireless net adds sharply slowed, but T-Mobile stopped reporting yet and given they're your largest overlap, would love any insight into year-to-date activity and view into the future. And then if I can squeeze a follow-up in about the satellite LEO competitors. Jim, I think you had mentioned that it's sort of a hazard strategy on go-to-market for them. How does that affect how you and the team think about competing in more rural areas? And do you have an updated point of view in terms of the structural market share of satellite connectivity and fixed wireless across your footprint? James Holanda: Wow, that's a lot for 2 questions, Julian. I wouldn't expect anything less, by the way. Thank you. On the satellite piece, and they're somewhat intertwined given the fact that roughly 80% of our footprint now has one or more FWA competitor, which is the latest and greatest information we have from OpenSignal. So we're already in a mode where we are competing fiercely in terms of retaining customers that we have and going after the low end where those product sets are more appealing. And so even as they might have the capacity to come to a more consistent go-to-market strategy. At some point, if you're competing against 2 or 3 FWAs and 1 or 2 other wireline competitors doesn't matter whether there's 6 or 7 in a particular market, we're focused on the things that we can control and the value and the customer experience differentators that we can bring to market and the localism that our network and our people bring to communities in the way that we support them day-to-day throughout the year. So we'll continue to try and take advantage of all of those opportunities to the best of our ability and see how that develops and unfolds. I think your narrative is accurate. I think we haven't seen according to our data, a whole lot of incremental expansion out of the Verizon FWA product, but we do continue to see and expect T-Mobile and AT&T deployment within the market. And I would call theirs slow and steady, but not -- they're not turning on huge additional sloughs from the information we've gotten so far. Todd Koetje: And then, Julie, on the structural market share, we did discuss last quarter, it's an estimate. It's a view, a thesis as it relates to what the future looks like. And when you think about wired broadband, we believe that longer term from an equilibrium perspective, wired broadband based on the capacity needs, the speed needs and the utilization that you see constantly increasing across our both residential and business customer base that, that will be in more of that 80% area. And then I would view the 20% is whether it's wireless only, whether it's mobile fixed wireless access or it's satellite that really comprises that other 20% factor when you think about an adoption being nearly ubiquitous for Internet connectivity. Julie Zhu: Got you. I appreciate the fulsome answers. I think maybe just a quick follow-up. Is it fair to characterize the rate of change for T-Mobile and AT&T fixed wireless as slowing when you say slow and steady? Todd Koetje: No. Consistent. Julie Zhu: Okay, got it. Todd Koetje: Thanks, Julie. Operator: That's all we have time for today. I will now turn the call back to Jim for closing remarks. James Holanda: Thank you, Alexandra. Before we wrap up, I just want to thank all of our associates across the country for welcoming me into the Cable One family and for their continued focus on our customers and each other. And over my first roughly 70 days, I've had the opportunity to meet many of our associates, customers and investors, and I look forward to continuing to engage with our key stakeholders in the quarters ahead. And thank you, everyone, on the call today for your time and your continued interest in Cable One. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the Axos Bank Third Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin. Johnny Lai: Thank you, Diego. Good afternoon, everyone, and thank you for your interest in Axos. Joining us today for Axos Financial, Inc.'s Third Quarter 2026 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will provide prepared remarks on the financial and operational results for the quarter ended March 31, 2026, then open up the call to a Q&A. Before I begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 10-Q for this call. All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg. Gregory Garrabrants: Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the third quarter of fiscal 2026 ended March 31, 2026. I thank you for your interest in Axos Financial. We generated another quarter of double-digit year-over-year growth in net interest income, ending loan and deposit balances, earnings per share and book value. We generated almost $700 million in net loan growth linked quarter, resulting in an 11.2% year-over-year increase in net interest income. Excluding the interest income impact of FDIC-purchased loans and 2 fewer days in the March 31, 2026 quarter compared to December 31, 2025 quarter, net interest income increased by $5.7 million on that linked quarter basis. We continue to generate high returns as evidenced by the over 16% return on average common equity and 1.8% return on assets in the 3 months ended March 31, 2026. Other highlights in the quarter include: noninterest income was $86 million for the quarter ended March 31, 2026, up from $53 million in the prior quarter and $33.4 million in the corresponding quarter a year ago. Excluding the benefit of the $22 million legal settlement this quarter, noninterest income was up approximately $10 million linked quarter due to higher mortgage banking income, advisory fee and the addition of rental income from the commercial office building we purchased in January of 2026 that will be used as our future headquarters. Net interest margin was 4.57% for the quarter ended March 31, 2026, compared to 4.94% in the prior quarter. Excluding the impact from the prepayments of FDIC-purchased loans and 2 fewer days in the quarter ended March 31, our net interest margin was down in line with last quarter's guidance of around 10 basis points. We continue to maintain a strong net interest margin with and without the benefit of the accretion from loans purchased from the FDIC, which has now dwindled to around 5 basis points of positive impact. Noninterest expenses were up $1.4 million linked quarter to $186 million. We are seeing some of the benefits from our operational efficiency initiatives and artificial intelligence on our salaries and benefits, data processing and other G&A expenses. The pending completion of the Jenius Bank deposit acquisition also allowed us to moderate growth in advertising and promotional expenses in the March quarter. Net income was approximately $124.7 million in the quarter ended March 31, up 18.5% from $105.2 million in the prior year's third quarter. Diluted EPS was $2.15 for the quarter ended March 31 compared to $1.81 in the third quarter of 2025, representing an 18.7% year-over-year increase. Total originations for investment, excluding single-family warehouse lending, were $5.1 billion for the 3 months ended March 31. Loan growth was strong across a number of lending businesses, including capital calls, real estate lender finance and equipment finance. Jumbo single-family loan balances were up slightly, while single-family warehouse had a seasonal decline of approximately $123 million. Ending loan balances grew by approximately $800 million linked quarter, excluding single-family warehouse. Average loan yields from non-purchased loans for the 3 months ended March 31 were 7.23%, down from 7.63% in the prior quarter. The sequential decline was driven primarily by the full impact from the 2 25 basis point rate cuts in the calendar Q4 2025. Average loan yields for purchased loans were 12.39% compared to 23.32% in the December 31 quarter. Purchased loan yields from the quarter ended December 31 benefited from one FDI-purchased (sic) [ FDIC-purchased ] loan paying approximately -- paying off and resulting in approximately $17 million of purchase discount accretion that was recognized in interest income. The FDIC-purchased loans continue to perform and all the loans in that portfolio remain current. New loan interest rates for the March quarter were 6.9% in both the single-family and C&I portfolios, 6.7% in the multifamily portfolio and 7.8% in our auto portfolio. Ending deposit balances were $22.4 billion, up 11.2% year-over-year. Demand, money market and savings accounts represent 97% of total deposits at March 31, increased by 13% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 52% of total deposits, commercial cash, treasury management and institutional representing 22%, commercial specialty representing 14% Axos Fiduciary Services representing 5%, Axos Securities, 5% and distribution partners representing 1%. Ending noninterest-bearing deposits were approximately $3.4 billion in the quarter ended March 31, an increase of $143 million from the $3.25 billion in the prior quarter. We deliberately reduced higher cost savings and time deposits and temporarily increased Federal Home Loan Bank advances in anticipation of the roughly $2.3 billion of Jenius Bank deposits coming in the June quarter. Client cash sorting deposits ended the quarter around $1.1 billion. In addition to our Axos Securities deposits on our balance sheet, we had approximately $415 million of deposits off balance sheet at partner banks. We remain focused on adding noninterest-bearing deposits from small business, custody clearing, fiduciary services and commercial and cash and treasury management verticals. Our consolidated net interest margin was 4.57% for the quarter ended March 31 compared to 4.94% in the quarter ended December 31. The early payoff of an FDIC purchase loan in that second quarter increased net interest margin by approximately 25 basis points. Excluding the early loan payoffs, the purchased loan yield was 14.2% in the quarter ended December 31 compared to 12.4% in the quarter ended March 31. With the diminishing impact of the FDIC-purchased loans, we expect reported net interest margin to stay roughly flat on an organic basis, excluding the impact of the deposit purchase premium from the acquired deposits, which we estimate to be around 5 basis points. The diversity of our lending channels provide us with flexibility to maintain strong loan and deposit growth while maintaining our net interest margin. Verdant had another strong quarter, contributing approximately $200 million of new loans and operating leases in the March quarter. We continue to identify opportunities to deepen our relationships with existing Verdant vendors and dealers as well as accelerate growth in a few existing verticals that were previously constrained by capital and size limitations when Verdant was under private ownership. The synergy between the Verdant and non-marine floor plan lending teams is starting to gain traction. We believe that our ability to provide a comprehensive retail and wholesale lending solution to top-tier original equipment manufacturers is a strategic advantage that we can leverage to win more deals. Demand in our commercial specialty real estate, fund finance, real estate lender finance and asset-based lending programs remain strong. Pipelines in the jumbo single-family and multifamily areas are rebounding. We are making steady progress growing our loan pipelines in newer lending verticals such as floor plan and retail marine lending. Taking all these factors into consideration, we are confident that we will generate loan growth by the low -- in the low to mid-teens on an annual basis this year. We had a strong increase in noninterest income as a result of several recurring and nonrecurring item. Mortgage banking income was $3.7 million in the quarter ended March 31, up $2.2 million year-over-year due to a favorable servicing rights fair value adjustment. Advisory fee income was $9.4 million, up $1.3 million year-over-year. Banking and service fees in the quarter included a $22 million onetime favorable legal settlement and the addition of rental income from commercial office properties we purchased in January. Verdant contributed approximately $23.7 million in noninterest income in the March quarter compared to $18.9 million in the December quarter. The credit quality of our loan book remains strong and our historic and current charge-offs remain low. Net charge-offs were 31 basis points in the quarter ended March 31 compared to 9 basis points in the year ago quarter. We charged off $14 million of our principal balance in the C&I cash flow loan that was put on nonaccrual over a year ago when we allocated a specific loan loss reserve. The remaining principal balance is approximately $17 million at March 31 on that loan, and we maintain a $10 million specific loan reserve on this balance. Excluding the charge-off related to that loan, total net charge-offs were $5.1 million in the 3 months ended March 31 or 8 basis points of annualized net charge-offs to average loans. Total nonperforming assets were $180.4 million at the end of the quarter, down approximately $5 million from $185 million at the March 31, 2025 quarter. Nonperforming assets declined by approximately $27 million in the multifamily group and commercial mortgages down by $19 million. One syndicated C&I shared national credit became delinquent this quarter, accounting for a $33 million sequential increase in our nonperforming assets in the C&I loan area. We have taken over as agent in the syndicated loan and are actively working to resolve this nonperforming loan. Total nonperforming assets was 62 basis points at the March 31, 2026 time, down from 71 basis points at June 30, 2025. We remain well reserved for our low levels of credit losses with our allowance for credit losses to nonaccrual loans equal to 192.2% at March 31, 2026. In Axos Clearing, advisory and broker-dealer fees were up sequentially due to higher asset and transaction-based income. Total assets under custody administration were flat at $44 billion. Net new asset growth of approximately $140 million were offset by a decline in the stock market in the first 3 months of 2026. Cash sorting deposit balances were roughly flat quarter-over-quarter despite significant market volatility. We continue to expand the scope and scale of artificial intelligence across the firm to a wide range of businesses and functional units. Having established the governance framework and infrastructure to educate, train and deploy AI tools to all Axos team members, we are now focused on scaling the usage of artificial intelligence across more use cases. We have over 500 team members using Claude Enterprise to improve the speed, quality and productivity of various workflows. Since the beginning of calendar 2026, the number of technical users of artificial intelligence tools has increased by 37%, increasing artificial intelligence's share of committed code to 90%. We are adding specialized agents to test, automate and QC various work products. We continue to evaluate M&A opportunities to augment growth from existing businesses and team lift-outs. The Verdant Equipment Leasing acquisition continues to perform well with good progress across a variety of strategic and operational initiatives. Loan growth remains healthy and profitability continues to improve. We announced the acquisition of approximately $2.3 billion of online saving deposits from Jenius Bank in February of 2026. These deposits are a perfect fit for us, and we're excited to offer additional banking, lending and securities products to the roughly 60,000 individual Jenius Bank digital banking clients. We received regulatory approval last month and expect to complete the deposit conversion and client onboarding next month. Last week, we announced a separate deposit acquisition of approximately $3.2 billion of IRA savings and CDs from Capital One. These are granular retirement savings accounts sourced through digital channels. We submitted our bank merger application for this transaction last week and are actively working with Capital One to determine the exact timing and mechanisms of a conversion and close in the second half of calendar 2026. These 2 opportunistic acquisitions help us with incremental liquidity and funding for future organic and inorganic loan growth opportunities. Our disciplined growth and strong capital allows us to capitalize on organic and inorganic growth. The regulatory environment and dynamics within the banking and fintech landscape have created a wealth of M&A opportunities that we intend to fully review. We continue to invest capital in areas where we see the best risk-adjusted returns and in tools, people and processes that will help us scale. Now I'll turn the call over to Derrick, who will have additional details on our financial results. Derrick Walsh: Thanks, Greg. A quick reminder that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Noninterest expenses were approximately $186 million for the 3 months ended March 31, 2026, up by $1.4 million from the $184.6 million in the 3 months ended December 31, 2025. Salaries and benefit expenses were down $0.6 million on a linked quarter basis and professional services fees were up $1.6 million. FDIC and regulatory fees increased $1.6 million quarter-over-quarter, driven primarily by the fiscal year-to-date loan and deposit growth. Across our noninterest expense categories, we are seeing some of the benefits from operational productivity initiatives, including the increased leverage of our AI tools that we have implemented over the past 12 months. Our income tax rate was 24.6% in the 3 months ended March 31, 2026, compared to the 26.8% in the prior quarter. The primary reason for the sequential decline in our income tax rate was the benefit of RSU vestings and benefits derived from certain tax credits in the current quarter. While we continue to explore tax credit opportunities that could provide future tax rate benefits, our expectation is to maintain an annual tax rate of approximately 26% to 27%, excluding these potential benefits. Provision for credit losses was $41 million in Q3 '26 compared to $25 million in Q2 '26. The primary driver of the quarter-over-quarter increase in the provision for credit losses was a specific reserve of approximately $20 million for C&I loan. We expect to maintain a loan loss reserve of approximately 1.3% to 1.4% of total loans and leases going forward. I'll wrap up with our loan pipeline and growth outlook. Our loan pipeline is robust at approximately $2.6 billion as of April 24, 2026, consisting of $611 million of SFR jumbo mortgage, $82 million of gain on sale agency mortgage, $103 million of multifamily and small balance commercial, $83 million of auto and consumer loans and $1.7 billion across the commercial portfolio. We expect broad-based growth across several lending businesses to drive low to mid-teens organic loan growth in the next year, excluding any potential acquisitions. We will deploy some of the Jenius Bank deposits to reduce the temporary increase in borrowings in the March quarter and plan to use the remaining Jenius Bank deposits in combination with growth in our consumer and commercial banking deposits to fund our strong loan growth. With that, I'll turn the call back over to Johnny. Johnny Lai: Thanks, Derrick. Diego, we're ready to take questions. Operator: [Operator Instructions] Your first question comes from Kyle Peterson with Needham & Company. Kyle Peterson: I want to start off on some of the balance sheet moving pieces. I know there's decent amount of stuff going on with the FHLB stuff and Jenius coming on board. But I guess I noticed the securities balances also went up a decent amount this quarter. So I guess like how much of that is managing some of the liquidity before the Jenius deal closes? Or I guess, do you guys anticipate running at a bit higher securities book in the near term? I just want to think about how we should think about the mix over the next few quarters here. Derrick Walsh: Yes. The -- if you'll notice, cash went down as well. So we have internal policy minimums for the level of cash or liquid assets that we hold. And what we identified in the marketplace back in October, November was kind of a dislocation where if we bought some treasuries in 3-, 5-, 7-year tenures that -- and we're able to hedge them with a SOFR swap, we could actually generate 30 basis points improvement over holding that cash at the Fed Reserve, which is what we would be doing anyway as part of that liquidity requirement. So that was something. It was the widest that spread had gotten in -- other than on the liberation day. And so there are -- that was a pretty rare dislocation in the marketplace. So we took that opportunity and acquired some of those treasuries. We still can actually flip them and borrow against them and we -- and they remain liquid since they're -- or remain rate beneficial from a standpoint since they're swapped. So that's why you see that increase in the securities portfolio and that decrease in the cash. So that was around $750 million that we moved into those securities. Kyle Peterson: Okay. That's helpful. I appreciate all the color there. And then maybe just a follow-up, particularly on capital call, it looks like it had a really nice quarter on the growth front there. So I guess I wanted to see if you guys could give any more color what is either on bigger draws with existing customers? Or how much are you adding new accounts and kind of teams adding the pipeline? Just want to think more about new accounts and clients versus bigger drawdowns and utilization and how sustainable this kind of growth can be at least in the near term? Gregory Garrabrants: Yes. Quite a few new clients. I wouldn't say there's any significantly greater drawdowns, although these -- they tend to take a few quarters, the lines we bring on tend to take a few quarters to reach their -- where they tend to be, but bringing on a lot of new clients mostly. With respect to sustainability, I think that given the diversity of the loan book, it's often the case that different segments will outperform in any one quarter. So I don't expect the cap call side growth will be as big as it was in the next quarter, but I still think it will be pretty decent. Operator: Your next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: Just wanted to ask on the credit front. Just looking at the allowance quarter-over-quarter and the increase there, was that pretty exclusively driven by the C&I nonaccrual add in the quarter? Or what other dynamics were at play in terms of the model on the allowance? Derrick Walsh: The C&I was the biggest aspect of it. There is maybe a little bit tied to obviously the broader economic events or the geopolitical events that obviously flow through the Moody's variables and into the quantitative model, but that C&I addition was the biggest piece of it. Gary Tenner: Okay. I appreciate that. And then just in terms of that credit, in particular, could you provide any additional color on the type of credit and timing of resolution, et cetera? Gregory Garrabrants: Yes. It was a syndicated shared national credit. We were not bank syndicated credit. We were not the agent. It's -- a lot of times with these agents, I think they've made concessions early on that they probably should have been a little bit tougher on. We're now the agent, and we're working with the sponsor, and we'll see where it goes, but we felt it was obviously -- well, it's prudent to put it on nonaccrual and also to take a significant reserve against it. And I think over the next several quarters, we'll know exactly how that's going to turn out. Gary Tenner: Okay. And just related to, Derrick, was there any material impact in terms of reversing interest on that in the quarter? Derrick Walsh: Not significant. Operator: Your next question comes from David Chiaverini with Jefferies. James Dutton: Brooks Dutton on for Dave this afternoon. Can you guys help us quantify the impact that temporary borrowings had on NIM this quarter and whether that pressure should reverse as these borrowings roll off given the pending Jenius acquisition? Derrick Walsh: Sure. So we -- it was maybe a basis point or 2, but for the most part, it was -- we swapped out or allowed a lot of our higher cost deposits to outflow and replace those with deposits. So it really wasn't anything too meaningful from an impact on NIM. Gregory Garrabrants: Yes. On the Jenius side, they've been -- that book has been -- they've priced it at a higher price to some extent that we've priced some of our deposits, but we're probably not going to adjust pricing immediately. So I think that although the Jenius acquisition is super helpful from a volume perspective, we don't really intend to try to optimize a few basis points here or there on NIM just to -- we feel pretty good about where NIM is being flattish going forward other than the -- that 5 bps of amortization of the premium. And I think eventually, we'll kind of be able to normalize that. But I don't want to introduce all those clients to the bank with a rate cut. So we'll probably keep it there. But -- so that's kind of the dynamic. Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: Maybe it's really nice how these 2 deposit acquisitions help provide avenues to fuel what's been really outstanding growth on your part. I'm wondering with -- as we've seen with the -- the Jenius deposits, I apologize, allowing you to maybe be a little more aggressive with repricing your own deposits. I'm wondering how you're viewing the Capital One deposits, maybe average cost of those? And if similarly, that's going to help you further price down funding or it should be kind of a net add to deposits, just as we think through both the margin and overall size of the balance sheet? Gregory Garrabrants: Yes. No, those are great questions, Kelly. Thank you. I think that we're kind of looking at these as be as absolutely ensuring that we're able to have the funding for the level of loan growth that we're looking forward to having it. I think certainly, it does ensure that we don't have to price up deposits or to increase marketing budgets in order to fund ourselves, which I think is obviously very helpful. But I wouldn't really model in any significant sort of increase in NIM from our ability to say, well, now we're going to try to price down other deposits just based on having that excess. I think we feel pretty good. I know I do, and I think Derrick does, too, feel pretty good about the fact that we've been able to manage this rate cycle really well and that we were able to have almost 100 or better than -- we had NIM expansion on the way up and essentially, for the most part, maintain our net interest margin on the way down. And so that is obviously assisted by this. And we probably would have had to increase marketing expense somewhat otherwise or be a little more aggressive on pricing. So I think it will help on balance, but I would -- I think that our guidance on NIM incorporates those acquisitions and how we're thinking about pricing with respect to them. Kelly Motta: Got it. So as those come on, just as we kind of like think through the balance sheet then in order to fund your growth, could we see a build in liquidity just as you kind of have the dry powder to deploy? And just trying to properly handicap if there's a bigger balance sheet, but a little pressure from the liquidity build there. Derrick Walsh: Yes. I think we've strategically positioned the balance sheet for this quarter and this coming quarter's growth. I mean might there be a little overhang potentially for this fiscal Q4 with relation to the Jenius deposits. But I think that, generally speaking, I think we've lined ourselves up well there, not to have much that's worth kind of modeling out. From the Capital One, it will somewhat depend on the timing of that and of course, on some of our own organic growth and opportunities there. But I would expect that there might be a little bit more of a balance sheet gross up in that kind of later portion of the calendar year 2026 that might roll over into early '27. But again, at that point, with the expectations being greater than $30 billion of assets, and it won't be anything that will be overly significant. Kelly Motta: Got it. That's helpful. Maybe a last question for me is in regards to the Verdant acquisition. You've had some really nice boost in your fee income related to that. As you kind of think ahead, given your really strong pipelines across your businesses, how are you thinking through the operating leases versus on balance sheet? And fair to say some additional fee income growth from that? Or should we see more of that added to the loan portfolio here just as you think through your appetite for that? Derrick Walsh: Yes. It's kind of tough to tell. I think I referenced last quarter that the operating leases are about 1 of every 6 or 1/6 of all the originations roughly. And that could flux up or down depending on just opportunities and the nuances of the accounting around specific leases. So the -- obviously, the objective, both the management team from an incentive standpoint and our business operations back office support are incented to help support and grow that business. And so I think the overall kind of -- it will be in line with our forecasted loan growth and is incorporated into that. So I guess, in summary, I can't give you a specific number or reference as to how that fee income will grow, but the -- it should generally grow. But I think I wouldn't, I guess, model it too significantly from that standpoint, given it's only 1/6 of the origination volume. Operator: [Operator Instructions] Your next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam on for David. On your securities business, it sounds like client acquisition trends remain pretty positive despite the market volatility in the quarter. And we've talked about the opportunity to cross-sell potentially to Jenius customers, but do you maybe see similar opportunity with those Capital One clients? And could you maybe talk about some offerings that could be attractive to them? Gregory Garrabrants: Yes. I think over time, the Capital One clients, they were a little sensitive in some periods to certain kinds of cross-sell. They were not sensitive to securities cross-sell. I do think that there would be opportunities there on the Capital One clients with respect to some of those offerings just because these are retirement accounts. Right now, they're very limited in their product types that they have offered and we'll obviously offer them greater product types. We have no restrictions on our ability to cross-sell securities products to those clients. I think over time, as that develops, they can become more general banking clients as well. So I do think there's those opportunities. Liam Coohill: That's helpful. And Kelly touched on the operating leases a minute ago, but I was also curious to hear about other core noninterest income trends. I mean, could you discuss where you're seeing success and maybe how you expect core fees to move going forward? Derrick Walsh: Sure. I think one of the other things that in there, and Greg referenced it in his quotes or in his prepared remarks was that there was roughly $4 million of rental income from our future headquarters as that building is larger than what we would plan to move in. So that there's a good amount of space there that is -- we -- when we acquired it, that is already leased out. So we have some rental income and then there's corresponding depreciation and other expense that was roughly $2 million to $3 million in the noninterest expense this quarter. But on the staying on the fee income side, that's probably one of the other major items that impacted the fee income this quarter besides, obviously, the Verdant piece and -- the one-time legal settlement. So that's -- otherwise, the growth across that category was driven predominantly by the mortgage banking increase. So there was a positive movement on the valuation of the MSRs at the end of the quarter. And then some of the other fees, advisory, broker-dealer and some of the other just general banking service fees and other income all had more kind of step stone, more increases that weren't overly significant. But I would say, as we grow each of these businesses that we expect those fees to also increase. Liam Coohill: Last one for me. Where do you think there is the most opportunity for M&A today? And where are you seeing valuations that are rational? Is that tending to be more lending teams or larger portfolios? Gregory Garrabrants: We're really looking at some of each. So if you looked at our portfolio, we've got team acquisitions. We've got fintechs that have some kind of element of their business model that they're really good at something, but they need components that we have. We have banks that we're talking with, large and small. So it's -- and there's always the specialty finance side, too, that we continue to look at. And there, it's teams and businesses. So we're very disciplined. We talk to people for a long time. We don't rush into things. We make sure that it's going to fit and that we're able to digest it. But -- so it really -- I think there's a lot of idiosyncrasy and a lot of times, the individual circumstances with respect to people funding, just where different individuals and companies are in their life cycle help fuel different opportunities. And so we're always very active. We talk to a lot of people. We have conversations over long periods of time. We try to build relationships. And then so sometimes it looks like an accident or something happens quickly, but it isn't really that. It's really a pretty deliberate strategy of staying with a lot of different opportunities over time and then building those relationships. And so then when they're ready to transact, we're there for them. Operator: Your next question comes from Edward Hemmelgarn with Shaker Investments. Edward Hemmelgarn: Could you walk me through the balance of loans throughout the quarter. I mean your -- if I'm looking at it correctly, your average balances barely grew from -- if at all, from the ending balance at December 31. Was there something else going on? Derrick Walsh: There were some early prepaid during the quarter. So that's what kind of counteracted some of the, obviously, ending quarter growth. So January, we were down at the end of that quarter from kind of the prior -- from the prior month of December. I think that had the biggest impact from that standpoint. On the -- we did grow on the average balance by $1.15 billion of loans. So I'm not sure if maybe there's something -- maybe you're looking at the assets. The assets did stay relatively flat, and that was as we basically -- we've been sitting on some level of excess cash. And so we did reduce that excess cash. As touched on earlier, some of it went into those investment securities, but it still came down about $800 million on an average balance as we had some surplus in cash previously. Gregory Garrabrants: Yes. And we're converting Jenius this weekend. So that will -- then on Monday, those balances will be at the bank. But yes, no, I think you may be comparing like -- I don't know if you're comparing end of period to average, but... Edward Hemmelgarn: We kind of just surprising because it's the first time I really noticed that there was this much of an adjustment within the quarter. I mean, generally, you have a -- unless something obviously is explaining your average balances grow similar to what the -- or in excess of what your ending balance were the prior quarter? Gregory Garrabrants: Yes. There was a couple -- there was a number of prepays, some of which we -- I don't think we were expecting. I think it was in January. But yes, I think average balance still grew, but that is important, right, because you only earn net interest income on what you're putting out. And if you're growing only at the end of the quarter, then that gets reflected next quarter, but not in the current quarter. So yes, I agree. I think everybody should stop using the quarter end as a mechanism of governing the speed at which they get things done. I agree with you 100%. I'm going to convey that message to everyone in the organization immediately. It will be the first time they've heard it. So... Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: I just had a real quick one. Just wondering, given the really strong loan growth we're seeing, just wondering how the competition is faring and spreads are holding up. I understand there's quite a bit of difference between businesses, but just trying to get a sense of the direction of loan yields from here. Gregory Garrabrants: Yes. I feel that spreads are stable, I'd say, from where we are. I think that there was -- to the extent that there was compression, I feel like that I'd say that compression has stopped. I do think that in some instances, there has been -- some of the outflows in private credit and things like that have resulted in just a little bit of a different positive competitive dynamic, but it's not enough to say that you're taking back any of that compression that kind of happened over the prior year. But I feel pretty good about where we are now in general. I think we've -- I don't predict that we're going to have further spread compression. There'll be a credit here and there that they're going to be bargaining and fighting about. But I think we've done a pretty good job and have a pretty good mix. And then I think also with respect to some of the like Verdant lending is a little bit higher spreads. I think we've got a pretty good mix that allows us to keep spreads where they are. Operator: And there appears to be no additional questions at this time. So I'll hand the floor back to Johnny Lai for closing remarks. Johnny Lai: Great. Thanks for everyone for joining us, and we'll talk to you next quarter. Operator: This concludes today's call. All parties may disconnect. Have a good day.
Operator: Good day, ladies and gentlemen, and welcome to Universal Display Corporation's First Quarter 2026 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed. Darice Liu: Thank you, and good afternoon, everyone. Welcome to Universal Display's First Quarter Earnings Conference Call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Brian Millard, Chief Financial Officer and Treasurer. Before Steve begins, let me remind you that today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, April 30, 2026. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now I would like to turn the call over to Steve Abramson. Steven V. Abramson: Thanks, Darice, and good afternoon, everyone. Thank you for joining us today and for your continued interest in Universal Display. Let me begin with how we are thinking about the business, both in the context of today's environment and the longer-term opportunity we continue to see ahead. While the near-term backdrop has become more challenging, our long-term view remains unchanged. Our leadership in OLED built on sustained innovation and deep customer integration positions us well to navigate the near-term macro uncertainty while continuing to capture the industry's long-term growth opportunities. We operate a high-margin business model with strong free cash flow generation, long-standing partnerships across the OLED ecosystem and a balance sheet that provides meaningful strategic and financial flexibility. At the same time, visibility across the consumer electronics value chain has become more limited in recent months. A more cautious demand environment, higher component costs and supply constraints are adding complexity to demand forecasting. These dynamics are consistent with what we are hearing broadly across the industry and reflected in newly published conservative outlooks from third-party market research firms. Against this backdrop of increased uncertainty, we believe it is prudent to moderate our near-term revenue expectations. Brian will provide additional details shortly. Despite these near-term dynamics, our profitability, cash flow generation and lean operating model remains strong. We ended the quarter with approximately $911 million in cash and investments, supporting a measured and balanced capital allocation approach centered on investing in innovation, pursuing strategic opportunities and returning capital to shareholders. Over the last 12 months, we returned more than $187 million to shareholders through dividends and share repurchases. We announced today the authorization of a new $400 million share repurchase program following the full utilization of our prior $100 million authorization. While we remain disciplined in our approach, this authorization underscores our confidence in the long-term trajectory of the business and the strength of our cash generation model. Looking beyond the near term, the growth runway for OLEDs remains as compelling as ever. Adoption is expanding across IT, automotive, televisions and foldables and emerging architectures such as tandem. At the same time, performance expectations continue to rise across key dimensions, including brightness, power efficiency, lifetime and color performance. As these requirements increase, materials and technology innovation becomes even more critical, reinforcing the value of our capabilities and our role in enabling progress across the OLED ecosystem. Phosphorescent blue continues to be a significant opportunity for the industry and a key area of focus for us. As specifications advance and new architectures emerge, expectations for blue are becoming more demanding and more varied across applications. In turn, we are aligning our blue development program to meet these increasingly complex specifications. While this evolution is extending the development path, our conviction in the commercialization of phosphorescent blue has not wavered. The value proposition is clear. When adopted, we believe phosphorescent blue has the potential to deliver up to an initial 25% improvement in OLED panel energy efficiency, a meaningful advance at a time when devices are being asked to do more, run longer and perform better. That is a compelling proposition for the industry and the market interest reflects it. We look forward to sharing additional technical detail next week during our invited paper presentation at SID Display Week. Supporting this work is an increasingly powerful in-house R&D engine. We are applying AI and machine learning at greater scale to enhance material discovery, evaluate candidates more effectively and prioritize development pathways. For example, these tools allow us to predict thermal processing stability up to 10,000x faster than traditional density functional theory while achieving near comparable accuracy. By combining AI-driven modeling with more than 20 years of proprietary data, deep device expertise and decades of OLED know-how, we are accelerating progress in phosphorescent blue while also advancing innovation across our next-generation red, green and yellow emissive materials. More broadly, earlier this month at ICDT, China's largest display technical symposium, we highlighted a meaningful shift underway in the industry. As performance requirements continue to broaden, progress increasingly depends on advancing materials, device architecture and display design together with a greater emphasis on energy efficiency. This system-level approach is supporting the development of advanced OLED architectures such as tandem and hybrid structures, advanced pixel layouts and PSF, helping address the evolving performance demands across applications. This direction aligns well with our long-standing development philosophy and reinforces our role in enabling innovative OLED solutions as the industry evolves and grows. One example we shared in the invited paper was the incorporation of our phosphorescent material into the industry's first commercial green PSF product targeting BT2020 specifications introduced by Visionox. This milestone highlights the growing role of our phosphorescent materials in enabling next-generation OLED architectures and reinforces our position at the forefront of OLED innovation. The same depth of collaboration extends across our broader customer base. During the first quarter, we announced new long-term agreements with Tianma and LG Display. These agreements underscore the value we deliver and the trust we have built over multiple technology cycles. At the industry level, we believe OLED is entering the early stages of a multiyear capacity expansion cycle. Significant new Gen 8.6 investments are progressing in Korea and China to support growing adoption across IT and automotive applications. Samsung Display's $3.1 billion facility is reportedly nearing commercial shipments and BOE's $9 billion fab has entered customer sample validation and is targeting mass production in the second half of this year. Visionox has begun equipment move-in at its $7.6 billion facility and TCL China Star continues construction on its $4.1 billion greenfield plant. We view this year as the beginning of a longer ramp with output increasing over time as facilities move through qualification, yield ramp and production scaling. Taken together, these developments across technology road maps, customer engagement and manufacturing capacity reinforce our conviction in OLED's long-term growth trajectory and in the increasingly important role we play in enabling next-generation architectures that advance performance. With our materials leadership, deep customer partnerships, strong financial foundation and disciplined capital allocation, we believe we are uniquely positioned to drive sustainable long-term value creation. And with that, I'll turn the call over to Brian. Brian Millard: Thank you, Steve. Revenue for the first quarter of 2026 was $142 million compared to $166 million in the first quarter of 2025. While material volumes decreased by approximately 4% year-over-year, total revenue decreased by 14%. This year-over-year decrease was primarily driven by customer mix as well as tariff-related purchasing activity by Chinese customers in the prior year period and the softer macro environment between periods. The ratio of materials to royalty and licensing revenue during the first quarter was approximately 1.5:1. For the full year, we continue to expect this ratio to average closer to 1.3:1 as customer mix normalizes. As Steve discussed, the operating environment has become more challenging over the past few months. Near-term visibility has declined as macro pressures weigh on consumer demand assumptions, while higher memory pricing and supply constraints continue to temper end market expectations. Based on current forecast, we expect second quarter revenue to be sequentially higher than the first quarter, and we continue to expect the second half of the year to be stronger than the first half. At the same time, given reduced near-term visibility and the evolving macro backdrop, we believe it is prudent to revise our full year revenue guidance range to $630 million to $670 million from our prior guidance range of $650 million to $700 million. Turning to materials. Total material sales were $84 million in the first quarter compared to $86 million in the first quarter of 2025. Green emitter sales, which include our yellow-green emitters, were $64 million in both periods. Red emitter sales were $20 million in the first quarter of 2026 compared to $21 million in the first quarter of 2025. As we've discussed in the past, material buying patterns can vary quarter-to-quarter. First quarter royalty and licensing fees were $54 million compared to $74 million in the prior year period, primarily reflecting changes in customer mix. Adesis revenue in the first quarter was $4.3 million compared to $6.6 million in the first quarter of 2025. First quarter cost of sales was $36 million, resulting in a total gross margin of 75%, which is consistent with our full year gross margin guidance range of 74% to 76%. This compares to cost of sales of $38 million and total gross margin of 77% in the first quarter of 2025. Operating expenses, excluding cost of sales, were $63 million in the first quarter compared to $58 million in the prior year period. Operating income for the quarter was $43 million, representing an operating margin of approximately 30% compared to operating income of $70 million and an operating margin of approximately 42% in the first quarter of 2025. The year-over-year decline reflects lower volumes, customer and product mix and higher input costs. Nonoperating expense for the quarter was $6.2 million, primarily reflecting foreign exchange and investment-related items. This included a $3 million foreign exchange loss related to movements in the Korean won associated with the tax receivable as well as a $2.7 million investment loss on our marketable equity securities. The income tax rate was 21% in the first quarter of 2026. For the full year, we now expect our effective tax rate to be approximately 20%. Net income for the first quarter was $36 million or $0.76 per diluted share compared to $64 million or $1.35 per diluted share in the first quarter of 2025. We generated $109 million of operating cash flow in the first quarter and ended March with approximately $911 million in cash and investments. During the first quarter, we repurchased approximately 633,000 shares of common stock for $66 million and completed our previously authorized $100 million share repurchase program, having repurchased a total of approximately 924,000 shares under that authorization. Building on this, the Board authorized a new $400 million share repurchase program and declared a cash dividend of $0.50 per share for the second quarter. These actions reflect our continued commitment to a disciplined and balanced capital allocation framework underpinned by strong free cash flow generation. We remain thoughtful but opportunistic in our approach to share repurchases while maintaining the flexibility to invest and support future growth. With that, I'll turn the call back to Steve. Steven V. Abramson: Thanks, Brian. 2.5 weeks ago, we rang the Nasdaq closing bell to mark 30 years as a publicly listed company. We started with a little more than a bold idea to help revolutionize the display industry. At a time when CRT television dominated living rooms. Our journey required tenacity, resilience and a long-term vision. Over these 3 decades, OLED has evolved from a laboratory concept into a global display platform powering billions of devices and supporting an industry estimated at approximately $50 billion this year. We're proud of how far we've come and even more energized by how far we will go in the years ahead. The best of Universal Display is still to come. I would like to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q&A. Operator: [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Brian Lee: I guess starting with the guidance revision here. I know starting off the year, you guys have kind of talked about how you're always tied to the square meter surface area growth, and you had alluded to sort of mid-single digit, maybe 6% specifically as sort of the guiding principle for your revenue outlook for 2026. Clearly, the year has been weaker, smartphone cuts have accelerated. But are you seeing that in capacity growth, too? And if so, can you quantify? And then as it relates to the smartphone pressures, can you speak to kind of the high end and midrange? Those are the areas that you obviously have the most exposure to given OLED is well represented there. But what's your view on kind of what the high-end, mid-range parts of the market are going to do this year if overall smartphones are now expected to be down, call it, 15%, 20% depending on who you talk to. Brian Millard: Yes. Thanks, Brian. Firstly, on the guidance, there has been an overall change in growth expectations this year, both in terms of area as well as units over the last -- even the last 2 months since February. And on the area, now there's a projection of roughly a 2% growth in square area this year. And as you know, some -- we occasionally do grow below that overall area industry growth because of customer efficiencies and other factors that come into place. As it relates to the capacity, the capacity plans that we've talked about and that Steve reiterated today in his prepared remarks continue to be moving forward at full force. Samsung and BOEs coming online this year and Visionox and China Star thereafter. So that is all really no changes as it relates to that. And to your last point on smartphones this year, certainly, the more premium models are expected to be more insulated from some of the memory concerns. But with OLEDs now having 65-plus percent penetration, we are in the mid and even some of the low-end models as well. So there is exposure that OLED has to the mid and low end that would be subject to some of the memory concerns out there, and that has evolved even over the last 2.5 months here. Brian Lee: Great. That's helpful. And then maybe a couple more here. Just on the China revenue contribution in Q1. That was particularly soft, especially in the context of your Korean customers still spending quite a bit. Can you speak to the trends you're seeing in China? Is there inventory? Is there just end market demand, share issues? Just what's happening with the China backdrop? Because it does seem like your 2 Korean customers spent a pretty good amount here in Q1. Steven V. Abramson: Well, Brian, as you know, the China revenues are much lumpier over the course of the year than the Korean revenues. We still have a very strong position, obviously, in China. We're working closely with all of our Chinese customers, and we believe that, that's going to pick up throughout the year. Brian Lee: Okay. Fair enough. And then last one for me. Maybe this one for you as well, Steve. I think you made a comment during your prepared remarks about different architectures and one caught my attention. You mentioned hybrid architectures, and I think you mentioned Tianma by name. But is there any notable progress or developments that UDC is seeing with TADF hybrid recipes? And maybe bigger picture question, why are customers looking at hybrid to begin with instead of just a full phosphorescent system? Steven V. Abramson: So hybrid means a bunch of different things. And I think it was separate than the Tianma issue. Hybrid in this context means you combine a layer of phosphorescent technology with a layer of fluorescent technology. And what that does is it enables you to get the best of both technologies. So you can get the efficiency from phosphorescence and the color points and lifetimes from fluorescence. And that type of technology can expand the market. And that's, I think, what our customers are looking for. Operator: Our next question is from James Ricchiuti with Needham & Company. James Ricchiuti: I was just wondering, given the softer environment, and you may have given this, Brian, but I'm just wondering how we should be thinking about OpEx as we look out over the balance of the year. Brian Millard: Yes. So we had guided back in February mid- to high single-digit growth in OpEx. This year, I think it's trending more toward mid at this point. And as we've always been -- we've always had a very lean OpEx organization, continuing to fund R&D and all the investment opportunities we need to make there, but maintaining a lean SG&A organization. And that continues to be the case, and we're being very cautious on spend this year just based on the overall environment. James Ricchiuti: Makes sense. With respect to the separate release you made regarding a new presentation, new paper at the upcoming SID show on blue. When last did you guys deliver a paper on blue at that conference? Can you remind me? Brian Millard: It's been a few years. We have -- some of our customers have presented papers on blue in recent years, but it's been a while since we have. And we're excited to share some of the progress that we've made over the last few years in our blue development efforts. And this is really our first blue paper in quite some time. So we're excited to get that out there and share those details next week. James Ricchiuti: And then one final question, if I may, and this relates to the question Brian just asked about China. If we think about what happened regarding tariffs last year, when did you see the biggest stockpiling of materials as it related to some of the tariff concerns that some of the Chinese display manufacturers had? I'm trying to get a sense as to how much that played a role in the decline in China this quarter. Brian Millard: Yes. It was the largest in April, but there certainly was some toward the end of Q1. And at the time -- as time went on, it became clear to us that a lot of the strength that we had in the Chinese market in Q1 of '25 was tariff related. But the largest bit of it was in April following the U.S. tariff announcement and customers placing significant orders thereafter. But it was in both Q1 and Q2 last year. Operator: Our next question is from Scott Searle with ROTH Capital Partners. Scott Searle: Maybe to follow up on the China front a little bit. I was hoping to get a little more granularity in terms of some of the linearity that you're seeing and historic buying patterns ahead of new fab capacity launch, if you could remind us what that's looked like in the past. And also wondering just your latest thoughts in terms of China and exposure more on the smartphone front relative to IT or TVs. Qualcomm last night, I think, was referencing they thought things start to loosen up as we get into the September quarter. So I'm wondering if you're starting to see some of that, I'll call it, optimism or order patterns from your customers in China? And then I have a follow-up. Brian Millard: Sure. So on your point about fab ramps and volumes associated with fab ramps, historically, especially many years ago, there was a good bit of yield issues and challenges as our customers turned on new fabs. They've gotten much more efficient in their use of materials. And -- but we do have a component of our guidance this year is reflective of materials that will be needed to bring on new capacity coming online this year. As it relates to the year and what we're expecting, we do continue to expect mid- to high 40% of revenues to be in the first half and the balance in the second half, which does imply a continued ramp over -- heading into the second half. Scott Searle: Brian, just to follow up on that. Do you have visibility at this point in time to China specifically in that recovery? Brian Millard: We have -- we always get ongoing forecast from customers and have routine conversations with them about what their forecasts are expected. As you know, our China market, as Steve just said a few minutes ago, it's been very lumpy historically, and that continues to be the case. But we have visibility right now to what we expect for the rest of the year, and we feel that our guidance range properly balances the outcomes that we can see ahead of us. And we do expect China revenues to grow in the coming quarters, as Steve mentioned earlier. Scott Searle: Great. And Steve, to maybe follow up on the hybrid architecture. As I understand it, it sounds like that's been complicated the process and time line for the adoption of blue. I'm wondering if you could give us some thoughts in terms of how you're seeing customers looking to implement blue, whether it's in a hybrid architecture or otherwise, if that is part of the -- basically the hesitation or kind of extended the time line for adoption. Steven V. Abramson: Well, I think you've hit an important point. The customers -- I mean customers are looking at a number of different ways to implement blue using phosphorescence and fluorescence. And because you're using multiple materials, the matching in those materials becomes even more complicated. So it does delay -- it delays the time line. It also, as we are continuing our development efforts, we're working on specific implementations to meet our customers' needs. Scott Searle: Got you. And Steve, just to follow up on that, and then I'll get back in the queue. But from an economic standpoint and performance standpoint for the customer, do the hybrid architectures meet what the customers need that these are commercially deployable products and we just kind of, I'll call it, had an extended time line related to the complexity of the new architectures? Steven V. Abramson: Well, I'll answer multiple ways. You have to talk to our customers on the product introduction in terms of the timing. But having said that, it's a question of -- clearly a question of when, not if. And we're working really hard with our customers to make sure that blue gets introduced as quickly as possible. Brian Millard: And Scott, just adding on to Steve's comments, when LG Display, May of last year, they went out at SID Display Week last year and showcased a hybrid tandem tablet using our material. That was using 1 layer of fluorescent, 1 layer of phosphorescent. And they noted at that time, both at the show as well as in their press release that it was a commercially performing display that they had validated using commercial equipment. So that, we believe, evidenced the use of our material in the commercial system. Operator: [Operator Instructions] Our next question is from Martin Yang with Oppenheimer & Company. Martin Yang: My question first is on the guidance. Can you maybe talk about the guidance range when it comes to your expectations broken down by capacity-related ups and downs, product release timing and then underlying market? Brian Millard: Yes. So Martin, it's -- our guidance range really reflects -- specifically, we already knew -- know what capacity is going to be online this year. That was -- is unchanged since February. What has changed is the overall macro environment with certainly the -- what's going on in the Middle East and oil prices being where they are and therefore, gas prices for consumers, all that is new. And we've seen people that we talk to in the industry as well as the market research firms that track the industry, all lowering their estimates over the last 2 months for the year just based on what's out there. As it relates to specific models and end markets, certainly, the midrange smartphones mid -- and to the extent that OLEDs are in the low end, which we are in a few models of low end as well. Those are the areas where I think we're seeing the most pressure. And certainly, the expectations for OLED smartphone growth this year have come down since February as well. Martin Yang: A follow-up on your capacity input guidance because we are getting new Gen 8 fabs online. Do you feel confident that you have a good sense of how those new fabs will consume materials for the year? Brian Millard: Yes. We've not heard that there is any shift in the plans that our customers have to bring that capacity online. And there is an expectation of the equipment -- Samsung is expected in the middle of this year to have their equipment for mass production and BOE shortly thereafter. That has been the case and was expected back in February as well when we issued guidance. And so things from -- in terms of the new capacity coming online, that's really not changed since February, and we do believe that they will come online and our customers are actively working to make sure that capacity is utilized. Martin Yang: Got it. Last question for me on IP. Can you maybe remind us your approach to IP protection? We're starting to see more phosphorescent OLED developers outside of China, mainly in Korea. Can you maybe remind us your IP position as well as your approach to protect your IP? Steven V. Abramson: Well, we firmly believe that when you have inventions, you need to protect them and we protect them with our IP worldwide. We have over 7,000 patents worldwide. And we utilize our IP as part of our product development because we have strong IP protection as well as the best materials on the market. And we believe that, that is a winning combination and has been for quite some time. Operator: This will conclude our question-and-answer session. I would like to turn the program back to Brian Millard for any additional closing remarks. Brian Millard: Thank you for your questions. We remain confident in the long-term opportunities ahead for Universal Display and the OLED industry, and we appreciate your continued interest. We look forward to speaking with you again next quarter. Operator: Thank you. This will conclude today's teleconference. You may disconnect at this time, and thank you for your participation.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the First Quarter 2026. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference. Julia Ferrara: Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David. David Becker: Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We delivered strong first quarter results that demonstrated the resilience and strength of our diversified business model. We generated solid revenue growth, expanded our net interest margin and continued making meaningful progress on credit quality, all the while navigating an uncertain macroeconomic environment. Let me start with some of the highlights for the quarter. Total revenue reached $43.1 million in the first quarter, up 21% year-over-year, driven by a 26% increase in net interest income. Our fully taxable equivalent net interest margin expanded to 2.45%, a 54 basis point improvement from a year ago and 15 basis points sequentially. This margin expansion reflects the benefits of our proactive balance sheet management strategy and the power of our deposit franchise, combined with our scalable nationwide lending platforms. Pre-provision net revenue grew 51% year-over-year to $18.1 million, underscoring our ability to generate strong operating leverage while maintaining disciplined expense management. This performance gives us confidence in our ability to drive sustainable profitability as we continue to work through our credit normalization process. On credit, our overall loan book remains solid and continues to perform in line with industry trends. In addition, we're seeing tangible evidence that the decisive actions we've taken over the past several quarters are yielding favorable results on the 2 problem portfolios, SBA and Franchise. Our provision for credit losses for the quarter came in better than expected, and we're observing improving trends in our portfolio with delinquencies and nonperforming loans headed in the right direction. The credit trends we're seeing, particularly in our SBA portfolio reflect the impact of enhanced underwriting standards, more vigorous portfolio monitoring and responsive problem loan resolution. On the growth front, our commercial lending pipelines remain robust across multiple verticals. Total loans increased to $3.8 billion with particularly strong production in single tenant, lease financing and construction lending as well as in one of our emerging verticals, wealth advisory lending. While we maintain appropriately conservative underwriting standards, we're seeing great opportunities to deploy capital into high-quality commercial relationships at attractive yields. Turning to the other side of our balance sheet. Total deposits reached $5 billion, up from $4.8 billion in the prior quarter. We continue to benefit from the strength and flexibility of our Banking-as-a-Service initiatives. Importantly, we're seeing continued growth in lower-cost fintech deposits, which has also allowed us to let higher cost CDs and broker deposits mature without replacement. Our fintech deposit platform also provides us with significant balance sheet management flexibility. During the quarter, average fintech deposits totaled $2.4 billion, an increase of over 186% from the first quarter of 2025. At quarter end, we have moved approximately $1.5 billion of these deposits off balance sheet, optimizing our asset size while maintaining these valuable customer relationships and the associated fee income streams. This capability is a unique competitive advantage that enhances both our profitability and our capital efficiency. In our SBA business, while seasonality and tightened underwriting resulted in softer loan production for the quarter, we're pleased with the strong foundation we're building and how the business is positioned for long-term profitable growth. To further align our strategy in SBA, we've strengthened the business by promoting Gary Carter to the position of National Sales Manager. Gary rejoined us a year ago as our Senior SBA Credit Officer, bringing deep industry expertise, including his role at Live Oak Bank that will help us continue building this business on a sound foundation. Our capital and liquidity position remains solid as we were able to closely manage the size of the average balance sheet while continuing to grow revenue. Regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.5% and a Common Equity Tier 1 ratio of 8.97% as well as substantial liquidity coverage. Moving to our strategic investments in technology and artificial intelligence. We continue to invest thoughtfully in digital capabilities that enhance the customer experience, improve operational efficiency and position us for long-term growth. These technology investments aren't just about maintaining our competitive position, they're also about creating sustainable advantages in how we serve customers, manage risk and drive operational excellence. Looking ahead, we're navigating an uncertain macro environment from a position of increasing strength. Our diversified business model is generating strong revenue growth. Our deposit franchise provides funding advantages and strategic flexibility. We've proven our ability to make difficult decisions and execute effectively. The credit challenges we've experienced are manageable in the context of our overall business. We've taken decisive action, strengthening underwriting standards, enhancing risk management and addressing problem loans proactively. We see the benefits in improving trends and expect continued progress throughout 2026. We are not standing still. We're investing in AI and technology to enhance efficiency and customer experience, strengthening our commercial banking capabilities, expanding fintech partnerships and repositioning our SBA business on a stronger foundation. We're confident in our strategy, our team and our ability to deliver value for shareholders. I'll now turn it over to Nicole for operational highlights, including commercial lending, SBA, Banking-as-a-Service and credit. Nicole Lorch: Thank you, David. Starting with commercial real estate, we saw solid first quarter activity with particularly strong production in construction and single-tenant lease financing. These businesses continue to perform well with strong credit quality and attractive risk-adjusted returns on new originations. We were also pleased to see higher balances in a couple of our emerging verticals, wealth advisory lending and equipment finance. The pipeline remains healthy with disciplined underwriting and good yields on new commitments. Turning to SBA. As David mentioned in his comments, the deliberate shift we communicated in our last call that prioritizes credit quality over volume, combined with a seasonally lighter first quarter resulted in lower originations for the quarter. This translated into lower loan sale volume and lower gain on sale revenue compared to the linked quarter. Regarding gain on sale revenue, while premiums have been strong so far this year, we still expect to retain more production on our balance sheet in future periods as the pricing on certain higher-quality deals will not fetch quite the same premiums in the secondary market. We generally look at a 12-month earn-back period when making decisions on whether to sell or hold loans. While this will impact gain on sale revenue for the year, it will be highly additive to net interest income and net interest margin in future periods. Nonetheless, barring any macroeconomic deterioration, we remain optimistic about the previously shared production and gain on sale targets for the full year. Importantly, while we're being selective about growth in this portfolio, we remain committed to small business lending as a core business. This is an attractive lending vertical with good long-term economics, and we have the platform, expertise and relationships to compete effectively once we've fully worked through this current credit cycle. As to credit performance, we've made substantial progress over the past several quarters through proactive and prudent actions. We've significantly enhanced our underwriting standards, added experienced talent to our credit and portfolio management teams and implemented more robust monitoring and early warning systems. We've also been proactive in working with our borrowers to prevent the formation of nonperforming loans, and we're seeing results. As of March 31, delinquencies in the SBA portfolio have improved 118 basis points quarter-over-quarter and 126 basis points year-over-year. As we look ahead, our focus in SBA is on durability and consistency rather than near-term volume. Loans originated under our revised standards are showing more stable early behavior. While these newer vintages are still early in their life cycle, we're encouraged by what we're seeing in terms of borrower performance, responsiveness and overall portfolio dynamics. The operational changes we've made across underwriting, execution and portfolio oversight are now fully embedded in the business. This enables us to remain selective today while preserving the ability to scale responsibly as conditions normalize. Our objective is an SBA portfolio with attractive long-term economics and reduced volatility across cycles, and we are building with that goal in mind. In Franchise Finance, we continue to make progress working through problem loans. Our special assets team was busy during the quarter coming to resolution on several credits. While net charge-off activity remained elevated during the quarter, it more than offset nonperforming loan formation as nonaccrual Franchise Finance loans dropped to their lowest level in 4 quarters. Looking at our Banking-as-a-Service operations, we continue to see strong momentum with our fintech partners. These relationships provide valuable deposit funding, generate attractive fee income and position us at the forefront of innovation in digital banking. We processed over $82 billion in payments volume during the quarter, an increase of over 260% year-over-year through a carefully curated partner network, a reflection of our efforts to strengthen and deepen existing relationships while cultivating new partnerships. We are constantly evaluating new partnership opportunities while ensuring we maintain the highest standards of compliance and risk management. Across the bank, we continue to invest strategically in AI and automation to drive efficiency and enhance customer service. Our strong data foundation built through previous investments in our data warehouse and integrated data sources now supports our infrastructure upgrades for AI agent processing. While scoping our own proprietary agents, we've already deployed third-party AI capabilities with measurable impact, such as fraud detection agents that screen outbound transfers before processing. Additionally, our virtual customer service agent resolves approximately 45% of inquiries, significantly reducing the burden on human agents and improving response times. The effects of this are validated by the favorable results from the Net Promoter Score framework and customer listening program we implemented in the first quarter with our consumer and small business banking team. Out of the gate, our scores are well above industry average. We have built relationships through transparency and delivering on our promises, and that loyalty delivers strong returns. The diversity of our business model is another key strength. We have multiple engines driving growth and profitability. Our commercial lending is performing well. Our consumer lending remains stable. Our fintech partnerships continue to grow, and we're seeing improving trends in SBA. We're executing on all of this with appropriately conservative underwriting standards that position us for sustainable profitable growth. I will now turn it over to Ken for additional insight into our first quarter performance and update to our 2026 outlook. Kenneth Lovik: Thanks, Nicole. We are pleased to report solid first quarter results with net income of $2.5 million or $0.29 per diluted share. Total revenue for the quarter was $43.1 million, a 21% increase over the prior year period and when combined with well-managed expenses, pre-provision net revenue totaled $18.1 million, up 51% year-over-year. These results reflect our diversified business model, strong operational execution and sustained business momentum across our core segments. Net interest income for the first quarter was $31.6 million or $32.8 million on a fully taxable equivalent basis, up about 26% and 25%, respectively, year-over-year. Net interest margin improved to 2.36% or 2.45% on a fully taxable equivalent basis, up 14 and 15 basis points, respectively, from the prior quarter and both up 54 basis points year-over-year. The yield on average interest-earning assets for the quarter rose to 5.67% compared to 5.57% in the prior year period as higher rates on new loan originations more than offset the impact of Federal Reserve rate cuts in late 2025. We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling 56 basis points to 3.45%. The ability to maintain and increase yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrates delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets. Noninterest income for the quarter totaled $11.5 million, up almost 11% year-over-year as fee revenue from our fintech partnerships continued to grow, supplemented by higher net loan servicing revenue following the servicing retained sale of single-tenant lease financing loans in 2025. David and Nicole both touched on our positive momentum in the Banking-as-a-Service space, which is evidenced by the growth in fee revenue with quarterly revenue increasing over 200% compared to the first quarter of 2025 and increasing over 220% on a trailing 12-month basis. Noninterest expense for the quarter totaled $25 million, up only 6% year-over-year despite continued investment in technology and AI to enhance both front and back-office operations and costs related to working out problem loans. Turning to credit. The provision for credit losses was $16.3 million in the first quarter, which was a little better than our initial expectations. The provision for the quarter included net charge-offs of $15.8 million and additional specific reserves in our Franchise Finance portfolio. Relative to our original forecast, the lighter provision was due to a combination of lower loan balances and unfunded commitments as well as updates to the assumptions in the CECL model. Our allowance for credit losses at quarter end was $56.5 million or 1.5% of total loans, up slightly from year-end. Nonperforming loans increased to $61.6 million or 1.63% of total loans. However, a portion of the increase consists of fully guaranteed SBA 7(a) balances where the government guarantee substantially mitigates our loss exposure. Excluding fully guaranteed balances, nonperforming loans to total loans drops to 1.22%. Another component of the increase in nonperforming loans was accruing loans 90 days or more past due. However, the largest portion of this increase, about $6 million, relates to one relationship that we expect to pay off in full in the second quarter. I will also note that our SBA team was successful in bringing some past due borrowers current shortly after quarter end, reducing delinquencies even further. At quarter end, the ratio of the allowance for credit losses to nonperforming loans was 92%. Adjusting nonperforming loans to remove the fully guaranteed SBA balances, the allowance coverage ratio improves to 122%. While we are pleased with the improvement in nonperforming loans and delinquencies, our updated allowance for credit losses model reflects our expectation that the provision for credit losses will remain elevated in the second quarter, but then improve gradually in the second half of the year. Total loans as of March 31, 2026, were $3.8 billion, an increase of $29.1 million or 1% compared to the linked quarter and a decrease of $479 million or 11% compared to March 31, 2025. David and Nicole both covered some of the lending highlights from the quarter where we experienced growth. Overall, origination activity was fairly strong across our commercial and consumer areas. We did, however, experience some early payoff and maturity activity in the Franchise Finance, Public Finance and Recreational Vehicles portfolios and in particular, saw early payoffs of some large balance relationships in the investor commercial real estate portfolio, which impacted total loan growth during the quarter. Total deposits as of March 31, 2026, were $5 billion, representing an increase of $142 million or 3% compared to December 31, 2025, and an increase of $36 million or 1% compared to March 31, 2025. David talked about the continued strong growth in fintech deposits, which has allowed us to further improve the mix of deposits and drive funding costs lower. Average CD and broker deposit balances, our highest cost of deposit funding were down over $180 million from the prior quarter. The weighted average cost of maturing CDs in the first quarter was 4.19%, while the average cost of fintech deposits was 3.19% and the cost of new CDs was 3.62%. As the cost of maturing CDs in the second quarter is 4.11% and in the third quarter is 4.06%, we have the ability to drive funding costs lower throughout the year and hence, drive net interest income and net interest margin higher even in a flat rate environment. Looking at our full year 2026 outlook, we're broadly maintaining the guidance we provided in January. However, we want to acknowledge the heightened macroeconomic uncertainty we're navigating, including volatile energy prices and other potential geopolitical developments. While we're confident in our business momentum and strategic positioning, we're taking a measured approach given the current uncertain environment. With regard to loan growth, while our commercial pipelines remain robust and our consumer business continues to produce solid results, we recognize our full year target could prove ambitious given higher-than-expected loan payoffs and the evolving macro headwinds, which could lead to further tightening of underwriting standards. We're closely monitoring the current environment, and we'll provide updates as the year progresses. In summary, we feel confident in the underlying momentum of our business and our ability to navigate the current macro environment while positioning the business for accelerating profitability in the second half of the year and into 2027. With that, I'll turn it back to the operator for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Nathan Race with Piper Sandler. Nathan Race: I was wondering if you could just help us kind of unpack the charge-offs a bit more for this quarter. And just generally, what kind of visibility you have into charge-offs over the balance of this year? I know you guys have spent a lot of time scrubbing the SBA portfolio. But just curious within that context, how we should think about the $50 million to $53 million provisioning forecast that was laid out last quarter for this year. Kenneth Lovik: Yes. I think as we think about it, it's -- I think it's still very similar to what we had talked about last quarter where we expect the bulk of it in the second half of the year. In terms of charge-offs for this quarter, we had $15 million to $16 million of charge-offs. I think where SBA -- I think our SBA came in line with what we were forecasting. Our Franchise number was a little bit higher because we took action on some other credits probably sooner rather than later. But I think we still continue to feel like first quarter is probably going to be the worst of the quarters in the second quarter. You can look at -- even though we made progress on reducing nonaccrual unguaranteed SBA balances and Franchise balances, we still have elevated nonperforming loans that we need to work through. But our special assets team is working through those. And I think we'll probably see some resolution on many of those here in the second quarter. And I think by the time we get to the third and fourth quarters, I think our feeling is that we'll be through a lot of the kind of some of the older vintages where there's probably still some potential problems. And by the time we get to the end of the year, the credit costs are going to be at a far more moderate level. Nathan Race: Okay. Got it. That's really helpful. Maybe changing gears to the margin. With the Fed on hold, I think that's a bit of a headwind in terms of deposit repricing. But David, you mentioned a lot of the success you're having bringing on some lower-cost deposits from some fintech relationships. So just curious how you're kind of thinking about the margin trajectory over the next few quarters, assuming the Fed remains on pause and just trying to drive that with the NII growth expectations for this year that were laid out last quarter of, I believe, $155 million to $160 million. David Becker: We're sitting here, Nate, Ken and I are pointing fingers back and forth on it. Yes, the net interest margin, the biggest issue that we have out here even without -- and we did not put in our forecast at the beginning of the year, any rate decreases. We have not come back and modified it with any rate increases yet. But we -- from the get-go, we weren't anticipating any rate fall off this year. But because of the CDs that are maturing and running off, as Ken said earlier, they're north of 4%. New CDs that we're adding and rolling are in the 3.6% range. So there's a gap there, but even better yet on the fintech deposits are coming in at about 3.19%, almost 100 basis points improvement. So that will continue throughout the course of the year. We have another $800 million rolling between now and year-end. So we could be up in that $290 million range by the end of the year. Kenneth Lovik: Yes. I think, Nate, in terms of what we -- I mean, kind of similar to what we talked about last quarter, I think our forecasting still holds that we'll probably -- I mean, feel like a 10 to 15 basis point improvement through the -- 10 to 15 basis point improvement per quarter through the end of the year is a very, very achievable target on our end. Nathan Race: Okay. And then David, I believe you said to get you to the $290 million by the fourth quarter, if I heard you correctly? David Becker: Yes. Operator: Your next question comes from the line of Brett Rabatin with StoneX Group. Brett Rabatin: I wanted to just continue to talk about guidance, and you just mentioned the $290 million guidance. I think for the outlook in January, you mentioned $275 million to $280 million by the fourth quarter. It sounds like the only tweak that you've made, if I'm hearing this right, really is you're a bit more conservative on that 15% to 17% loan growth target, just given some uncertainties. But I was a little surprised you didn't tweak down maybe the expense guide a little bit from the $111 million to $112 million and then also, it seemed like the fee income guide could have increased. Any thoughts on fee income and expense guidance and just the variables that might impact that? Kenneth Lovik: Yes. I think on the expense side, Brett, I think we're -- the guidance we had out there before, I think we're good keeping it there just for conservatism. I do think if, for example, in the macro headwinds, if you will, impact originations or maybe the SBA originations are lighter in the first half of the year or whatever, we have some offsets on the expense side, certainly in incentive compensation tied to loan origination. So there are definitely some offsets there on the expense side that would take that number lower. And then on the fee side, too, there's levers there, too. I mean, as we -- Nicole said in her comments that we expect to retain more balances going forward in SBA, given some of the higher quality deals we're doing. But as we put in our deck, look, premiums are holding in there on gain on sale. So there could be -- if the premium levels hold up near the high end of the range, I mean, there's the opportunity to sell more into the secondary market and drive higher fee income. So there's a number of different levers there that could offset perhaps any shortfall in the loan growth. Brett Rabatin: Okay. So there's leverage to both those line segments. Kenneth Lovik: Yes. Absolutely. Brett Rabatin: And then I know you guys have been working really hard on the Franchise and SBA. When I think about the macro of higher oil prices, I guess the only piece of your portfolio that I start to think about would be the RV portfolio. And I know quite a few of that or a lot of that is not RVs per se. It's horse trailers and things that people use for work. But have you guys seen any migration in the RV book as you've been looking at that portfolio just to watch it as oil prices/gas has been higher? Nicole Lorch: A great question, Brett. I'll take that one. We actually just had a credit committee meeting this morning, and we're talking around the table with all of our lending lines about the impact of fuel prices. I think diesel fuel is up over $1 per gallon and certainly regular gasoline is as well. Our consumers have not been affected. We are not seeing any increase in delinquencies or any problem loans in the consumer book as a result of fuel prices. The horse trailers in particular, have always performed well even with headwinds. Other lines of business that could be -- and in fact, originations are very solid. So even in this first quarter and the conflict has been going on for a little over a month now. So we're not seeing any depreciable decline in new originations with people spooked by the prices. So that's a positive sign. In other lines of business, equipment finance, we do some lending for fleet vehicles. We're not seeing any issues there that are related to fuel prices. We've also done some outbound contacting of our top SBA customers who are most likely based on their industry to be affected by fuel pricing. So that's not just transportation, but it's anything that would have a fuel component to it. And there -- we're hearing no issues related to fuel pricing at this point. Some have had to pass along price increases to their customers. But overall, we're not seeing any weakness in the portfolio as a result. Certainly, we all hope that the conflict gets resolved sooner than later. Brett Rabatin: Yes. That's -- I think everyone knows that. And then if I could just ask one last one just around -- you guys highlighted the $82 billion of payments processed. When I think about some of the stuff that you've been doing in fintech, I guess I look at the fee income and just think that there should be some momentum in fees aside from whatever happens to the SBA bucket. Do we start to see bigger fees related to all these things you're doing in fintech? Or is that just going to be a process over time? It just seems like you're gaining some momentum on the fintech side, but it hasn't yet showed up really in a meaningful way on the fee side. Nicole Lorch: Well, we are seeing some momentum there. And I think what's important is that we have negative net revenue churn, which means we are seeing really good retention from our existing programs, and we have been able to increase our fee structure in a way that helps us to support them and support the growth of the program. We're not bringing on new programs at a rate that we cannot sustain. So we always have a backlog of customers that we've been talking to. We're in due diligence with half a dozen programs, but we're trying to make sure that we're bringing them on in a really responsible way. And we have some solid partners that are meaningful. So I think on a year-over-year basis, we've doubled the fees that we're seeing in our fintech partnership line of business. But it does show up in different ways across our income statement. For instance, the balances that we've been able to push off balance sheet, those are not showing up in the interest income or interest expense, but those are showing up in noninterest income. You're also seeing the fees in the noninterest income. And then we do have a couple of lending programs and those are going to show up then in interest income. Does that help? Brett Rabatin: That is helpful. Do those things show up in the other line? Or what line items did those show up in? Kenneth Lovik: Yes. Brett, they really -- they show up in the other line item. Well, they show up in the other line item. They also show up in the services and fees, service charges and fees line item. But just to put some numbers around that. I mean, in the fourth quarter, we had about just, call it, a little bit over $1 million for the quarter in fee income. This -- in the first quarter of '26, we had a little over $1.5 million of fee income. So to Nicole's point, with some of the momentum that we're getting with some of our existing partners, higher volumes, higher payments volumes, higher deposits, more deposits pushed off balance sheet. I mean if you run rate that, you're talking about a 50% growth year-over-year and you're starting to talk about real dollars. Brett Rabatin: Okay. And Ken, just to be clear, that $1.5 million, that encompasses all of your fintech operations? Kenneth Lovik: Yes. That's just fees, right? That doesn't include any interest income from any of our lending partners. That's just pure fee income. Yes. Operator: Your next question comes from the line of Emily Lee with KBW. Emily Noelle Lee: This is Emily stepping in for Tim Switzer. Yes. So you mentioned you're in due diligence with about half a dozen programs right now on the fintech side. Can you speak more on just those partners in the pipeline and maybe the projected timing of those launches or an idea of kind of potential earnings impact surrounding those? Nicole Lorch: Well, we are not known for being easy in the fintech space. In fact, I think we've gotten a reputation for being one of the tougher due diligence programs out there. So we certainly kick the tires and give them a good opportunity to understand what our expectations are because, in fact, we are the regulators of these programs because they are, in fact, our customers in many cases. So right now, I know we have a couple of lending programs that we are taking a look at. We also have a couple of deposit programs that are out there. We have one that is moving much closer to approval. And so I think that would be a second quarter onboarding event. But some of them will go more slowly, especially when there is a consumer lending program involved, for instance, that's going to be probably the longest due diligence process. Something that might be a business payments program can be a bit faster. It just depends on the nature of the program and when that starts to show up. Also depends on whether or not the program is existing with another financial institution as a sponsor bank. A conversion is a different beast and usually can be quicker to have an impact on the financial statements as opposed to a brand new program that needs to ramp up itself. So it all depends is the very official answer to that, but we have some that we do expect to be bringing on in the next quarter and then the third quarter as well. Emily Noelle Lee: Understood. And then also just on the NIM. You mentioned 10 to 15 basis points of improvement per quarter through the end of the year as a very achievable target. That's if the Fed doesn't cut, but what would be the impact of 125 bps cut? Kenneth Lovik: If they cut -- and this is -- keep in mind, we run this on a static balance sheet. So this doesn't impact -- this doesn't take into account growth. But on a static balance sheet, you're talking about probably $2.2 million to $2.3 million annually of net interest income. Operator: Your next question comes from the line of George Sutton with Craig-Hallum. Logan W Lillehaug: This is Logan on for George. First one for you, Ken. I was wondering if you could just kind of talk about the loan-to-deposit ratio. I've got it kind of stepping down again this quarter, and you've talked about how it's kind of a historically low point for you guys. I wonder if you could just sort of address sort of the path for that from here, especially as we think about potentially lower loan growth this year and just sort of how you plan to manage that? Kenneth Lovik: Well, I think over the course of the year, we expect the loan-to-deposit ratio to increase. We ended the year with pretty healthy cash balances. And it's kind of hard to look at any particular quarter end cash balances because sometimes they're inflated due to payments activity at the end of the month. But we do have, in our minds, excess cash that we can just take out of the cash and deploy. So we probably see that ratio if we're at 75%, 76% this quarter, probably gradually stepping up and probably being somewhere closer to 85% to 90% in the fourth quarter. And I think that's -- we like that because you're obviously -- you're deploying cash into higher interest-earning assets, loans, but on keeping the balance sheet relatively -- keeping balance sheet growth to a minimum. David Becker: We had a couple of very large commercial loans, literally one paid at the last day of the quarter that was over $50 million and knocked it down. So that kind of messed up the ratios pretty quickly. But as we are in that commercial market now, we can have some pretty big swings. And as Ken said, we have swings on the deposit side at quarter end because of bill payment services and we also have people trying to close deals or clear them up by quarter end. So that number didn't intentionally go down. It was just a matter of math and the way things happen in that last week of the quarter. Logan W Lillehaug: Okay. Got it. And then maybe just a high-level one for you, David. I mean the last few quarters, you kind of mentioned that returning to that 1% return on asset level. And obviously, there's a lot of moving dynamics this year. But maybe just talk about sort of the steps that you need to take to sort of get back there and call it, the medium term? David Becker: Yes. We get back to our -- what we think our numbers are for the fourth quarter, that will set us up to be back into the 1% return for 2027. And we just continue the improvements. We've got a great base taking that number forward through our calculations, we'll be right back at 1% by the end of 2027. Operator: Your next question comes from the line of John Rodis with Brean Capital. John Rodis: Ken, the -- what drove the tax benefit this quarter? And how should we think about the tax rate going forward? Kenneth Lovik: The -- again, it's -- when net income is low like it has been, we do get a significant benefit from our tax-exempt businesses, particularly our Public Finance portfolio. So we have to get to a certain level of pretax income before you start applying rates to it. I mean I think if we're in the range of I don't know, call it, maybe $3 million of pretax or less, probably that tax rate is going to be nonexistent to a credit. And then kind of once you get into maybe north of $5 million to $8 million or so, you're probably a low mid-single-digit tax rate. And then if we get into, say, a $10 million to $12 million of pretax income, you're probably looking closer to a 7% to 9% tax rate, effective tax rate that is. It's just when income -- when pretax income is low, we just -- we get such a benefit from the not only the tax-exempt business in public finance, but we also get benefits from some LIHTC investments. And obviously, from last year, we have an NOL that we can carry forward when we make money. So as long as when pretax income is low, we're going to have a pretty -- we're going to have a decent tax credit. John Rodis: Okay. It's a moving target then. Kenneth Lovik: It is. Operator: Your final question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Just on the SBA revenue going forward, I appreciate Nicole's comments earlier around holding some production for a longer seasoning period, I think, was what she was alluding to. So I'm just trying to think about kind of the cadence of SBA revenue. I think in the past, it's been more back half loaded. But I know you guys have made a number of changes to your platform and credit infrastructure over the last handful of quarters. So I was just hoping you could kind of speak to the cadence of kind of SBA revenue within that context. Kenneth Lovik: Yes. I think historically, if we go back in time a couple of years, it's probably like first quarter, you had -- it was seasonally light, although oftentimes, you may reap the benefit of a strong fourth quarter in terms of loan sales. But in terms of originations, first quarter historically has been light and it ramps up in the second, ramps in the third and then usually maybe comes back a little bit in the fourth quarter. I think the way that we're looking at it this year and the experience we saw in the first -- certainly in the first quarter with, again, kind of changing our approach on underwriting and having our team get around that, combined with just the typical seasonality is that probably the way that we're looking at originations this year is that there's just -- there's going to be a ramp-up throughout the year. And second quarter will be a little bit higher than first and third quarter and fourth quarter will be -- I don't want to use the word significantly higher, but we do have those third and fourth quarters ramping up in terms of origination volume, much higher than we have second and first quarter. Nicole Lorch: And our pipeline is building. It's up about 1/3 from where it was at year-end. So that would suggest that we're going to be in a good position to hit that. Nathan Race: Okay. So it sounds like the base case is SBA revenue grows from here and the guidance from last quarter on total fee income, which I believe was $33 million to $35 million, it's going to be higher than that, correct? Kenneth Lovik: Well, I think right now, we think -- keep in mind, that's total fee income. I think last quarter, we said in terms of just pure gain on sale somewhere in the $19 million to $20 million range, just that line item within the fee income. I think as we talked about, I think we still feel good about that total amount. Maybe it just shifts a little bit more towards third and fourth quarter than say, I mean, we had a pretty good first quarter without a doubt. The second -- the third and the fourth quarters are definitely stronger than the second quarter. Operator: I will now turn the call back over to David Becker for closing remarks. David Becker: We thank you for joining us today and for all the thoughtful questions we had. We're pleased with the strong momentum that we built during the first quarter. We remain confident in our ability to execute on the priorities we've outlined for the year. We are very mindful as we have said many times about the macroeconomic uncertainty, but we think we're executing from a position of strength and we're well positioned for improving profitability throughout this year and beyond. So we appreciate your continued support. Look forward to keeping you updated on our progress next quarter. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings, and welcome to The Boston Beer Company's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Andrews, Associate General Counsel and Corporate Secretary. Please go ahead. Michael Andrews: Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of the Boston Beer Company. I'm pleased to kick off our 2026 first quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder, CEO and Chairman; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass over to Jim to share his comments. C. Koch: Thanks, Mike. I'll begin my remarks this afternoon with an overview of our strategy and operating results before turning the call over to Diego to discuss our first quarter financial results and our financial outlook for the remainder of 2026. Immediately following Diego's comments, we will open the line for questions. In the first quarter, we were encouraged to see some signs of improvement in the total beer and RTD category, which we estimate was flat in volume compared to a decline of 4% for the full year of 2025. Beyond Beer continues to outperform traditional beer in volume in measured off-premise channels with an increase of about 3% for the quarter compared to traditional beer, which slightly declined. While these trends represent modest industry progress, we continue to anticipate volume headwinds for 2026, given a dynamic macroeconomic environment and evolving geopolitical developments that may impact consumer spending. With respect to the Boston Beer portfolio, we have not yet fully participated in the improvement in category trends. We are encouraged that Twisted Tea and Sun Cruiser together are growing depletions, driven by the strong performance of Sun Cruiser and some sequential improvement in Twisted Tea. Angry Orchard and Dogfish Head have now experienced 4 consecutive quarters of growth. However, Truly remains a meaningful portion of our mix and continues to lose share, and we've also seen some softness in Samuel Adams and Hard Mountain Dew. Our first quarter depletions were down 4%. As we expected, shipments trailed depletions at down 7%, reflecting first quarter 2025 shipments comparisons when distributors built inventory for our Sun Cruiser and Truly Unruly innovations. Additionally, improvements in the responsiveness of our supply chain to meet consumer demand led to moderately lower distributor inventory of 4.5 weeks on hand at the end of the quarter versus 5 weeks on hand in the prior year period. We continue to make strong progress on our margin enhancement initiatives, delivering 49.3% first quarter gross margin, and we're on track to achieve our planned full year 2026 savings. The business is generating strong cash flow, and we have repurchased over $30 million in shares year-to-date. Our priorities for 2026 continue to be supporting our category-leading brands to improve market share trends, launching strong innovation and continuing to expand our gross margins. We remain focused on controlling what we can control and executing in the marketplace, and I'm confident in our operating plans for the key summer selling season. Incremental advertising support for our brands following a significant step-up in 2025 is on track, while maintaining flexibility to adjust toward the lower end of our financial guidance range of brand investments as we monitor the energy cost environment. With respect to our full year outlook, we expect the factors that I discussed on our last call, including tighter consumer budgets, pressure on the Hispanic consumer and moderation trends to continue. Based on year-to-date depletion trends and our latest outlook for the balance of the year, we are slightly narrowing our 2026 volume range to down low single digits to mid-single digits from our prior guidance of flat to down mid-single digits. As we look to the summer, we're highly focused on executing our marketing plans with strong partnerships, programming for the U.S. men's soccer team during the World Cup and local market activations. We expect to slightly increase our total portfolio of shelf space this spring, while we continue to make progress on regaining lost display space. I'll now provide an overview of our brand performance and plans. As I mentioned on our last call, a key priority for 2026 is to improve share trends and grow volume in the hard tea category through progress in Twisted Tea and the continued expansion of Sun Cruiser. On a combined basis, Twisted Tea and Sun Cruiser delivered depletion volume growth in the first quarter. As a reminder, to the extent that Sun Cruiser sources volume from Twisted Tea, this is revenue and margin accretive for us. Twisted Tea off-premise measured channel depletion trends improved sequentially in the first quarter, but are not yet where we want them to be. Measured channel sales dollars declined 4% in the quarter compared to a decline of 9% in the fourth quarter against more difficult prior year comparisons. Twisted Tea continued to gain distribution and shelf space with lower velocities reflecting broader category headwinds, reduced feature and display activity, primarily due to the expansion of RTD spirits and some interactions with spirit-based hard tea. The declines are primarily concentrated in the original Lemon Tea and variety packs, particularly in 12-pack sizes, as previously discussed. Encouragingly, Twisted Tea Extreme and Twisted Tea Light are both growing and gained shelf space in the spring resets. We're seeing much better trends in single-serve across the full brand portfolio, which indicates continued consumer engagement with the Twisted Tea brand. So far this year, we've increased advertising investment, added new partnerships and launched new pack sizes and Twisted Tea Extreme flavor innovation. This summer, we'll be running our high-performing Tea Drop national ads complemented with in-store display programs and always-on media for Twisted Tea Extreme and Twisted Tea Light. We've expanded partnerships, including Barstool's #1 sports podcast, Pardon My Take, and with Realtree Camo. Lastly, we continue to increase our investment in Hispanic and Hispanic language brand content, including new media and digital content to continue to widen the brand's appeal. Our pack size innovations, including lower price point 4 packs, a 16-ounce can, and a 24 can value pack, and the Twisted Tea Extreme variety pack are now in market. While it is still early, we believe these offerings will continue to provide more options for consumers to engage with the brand and benefit volumes over time. Sun Cruiser has quickly grown to Top 5 spirits RTDs and is the fastest-growing brand in the category by volume across combined measured and off-premise channels. Built in bars and restaurants, Sun Cruiser is the leading RTD spirits tea and lemonade brand in the measured on-premise channels. On-premise remains a key driver of trial, and we are investing in the channel alongside our off-premise expansion. We expect strong distribution gains for Sun Cruiser in 2026, but continue to expect measured off-channel -- off-premise data coverage to be lower versus our other brands due to Sun Cruiser's strong presence in on-premise and independents. Advertising support for Sun Cruiser includes content around the Let the Good Times Cruise media campaign, which includes television, paid social and digital advertising and key influencers. We will be present where Sun Cruiser fits into our drinkers' lifestyles with a particular focus on music and sports. And we recently announced a multiyear USGA partnership, making Sun Cruiser the official ready-to-drink cocktail of 2 of golf's most noticeable championships, the U.S. Open and the U.S. Women's Open. The partnership goes live this spring and programming includes retail and tournament activation, golf media influencers and experiential marketing programs as well as wholesaler incentives. Sun Cruiser will have continued media presence in sports, including the NCAA, the MLB, the NFL, and sponsorship of numerous music concert series. From an innovation perspective, we're maintaining a disciplined range of tea and lemonade styles while expanding package options, including new 19.2-ounce single-serve packages, single-style 8 packs, and tea and lemonade sampler 12 packs. We expect these offerings to broaden drinker occasions and support strong growth in 2026. Turning to hard seltzer. The overall hard seltzer category has continued to improve and grew slightly in dollars in measured off-premise channels for the first quarter. Truly has maintained its #2 share position in the category. However, share trends remain challenged. Our effort to improve our share during 2026 include investing in new equity building creative, capitalizing on the U.S. men's soccer team participating in the World Cup, and continuing to expand Truly Unruly. We're continuing to build our communications platform of Make Your Dreams Come Truly, while leveraging our U.S. soccer partnership through our Drink Like A Believer program. Drink Like A Believer commercial activities launched in May and have been well received by major retailers. The programming includes displays and a U.S. soccer collector set of singles along with the soccer-themed Star Squad Rotator 12-pack and 24-pack. In addition, we will have significant local media and retail programming investment in the 11 host cities. High ABV offerings continue to be a growth driver in hard seltzer and Truly Unruly continues to grow both volume and distribution as our second highest volume 12-pack. In cider, Angry Orchard continues to grow, supported by new positioning, refreshed creative and strong retail programming, including our St. Patrick's Day themed promotions and displays in the first quarter. The new Angry Orchard Crisp Imperial 19.2 single-serve cans are a growth driver for the brand and overall Crisp Imperial volume has increased more than 40% in the first quarter in measured off-premise channels. For our Samuel Adams brand, we have recently updated our brand messaging around Independent Since Forever, and are excited to celebrate America's 250th anniversary this summer. To support our Drink Like It's 1776 retail programming and promotions, we have launched limited edition retro packaging. For our Dogfish Head brand, which returned to growth in 2025 and has grown for 4 consecutive quarters, we continue to expand Dogfish Head's Grateful Dead Beer collaboration and invest behind the Minute Series IPAs. Turning to innovation. We continue to prioritize high-growth, margin-accretive opportunities. Our Sinless Vodka Cocktails are full-flavored spirit-based cocktails with zero sugar and zero carbs. With approximately 100 calories per can, it is positioned as guilty of flavor, free of sugar and carbs, and targets incremental consumer segments that complement our core brand portfolio. Sinless was tested in a small number of states in 2025 and expanded to more than 30 states in March. Sinless is in the early stages of launch and initial feedback from wholesalers, retailers and drinkers has been positive. In closing, I'm encouraged to see modest improvements in category trends. While the macroeconomic environment remains dynamic, we are focused on executing our operating plans for the upcoming summer season. We're acting with urgency to leverage the strengths of our brands, our innovation capabilities and our distributor relationships to improve performance and drive long-term value. I'd like to thank our Boston Beer Company team and our distributors and retailers for their continued support. I'll now pass the call to Diego for a detailed review of the first quarter and our 2026 guidance. Diego Reynoso: Thank you, Jim. Good afternoon, everyone. Depletions in the first quarter decreased 4% and shipments decreased 6.9% compared to the first quarter of last year, primarily driven by decreases in our Twisted Tea, Truly, Sam Adams, and Hard Mountain Dew brands, partially offset by increases in our Sun Cruiser, Angry Orchard, and Dogfish Head brands. Consistent with our plans, shipments declined at a higher rate than depletions in the quarter, with shipments lapping strong growth in the prior year to load innovation. Distributor inventories at the end of the quarter was 4-1/2 weeks on hand, which was approximately 1/2 of a week lower compared to the end of the quarter last year. This decrease in distributor inventory was due to the timing of innovation and supply chain improvements, as Jim mentioned earlier. Revenue for the quarter decreased 4.4% due to lower volume, partially offset by price increases and favorable product mix. Our first quarter gross margin of 49.3% increased 100 basis points year-over-year. Gross margin performance primarily benefited from procurement savings and brewery efficiencies. The positive impact of pricing and product mix were offset by inflationary commodities and tariff costs. Advertising, promotional and selling expenses for the first quarter of 2026 increased $2.5 million or 1.8% year-over-year due to higher freight rates, partially offset by lower volumes. Brand investments were flat, lapping mid-teens increases in advertising investments in the first quarter of 2025. General and administrative expenses increased $4.4 million or 9.1% year-over-year. Excluding legal costs related to the onetime litigation expense, general and administrative expenses increased by $0.4 million from the first quarter of 2025, primarily due to increased consulting costs. We recorded $216 million in total pretax litigation expenses in the quarter. As we previously disclosed, this amount is related to a supplier contract dispute, and we intend to pursue all available post-trial motions and appellate remedies. We cannot estimate when or if damages or interest will ultimately be paid, but do not expect this issue to have a material impact on our operating plans. The total impact of these litigation expenses represented a $15.52 impact to our first quarter GAAP EPS. Excluding the litigation-related expenses, we reported non-GAAP EPS of $1.64 per diluted share. Now I'd like to provide an update on our ongoing productivity initiatives. We continue to make progress and are on track to deliver our 2026 savings target. As I noted on our fourth quarter call, we expect year-over-year gross margin improvement in 2026, although at a lower rate than that of 2025, given strong performance in 2025. We believe the multiyear operational improvements that we have made in our supply chain better positions us to manage variability in volume, product mix and the tariff and commodity environment. For the remainder of 2026 and beyond, we continue to expect contribution from all 4 savings buckets, as I discussed on the last quarter call. I'll now provide some highlights on our initiatives in each bucket. In brewery performance, we continue to see improvements in OEEs driven by process improvements, which helped to increase our internal production capacity. In the first quarter, we produced 95% of our domestic volume internally compared to 85% in the first quarter of last year. For the full year 2026, we continue to estimate domestic internal production will be over 90% compared to 86% last year. In procurement savings, our first quarter results benefited from lower negotiated pricing on certain packaging and ingredients. As discussed previously, procurement savings have been a significant contributor to our gross margin improvements over the last 2 years. While we expect some continued benefits in 2026, the impact is expected to moderate versus 2025. In waste and network optimization, we're continuing to enhance our customer ordering and inventory management system. These efforts helped us achieve high customer service levels, lower inventories and improved our cash flow. In addition, we reduced obsolete inventories 36% in the first quarter. Revenue management capabilities were added this year as part of our margin agenda. These efforts are in the early stages in 2026 with a more meaningful contribution expected in 2027. Turning to our 2026 guidance. As Jim mentioned earlier, our volume guidance range of down low-single digits to down mid-single digits reflect year-to-date depletions and market share performance and our latest outlook for the balance of the year. Fiscal week depletion trends for the first 17 weeks of 2026 have declined 4% year-over-year, a sequential improvement from down 6% in the fourth quarter of 2025. As a reminder, the summer selling season is a significant driver of our full year volume performance, and we will have more visibility on market trends as we move through the summer. Since our last earnings call, we are seeing additional inflation in energy and aluminum that could impact the balance of the year. We do not hedge commodities and are closely watching recent market cost increases driven by macroeconomic factors. As a result of these 2 factors, we are narrowing our full year non-GAAP EPS guidance to $8.50 to $10.50 from our prior guidance of $8.50 to $11. This EPS outlook embeds our latest volume and energy cost projections as well as productivity and cost mitigation efforts. We also expect to maintain flexibility to reduce incremental advertising spending, if needed, to offset further headwinds from the macroeconomic cost pressure. We will update our EPS outlook if commodity inflation continues to increase. We continue to expect price increases of between 1% and 2% and some additional benefit from mix. We continue to expect full year 2026 reported gross margins to be between 48% and 50%. Our outlook expects tailwinds from positive pricing, favorable product mix, productivity savings and lower shortfall fees with headwinds from tariffs and commodity inflation. As a reminder, the majority of our freight expense is booked in advertising, promotional and selling expenses. Our 2026 guidance reflects a full year tariff cost estimate of $20 million to $30 million versus a partial year in 2025 of $11 million. These tariff cost estimates are based upon tariffs that we are currently being charged by our suppliers and that what we expect to continue going forward. We continue to estimate that our investments in advertising, promotional and selling expenses will increase between $20 million and $40 million. This amount does not include any changes in freight costs for the shipment of products to our distributors. As I mentioned earlier, we may choose to spend at the lower end of the range depending on the commodity and energy cost environment. We are estimating our full year 2026 non-GAAP effective tax rate to be approximately 29% to 30%. As you model out the year, please keep in mind the following factors: our business is impacted by seasonal volume changes with the first quarter and the fourth quarter being lower absolute volume quarters and the fourth quarter typically our lowest absolute gross margin rate of the year. We expect first half shipments to decline towards the lower end of our full year volume guidance with better shipment performance later in the year. This is due to higher shipment comparisons in the first half of the year as the company shipped ahead of depletions in 2025 to support innovation and build distributor inventories as well as 2026 innovation launches, which are second half weighted. Additionally, improvements in the company's supply chain responsiveness, that enables modestly lower distribution inventory levels, are expected to have a more meaningful impact on the first half and begin to be lapped throughout the second half. During the full year 2026, we estimate shortfall fees and noncash expenses of third-party production prepayments in total will negatively impact gross margin by 40 to 60 basis points. We expect year-over-year gross margin rate improvements to be the most meaningful in the fourth quarter. We typically expense the majority of our shortfall fees in the fourth quarter. We expect lower shortfall fees in 2026 and the timing of these benefits, together with the fact that the fourth quarter is a smaller dollar quarter has an outsized favorable impact on the gross margin rate. Incremental advertising investment is expected to be weighted to the second and third quarters to support the key summer selling season. Turning to capital allocation. We ended the quarter with a cash balance of $164 million, and $150 million of availability on our line of credit. These balances, together with our projected future operating cash flow, enables us to maintain operating investments in our business and cash returns to shareholders as well as the potential litigation-related payments. We expect capital expenditures of between $70 million and $90 million in 2026. These investments will be primarily related to our own breweries to build capabilities, improve efficiencies and support innovation. We will continue to be disciplined in our capital spending as we monitor the dynamic industry environment over the long term. During the 13-week period ended March 28, 2026, and the period from March 30, 2026, through April 24, 2026, we repurchased shares in the amount of $23.8 million and $7.4 million. As of April 24, 2026, we had approximately $197 million remaining on the $1.6 billion repurchase authorization. This concludes our prepared remarks. And now we'll open the line for questions. Operator: [Operator Instructions]. And your first question comes from the line of Eric Serotta with Morgan Stanley. Eric Serotta: Jim, I wanted to get your perspective on Twisted from here. You made a number of interventions last year, including some selective pricing adjustments or certain packs in certain channels. The brand still seems to be stubbornly declining. Can you talk about how you're looking at the outlook from here? I know you talked about some innovation in packaging, new packaging coming. But do you think you need something sort of a little bit more of a reset or something a little bit more, I don't want to say drastic or extreme, but more expensive to get the brand back to where you want and need it to be? C. Koch: Yes. To answer your question, I don't think it needs a drastic reset, but it does need some levers. What I think is going on is, the success in the rise of vodka-based teas has certainly eaten into the Truly (sic) [ Twisted Tea ] volume. No question about it. It's happened in a bunch of ways. One is it took a lot of display space in 2024. In the first half of 2025, we were getting significant display space for Twisted Tea. We lost some of that last summer to sort of the new shiny penny, which was brands like Sun Cruiser and Surfside. And in total, our Twisted Tea and Sun Cruiser volume is actually up this year. And of course, but the shift is we lost volume in Twisted Tea, made it up in Sun Cruiser, which happens to be margin and revenue accretive in that shift. So our volume in hard tea is actually up a little bit, but there's movement from FMB tea like Twisted Tea to Sun Cruiser and Surfside in the vodka-based teas. What we're doing with Twisted Tea, there's a bunch of sort of smaller levers. One of them is trying to reset some of the pricing. There are markets where it's up at Stella pricing or Modelo pricing, and it's traditionally lived a little bit below FMB pricing because of a more kind of blue collar, but upscale blue collar clientele for Twisted Tea. Second, we've actually gained shelf space for Twisted Tea in the resets. And a lot of that went to Twisted Tea Extreme, which is growing triple digits. Then we are putting more advertising dollars into it and things that don't show up as advertising dollars like Pardon My Take, which is the #1 sports podcast in Barstool. So we're adding more advertising money and pushing it towards NASCAR, Realtree Camo, those kind of partnerships that refresh our connection to our original or blue-collar drinker base for Twisted Tea. And then we've introduced some new packs to give us a better price pack architecture, things like a 4-pack of 16-ounce for under $10 because even the 6-pack pricing has gotten over $10. So this gives us an entry point. And then at the other end of it for value, some 24 packs. So those are the things we're doing with it. And within FMB hard tea, I think Twisted Tea is holding or perhaps gaining share, because the new entrants that have come in the last 5 years from like Monster and Belgium and even Lipton are kind of falling away. So like those are the actions that we've taken, none of them is a drastic reset, but there's a bunch of tweaks. Eric Serotta: And for Diego, look, your gross margin performance over the past year has really been very impressive, especially in light of the commodity pressure and some of the volume deleveraging. It looks like you're basically maintaining the gross margin guidance for this year and the EPS guidance more or less despite the incremental costs since the war. Can you help us unpack some of the gross margin drivers from here? I know you don't give specific quantifications, but kind of order of magnitude, what you're expecting for incremental cost headwinds. LME aluminum is up quite a bit since the war. I believe you don't hedge. So if you could help us understand the moving pieces there, it would be great. Diego Reynoso: Yes, sure. So first of all, thank you for the comment. Look, our margin agenda has always said, look, we think we can get to high 40s. And the difference between high 40s and 50s is that to get to 50%, you need the external kind of situation to, whether it's volume or geopolitical, to help. And I think that's where we've gone to where we're still delivering the savings. But to your point, those savings are being used to offset some of the challenges that we have. So if we look at Q1 for the moment, you can see that like just in aluminum for the quarter, which is a small volume quarter, we've got like $4.3 million of aluminum tariff costs, which is the biggest piece of the tariffs. We also have some POS costs in there and some ingredients. We've been able to offset some of those. We think for the rest of the year, we'll be able to take our continuous agenda, which is procurement savings, brewery efficiencies, where we're 95% in-house versus out of our production facilities. And the other piece is the positive mix that Jim mentioned when we're talking about things like Sun Cruiser and some other innovations that we're launching this year that are accretive to our margins. All of those things are helping us offset some of these external pieces that have challenged our cost structure. Now in order for us to actually improve our gross margin even less (sic) [ more ], what we need to do is maintain those opportunities and savings. And hopefully, as those headwinds disappear, hopefully, in the future, we'll be able to maintain those, and that would be the only way we could drive our margin even higher. Operator: The next question comes from the line of Robert Ottenstein with Evercore ISI. Gregory Porter: This is Greg on for Robert. I just had a quick question about Sun Cruiser. Maybe if you could talk a bit about how the ACV and the brand's penetration differs between the East and the West Coast, and sort of like as you build the brand across the country where you see the biggest opportunity still for TDP gains? C. Koch: Yes. It's strongest in New England. I mean, it's been sort of game changing in some ways in New England. It's the size of Twisted Tea at a higher margin. So our distributors are quite delighted with the performance there. Mid-Atlantic is fairly strong. And you do see differences in penetration. Like Twisted Tea, the last major market was California, and it was almost 15 years behind New England. So there is that regional gap. And with Sun Cruiser, you have the added complexity of the state tax rates and the distribution limitations because it's vodka based. So you have much bigger variations than we have with Twisted Tea in states where you have to buy it from a state liquor store, like in New York, for example. So it's not readily available cold, it's not in the same distribution channels. In Texas, you have to go through a different class of distributors to get to the bars. So there's just much bigger -- and in Washington state, there's a huge tax on any spirits-based products. So there's no really great potential like in Washington state that we would have in Massachusetts or Connecticut. So there are these big differences. To try to boil it down, I think we probably -- we do have ACV upside if we look at it versus High Noon, which is highly developed. There's definite upside, maybe another 50% ACV, and we did not pitch it to chains this time last year. So we didn't get on the steps (sic) [ shelf sets ] quick enough. But now we are. And so we weren't on the shelves a year ago, but we had successful distribution drives this year. So in the shelf sets this year, there's going to be significantly more Sun Cruiser. In some of the chains, we got one item, and now we're getting 3 or 4. So I see a nice bump in the next 3 or 4 months, and then long-term continued upside as the category gets more and more developed. Operator: Our next question comes from the line of Peter Grom with UBS. Peter Grom: So Jim, you touched on the category improvement. Can you maybe just give us a sense for how you see category growth evolving from here? And maybe just some perspective around why you think category trends are getting better? C. Koch: Sure. With the kind of the caveat, my crystal ball is no better than anybody else's. But we can look at the numbers so far this year, and there's been an improvement. There's no precise number. People don't agree on what's in the beer category when you look at a lot of numbers, for example, hard cider is in there. But overall, what we're seeing is when we look at traditional beer and hard cider, it's down this year, maybe 1.5%, something like that as opposed to 5%, 5.5% last year. So that's a significant improvement. If I try to attribute that to something, I would say that some of the big factors last year like the health publicity. A year ago, we were reading about beer cause of cancer. Now we're hearing, wait a minute, beer is an important social lubricant, an important element of sociability, and it's a mitigation of the loneliness epidemic and Dr. Oz talked about it helps people create social connections. And we know that there's more and more evidence that those social connections are an important part of longevity and beer is an important part of that, and the dietary guidelines came out and they basically said, it's okay to have a beer now and then, might just be a good thing. So the health dialogue has become much more hospitable. Hemp, with the changes in the legislation and basically a federal ban on hemp-based THC products, including the beverages, that has taken a fair amount of the excitement around the hemp-based beverages becoming 5%, 10%, 20% of beer. That looks like that's off the table. There's still a lot of them out on the shelves. And I think a lot of retailers are waiting to see maybe the loophole has been extended, but it looks and I think the Farm Bill got out of the house today without an extension of the loophole. So it's an uncertain legislative landscape, but things look much more difficult for hemp-based THC replacing beer and finally, less pressure on the Hispanic community. We don't have as good a data as Constellation. So they're better authority than we are, but we're seeing a little bit less pressure on that. So that's where I would see the improvement. It's somewhat subject to the macroeconomic environment, which is probably worse right now than it was 6 months ago, but very uncertain. Consumer confidence is very unpredictable, but the price of gas can't help and C-stores are hurting a little bit. So if I had to attribute this improvement, which is real, that's where I would go with it. And then finally I'd add in from us, we view our kind of accessible market as being traditional beer, cider, beyond beer, and a certain part of the spirits-based RTD-type beverages. Last year, when we ran our numbers, that looked like it was off about 4% versus 5%, 5.5% with beer. This year, it's probably slightly down, but significantly better than the 1.5% to 2% that traditional beer is suffering. So closer to flat. And the bad news is our volume is still off 4%. We think there's a lot of things in the pipeline that will affect our trends over the next 9 months in the back half of the year. So we are planning on that getting better. But right now, as opposed to last year when we held share, right now, we've actually lost share of what we consider our addressable market. Peter Grom: That's very helpful color. And then, Diego, you made a comment around updating the EPS outlook if commodity inflation continues. So just curious if you could maybe unpack what inflation assumptions underpin the outlook today. And then just on the offsets you mentioned to Eric's question, mix and kind of the savings initiatives, are you leaning more or leaning in here further? Or are the benefits from these items greater than what was originally contemplated? Just trying to understand whether the shift in cost pressures changes your perspective around where you would expect to land in the gross margin guidance? Diego Reynoso: Okay. Perfect. Let me unpack that. So first, let's start with inflationary costs. So as you can see in our 10-Q, for the quarter, we've got about $12.5 million of inflationary impacts, out of which most of that was aluminum. And in that piece of aluminum, you got $4.3 million of tariffs. The rest is kind of the underlying cost of aluminum. We are forecasting that to continue mostly through the back end of the year. So we're not expecting any big shifts like either up or down. We're just projecting our current situation and assuming that, that will continue. So that's kind of our base assumption of where we're going. The second part of your question is, in the buckets we've kind of laid out, I think in general, we're a little bit better than we thought in total of the savings that we could deliver. Some buckets have delivered more, some less, but the big difference has been the speed at which we've been able to go after it. So our procurement savings that we've kind of laid out a 5-year road map, we've pretty much tapped out in 3.5 years. Some of our other buckets like our brewery efficiencies, again, are ahead of schedule. The one that I think is lagging a little behind and it still has some room to deliver is our footprint. So I'd say, overall, in total, they are going to deliver a little bit more than we thought, but it's more the speed of the delivery that has changed. Now what we have done is we've added a fourth bucket that hasn't really started delivering yet, but we expect it to start delivering in 2027, which is revenue management. So as we've been able to accelerate some of our cost savings buckets, we're making sure that we keep adding new things that we think can maintain that gross margin or potentially help it depending on volume and inflation, and that would be the bucket that we're adding. So I'd say it's mostly acceleration, although in total, we will deliver a little bit more savings than we thought we could deliver of current buckets, and we're adding a new bucket to try to offset from those pieces. So hopefully, that answers both parts of your questions. Operator: The next question comes from the line Filippo Falorni with Citi. Filippo Falorni: Jim, I was hoping you can give us your perspective on the expectation heading into the summer, especially with the big events coming with the FIFA World Cup, America's 250th. How are you thinking the consumption occasions will evolve, especially the interaction between traditional beer and, as you call it, the fourth category and the RTD space. Do you see that more of an occasion for more traditional beer? How do you think you can get consumers into your core portfolio for that? I know you have the sponsorship with Truly, but maybe you can expand a little bit more how you're planning to capitalize on those occasions. C. Koch: Yes. We have a number of things that we're playing. The big one is with Truly, and that is our sponsorship of the U.S. men's soccer team. And we have gotten good reactions from retailers. I mean, basically, we're using that to get on the floor, to get big displays, theme displays around the U.S. soccer team. We have a soccer ad that we're running about and a whole sort of campaign around Believe in the U.S. Soccer Team. So that's the biggest thing we've done with Truly in a number of years. And we've gotten good reception from retailers. So we think that will have at least temporary effect on bending the trends on Truly. With Samuel Adams, we are using it more in a PR sense. We're having 0.25 million person toast to America's birthday where 250,000 people who raise the Sam Adams. As we go into the summer, we benefit from just the seasonality of Sun Cruiser and Hard Tea in general. So we expect the fact that Sun Cruiser is the fastest-growing significant RTD out there, and it's heavily seasonal products. So that growth of Sun Cruiser is going to mean a lot more in Q2 and Q3 than it did in Q1. So those are the big summer-oriented promotions. How much more -- are they going to benefit traditional beer more than the fourth category? I don't know. I don't think they will. I mean we are seeing Gen Z accepting the beyond beer category as being as attractive, in some ways more attractive than traditional beer. And traditional beer is much stronger in people over 40, but people under that are quite accepting of fourth category as a beverage that they would consume in an occasion that 15 years ago was dominated by beer. Filippo Falorni: Great. That's very helpful. And then, Diego, maybe on the cost front and the commodity front, can you remind us a bit of your hedging policies? Looking through your filings, it seems like most of the hedging is on some of the brewing ingredients like hops. But maybe on the packaging side, is it more on the spot rate? Should we think about it that way on the Midwest premium? And then maybe any comment on transportation costs as well, that would be helpful. Diego Reynoso: Excellent, Filippo. Well, first of all, we do not hedge. So in general, our policy is not to hedge. Some of our suppliers will hedge for us, but we do not directly hedge. So the Midwest premium kind of directly goes through our numbers. And we feel like overall, over time, that's actually a better approach than spending on hedge. So from that point of view, that's why you're seeing kind of the movements in the Midwest premium in our first quarter, and that's why we're kind of disclosing what assumptions we're taking for the rest of the year. So that's kind of the piece that we'll see during the year. If the Midwest premium comes down, we will be able to improve kind of our P&L. On the second piece, as you know, we book most of our distribution costs through SG&A. We do kind of see the impact of diesel like everybody else is doing. And although it hasn't materially impact our numbers, we've been able to offset it through other pieces. I do think that is going to be a challenge for everybody as the year continues in 2 fronts. From an impact on the actual fuel cost can be -- right now, we're probably thinking kind of mid-single digits in millions, but it will depend on the mix. But the second one is we're also seeing the availability of truckers being a challenge given some of the policies implemented. So I think as we go through the year, especially in the high season, that's something that we're working very close to our supply chain team to ensure that we can minimize the impact to our P&L. But that is definitely something that is going to impact pretty much every CPG company as we go into the summer. Operator: The next question comes from the line of Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: Good job on getting my name correct. So I just want to ask a couple -- a question on Dogfish Head and Angry Orchard. It's great to see that you're delivering growth once again. So what would you point to as the key drivers for this level of improvement for the brands? Is it new customer additions? Or are you growing more penetration with younger drinkers? And on a go-forward basis, how do you think about -- like how do you see this playing out for the remainder of the year? And do you expect to sustain this level of growth that you're currently seeing? C. Koch: Yes. Let me talk about those brands. I think the growth with Angry Orchard has come partly from us focusing on a little bit and focusing on the core. We did a year ago, a push on Angry Orchard Draft that gave us a bunch of draft lines, some of them stuck. And some of it's just consumers are sort of swinging back to cider. They're open to non-beer experiences. So in some ways, this is like a fourth category. And cider has -- it kind of belongs in beer occasions. It comes out of a draft line, you drink it in a pint glass. It happens to be gluten-free, and it's very friendly to drinking when you're in a group drinking craft beer. And it's very fruit forward. Like a lot of fourth category products, it is sweet. So it sort of bridges traditional beer and fourth category products. And that's given it some underlying consumer-driven growth. And then we focused a little more on it, cleaned up the portfolio, we have an effective advertising campaign underneath it, Don't Get Angry, Get Orchard. And we had a very successful Halloween promotion with the Friday The 13th character, and we're repeating that this year. So I think it will sustain itself, repeating it with Scream, another Halloween franchise. So I think that will sustain itself with Dogfish Head. Again, we went in, sort of cleaned up the brand, cleaned up the clarity of the product line around 30 Minute, 60 Minute, 90 Minute, which was very easy for consumers to understand. And we're getting growth from Dogfish Head Spirits. And Dogfish Head was one of the original craft distillers over 20 years ago. So they've got a history of being a distiller and a line of delicious canned cocktails that they sell at a price premium over Cutwater or a similar product, so they have a higher-end niche. So I think those are the things that have made both of those brands grow. Operator: The next question comes from the line of Michael Lavery with Piper Sandler. Michael Lavery: Just was wondering if you could start by unpacking some of the shelf resets and display upside you've talked about. I don't know if you could quantify some of that or maybe clarify on some of the displays, either timing or how temporary or relatively permanent they might be? And just how to think about that retail distribution piece of the equation? C. Koch: Yes. Overall, we were one of maybe 2 or 3 suppliers that gained shelf space. I think the beer category was a little bit stressed given its performance last year. Nobody was really eager to add a significant amount of beer and beyond beer fourth category shelf space. We were fortunate enough to be one of a couple of suppliers who did. That was driven on the upside by, as I talked about earlier, a lot more shelf space for Sun Cruiser. In 2024, we didn't really pitch Sun Cruiser very strongly. And so we didn't get a lot more shelf space. But last year, we did, and we're reaping the benefits of that this year. So where Kroger had 1 SKU, now they're going to have 3, in some stores 4. Some chains didn't put it in at all and are now giving us multiple SKUs, I mean, because Sun Cruiser is the fastest-growing brand in probably the fastest-growing category in the spirits-based RTDs. So we're getting that. Twisted Tea actually gained shelf space because they found a place for Twisted Tea Extreme. So we got a lot more shelf space for Extreme that more than offset where we lost a peach or raspberry. And that works out advantageously to us because the SKUs that we lost have a lower rate of sale than Twisted Tea Extreme. So there's kind of a double benefit. We got more space, and it's going to be more productive. Where we lost, and we lost significantly, was on Truly and a little bit on Sam Adams. But the net of it was not only more points of distribution for our portfolio, but even more an increased share of the available shelf space. Michael Lavery: Okay. That's great color. And just on a brand that doesn't get as much attention, but can you maybe walk us through Hard Mountain Dew and just a little bit of maybe what hasn't worked there. It seems like when it first launched in the states where it launched through Pepsi's distribution, it had sort of a 2-ish share of FMBs, but it doesn't seem like it's held or gotten to that with the broader distribution from your system and is soft now. Can you just help us maybe understand what happened there and kind of how -- it seems like -- I'm assuming that didn't come out just as much as you would have expected. Maybe just a little bit of a review of how to think about what happened with that brand? C. Koch: Yes. I would say, overall, the hard sodas that came out have not had the appeal on an enduring basis that I think a lot of us thought they would. And they've actually struggled against sort of new-to-world purpose-driven brands. And that's across all of the hard sodas, whether it's Fresca or some of the other extensions like Simply and so forth. Hard Mountain Dew is -- our experience with it, it's a very strong brand. I'm not sure that we've found our niche with it. So we are looking at, where is the core Hard Mountain Dew consumer, and what is his or her occasion for Hard Mountain Dew, which has very strong attributes. It sort of has some energy drink attributes in it. And we want to see if there's a way to bring those to the fore as the hard soda category. And then there have been some distribution issues where the bottlers, the remaining independent bottlers have been able to block it coming into their territory. And that has then made it difficult to get chain distribution, and it's difficult to get wholesaler support when the Pepsi bottler's territory doesn't have the same footprint as our wholesaler and so our wholesaler only has it in part of their territory, which makes it harder for them to give day in and day out support to it. So that's some of the underlying issues. But at the end of the day, we continue to believe it's a really strong brand, and we continue to work to try to figure out how do we find a good niche that's based on all the brand equity of Hard Mountain Dew, which is unique. Operator: [Operator Instructions] And the next question comes from the line of Chris Barnes with Deutsche Bank. Christopher Barnes: Jim, recently, Brown-Forman and the Brown family put their toes in the water on a merger process that ultimately didn't materialize. But I'm just curious to hear your thoughts on why you think they'd evaluate a transaction down here? Clearly, the investment community thinks the alcohol profit pool is evaporating. So is consolidation and the related synergy capture increasingly becoming a survival strategy that alcohol and beverage companies need to more seriously consider today? C. Koch: You know, that's a question to investment bankers, and frankly, the brainpower of the people on this call is much greater than mine. So I'm going to -- that's up there in the stratosphere. We're just down here going from bar to bar trying to sell more product. There's clearly consolidation going on. I think we feel like, in some ways, we're in a unique position in that we've gotten over the hump as a supplier to the point where we're important to our wholesale partners, and we're important to our retailers. And that importance is amplified. For an average wholesaler, we may be 10% of their gross profit. So that's meaningful. When they're top 5 suppliers, so we're important to them, and that's somewhat amplified by -- historically, we've been a bigger part of their growth. And we have a great innovation track record. We're very happy with our pipeline. Again, the success of Sun Cruiser in the last year has validated our continuing ability to bring new-to-world brands to our wholesalers that they don't have to pay for and buy from somebody else. So we continue to be big enough to get the attention that we need. So I don't feel like we're disadvantaged. I think that we're in the sweet spot of we're big enough to innovate and bring successful new products to market with a strong 550-person sales force bigger than any other sales force in our category. But we're small enough to be nimble, move quickly, be innovative and continue to grow against the opportunities that we're finding today, which primarily are in the fourth category, which is now 85% of our volume. So it's where we've proven our capabilities of bringing new strong brands to our wholesalers and our retailers. I would also add that I think as investors, when there's a segment that drops value like alcohol in general has, obviously, there's a lot of people that see the value there and see it as an opportunity to jump in. I think part of the reason you're not seeing some of those mergers materialize is because people see the opportunity in the future and therefore, hold on it. So I still think it's an industry that has a lot of value, but I do think that people see an opportunistic time given that last year, on average, most companies have gone down to jump into something they see value in the future. So I think the value will continue in the industry, and I think we're really well positioned to play in that. Operator: Thank you. This concludes the question-and-answer session. And I would like to turn the call back over to Jim Koch for closing remarks. C. Koch: Thanks to everybody for joining us this afternoon, and it's an exciting time to be in this business. There's both lots of challenges and opportunities, and I look forward to talking to you in a few months. Operator: This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.
Operator: Good afternoon, and thank you for joining Atlassian's earnings conference call for the third quarter of fiscal year 2026. This conference call is being recorded and will be available for replay on the Investor Relations section of the Atlassian website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam: Welcome to Atlassian's Third Quarter Fiscal Year 2026 Earnings Call. Thank you for joining us today. On the call with me today, we have Atlassian's CEO and Co-Founder, Mike Cannon-Brookes; and Chief Financial Officer, James Chuong. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2026. The shareholder letter is available on the Investor Relations section of our website where you will also find our other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. And we undertake no obligation to update or revise such statements should they change or seek to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors and our most recently filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. So out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Mike for opening remarks. Michael Cannon-Brookes: Thank you all for joining us today. As you've already read in our shareholder letter, we delivered some incredible Q3 results. Total revenue grew 32% year-over-year to $1.8 billion. Cloud revenue surpassed $1.1 billion and accelerated to 29% growth year-over-year, and RPO grew again 37% year-over-year to $4 billion. These are likely thanks to our team's excellent execution and clear momentum across our key strategic priorities: enterprise, AI and the system of work. This quarter, some of the world's largest enterprises, including Siemens Energy, Rheinmetall and Wayfair deepened and broadened their commitments to Atlassian. In AI, we continue to add millions of monthly active users to Rovo and our AI Rovo credit usage is growing more than 20% month-over-month. Customers using Rovo are also growing their ARR at roughly 2x the rate of customers who are not using Rovo, contributing to our strong cloud outperformance and expansion in the quarter. And more and more enterprises are embracing our platform-wide vision using Atlassian system of work to see the full picture of their organization. This is because the Teamwork Graph connects knowledge, work, people and code, giving our customers one of the richest enterprise context graphs in the world. Context is a clear differentiator for us. And we're saying this is our competitive momentum built. This is our largest ever quarter for competitive displacements from a major ITSM provider. We're taking it from rivals as customers move away from legacy systems and choose Atlassian for a more modern AI native and much better value service platform. As I've said before, I believe AI is one of the best things that has ever happened to Atlassian. In a world where human will run teams of agents, context is the only anchor to avoid chaos. And we believe the companies that prioritizes context will come truly AI native. With Atlassian, our customers aren't just choosing software that choosing the kind of company that they want to become. This is a time of significant change in our industry, and we're moving forward with strong conviction and discipline. We're focused on executing, delivering customer value and driving, durable profitable growth. With that, I'll pass the call to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from Arjun Bhatia from William Blair. Your first question comes from Keith Weiss from Morgan Stanley. Keith Weiss: And congratulations on a really solid Q3 print. It's great to see all these investments in all innovation really starting to come to fruition within the numbers. As it is important in getting investors more confident in the stock, I think another sort of important part of it, and I think Mike, you do a good job of this, is helping people better understand how the existing software that Atlassian brings to the equation plus AI brings a better result. And then there's one line in the shareholder letter that I thought was really interesting. When you're talking about the Teamwork Graph and how it makes the AI investments not just smarter, I mean, we've been talking a lot about context and how it makes the AI better, but you're also talking about cheaper and more valuable. So one, I was hoping you could dig into that and how the Teamwork Graph and the broader system lowers the cost of these AI investments, particularly as we're hearing more and more pushback on these credit costs were really starting to rise and the token costs starting to get really big? And then maybe a follow-up for James. Again, in the shareholder letter, you mentioned data center outperformance driven by some pull forward of some of the -- some deals from future quarters. Any kind of view you can give us into what that means for FY '27 and what we should be expecting from data center in the year ahead? Michael Cannon-Brookes: Keith, sure. Thanks for the question. Not what I expect from the start, but a great question, very, very savvy as I would expect from you. Look, the Teamwork Graph and the Atlassian platform is certainly delivering amazing results to customers. You can see that, that customers using Rovo are growing their ARR at twice the rate of non-Rovo customers. Their credit usage continues to grow strongly, with strong results of over 20% month-on-month. And they're upgrading the Teamwork Collection to get more of those credits included in the base offering, but also using many more agents, right?. And that agent usage is, I think, what you're referring to, whether that agent usage are Rovo agents or whether they're other platforms' agents that are accessing Atlassian's context with Teamwork Graph, that usage is increasing markedly. And that's the compounding effect of intelligence for customers as models continue to get better. But to really accelerate a business, the intelligence compounding is only one aspect. What you also need is the context. That is your knowledge, your work and projects and goals, understanding of your people, so your org chart, their skills and everything else, as well as knowledge of the code. We have a lot of huge announcements coming up next week at Team '26 around this area, but what you're seeing in the Teamwork Graph is the world's best context graph across all aspects of the business. So whether that's a service team, a marketing team, a technology team or a business team, bringing that context to bear in all of those AI surfaces is what's the most important. Now when we say it makes better, faster and cheaper. Why is that? Well, we have a lot of statistics and proof points that not only do you get higher quality AI answers because of our search, the Teamwork Graph, everything put together in the knowledge that we have about your business, but you also get cheaper answers. Those are cheaper answers because you use far less tokens to get to an answer in the same amount of time and fundamentally using less tokens and reduces your cost of AI or allows you to do far more AI investment, whichever way you look at it. So customers are seeing that. You're seeing that in the usage and then showing up in and financial results. James, do you want to follow on with the second half? James Chuong: Yes, Keith, thanks for the question. So on the data center side, the Q3 revenue beat, as we mentioned, was primarily driven by recognizing greater-than-expected upfront term license revenue within that quarter. Since our announcement of the data center end of life back in September, we've had a couple of quarters now to really better understand some of the signals that we're seeing from our customers in terms of their buying behaviors, especially Q3 being the largest expiry base for us. So let me unpack that a little bit more for us here. So first, I would say that the migration to the cloud is on track and continues as expected. We're pleased with what we're seeing there. We still expect that to contribute mid- to high single digits on cloud growth. And second is that the retention rates on our data center business remain incredibly robust, in fact, actually outperformed expectations in the quarter. And third, for some of our largest customers with more complex migration, they remain committed to transitioning to the cloud. But it's going to be a multiyear journey for them, right? They've got a lot of deep customizations, change management. It's going to take these customers time, right? Often many of these have tens of thousands of users, some with over 100,000 users. So this category of customers, we saw a pull forward of purchasing and expansion activity into Q3 from future periods. And we also had a pricing change in March. That further catalyzed this dynamic. So as a result, that drove greater-than-expected upfront term license revenue recognized in the quarter. In fact, relative to our expectations for Q3, we recognized approximately $50 million more in upfront term license revenue. And that's some of the trends that we've been seeing since our announcement of end of life back in September, but more pronounced in Q3 given the size of the expiry base and the pricing catalysts that I mentioned. And maybe lastly, the cohort of DC customers that are actively planning and transitioning to the cloud, we're seeing these customers moderate their seat expansion. versus historical trends we've seen. Again, I'll mention that retention rate remains incredibly high, but now expecting a more muted level of data center expansion from these customers going forward as they try to move to the cloud. We're still seeing really nice uplift when customers move from DC to cloud. So net-net, what we're seeing is that our largest strategic customers continue to deepen their commitment at lasting, whether that's on DC or cloud, and we're working hard to meet them where they are and help them accelerate that transition so they can unlock all the AI and agent capabilities in the cloud. So hopefully that gives you a little bit of color there, Keith. And maybe I'll just share that with these dynamics sort of playing out across the year on data center, with Q4 yet to play out where revenue rec is being pulled into FY '26 from FY '27, we recognize that there's lumpiness in that pull-forward effect in data center and having the timing of -- and that does impact the timing of reported revenue RPO and CRPO. So internally, of course, we look at a variety of metrics to performance manage our business, including a really healthy ARR. So next week, we're going to be holding that investor forum at our Team '26 Conference and to help guide investors through the revenue recognition timing dynamics on the data center side. We'll look to enhance our disclosures and share historical subscription ARR, which will help normalize some of those timing effects and help everyone better understand the underlying strength of the overall business. So all up, we feel really good about our execution, the runway that we still have ahead of us. So more to share next week at the TEAM event and the investor forum. Operator: Your next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Sorry about that. But congrats on the strong quarter here. I was curious on just Rovo, how you're thinking about positioning that against some of the third-party agents. It seems like you're having a lot of success in your existing customer base I'm curious, are customers evaluating other agents against Rovo? Or is this sort of an easy add-on given how integrated it is into the rest of the platform with Jira and Confluence and JSM and the rest of the suite? Michael Cannon-Brookes: Thanks, Arjun. I can take that one. Look, there are a lot of places that customers can access Rovo is maybe the simplest way to phrase it. Think of Rovo as the AI part of the Atlassian platform that shows up in all of our surfaces, whether those surfaces are on the Atlassian platform inside of Jira or Confluence, in our chat app from the mobile and the desktop or whether those surfaces are in other agent platforms, right, be that from Google, Salesforce or any of the foundation model vendors. Like we want to make sure that Atlassian's workflows, processes, the Teamwork Graph show up wherever is most relevant for the customer. Now that has required us for a number of years to push past through a huge amount of R&D work, really hard R&D work to make sure that our context graph in the Teamwork Graph is the best out there. It has the most amount of context about the organization. It's the most deeply connected. We do the inference upfront to make sure that you get those better, cheaper and faster results that we talked about, better quality answers at lower cost with that run your agents faster is an amazing offering to customers, and they're realizing that. Whether or not that happens on the Atlassian platform or off the Atlassian platform, what we want to make sure is that the customers see value in the platform overall. There is no doubt that agents existing in native context in our automation framework. If you have a huge amount of business processes running through Jira or the Service Collection, the agents that are natively integrated have the largest access to that platform and they're right in the sidebar. They appear in the Jira UI, that's a huge advantage. At the same time, we've shipped a whole series of features that allow third-party agents from Gamma and Canva to Cursor and Claude Pro in each of our different types of teams. We want to make sure that third-party agents also surface in Atlassian's context, whether that's on a Confluence whiteboard, whether that's on a Jira work item, but they all use the Teamwork Graph at the core. So customers are really seeing that. We certainly get evaluated against other platforms. I'll tell you that customer reaction is amazing. We've done a phenomenal amount of R&D to give you great quality answers. We see that in the increasing usage of our Rovo platform on and off Atlassian, both of which benefit us. And then you can see that in the customer is increasing their they see an expansion rates as well as using our AI technology. So all AI is not built equal. We build fantastic AI, and we get it into the customers' hands. That's what's most important. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Gregg Moskowitz: James, welcome to Atlassian. Mike, you may recall my high level of frustration one quarter ago when after I thought it was a pretty good quarter of acceleration, your shares perceived to go materially lower -- continue to be materially lower. And I don't want to minimize that there's a lot more work to be done. But clearly, this is an impressive result. My question relates to a comment in the shareholder letter that strong seat expansion in Jira was a key driver of the cloud revenue acceleration this quarter. And given that there is so much fear about meaningful seat compression at Atlassian being on the horizon, can you unpack the drivers of the seat growth for us? And secondly, is this a dynamic that you think can be durable? James Chuong: Gregg, thanks for the question on that. Yes, on the cloud side, again, we saw strong performance reaccelerating to 29% year-on-year there. And maybe I'll start with the fact that DC migrations again to the cloud were in line with our expectations and not the realistic contributor to that $50 million beat on the print. It's progressing well, and we still expect that to contribute that mid- to single high-digit growth to cloud, like we mentioned. So the real 2 primary drivers that we talked about on the outperformance is really that cross-sell and seat expansion. . So on the cross-sell side, we saw outperformance in our collections business across Service Collection and in particular, Teamwork Collection. We have got Jira and Confluence, Loom and Rovo. And just keep in mind that right now, Teamwork Collection is really the best vehicle for our customers to buy and unlock AI and all the agent capabilities across the Atlassian platform, right? Customers are upgrading to TWC because of the increased AI credits. We're giving 10x more credits on Rovo versus the stand-alone subscription. And I'm sure Mike can touch a little bit more on some of the progress that we're seeing there. But importantly, we're also -- the other driver here is that we're seeing that growth in TWC while also seeing continued seat expansion in our core Jira stand-alone offering, right? And I think that really speaks to how an AI-driven agentic world, Jira and the Atlassian platform really remain core to enabling customers to manage their workflows and collaboration to fully unlock that value of AI. So whether it's TWC or standalone Jira offerings, we're launching a ton of new value that's really enabling our customers to deploy agents to do the work, to capture that agent activity alongside work history, full permissions and audit trails and admin governance. So a lot of great traction here, as you can see in our Q3 print. Michael Cannon-Brookes: Yes, Gregg, thanks for that and for calling it out. I hope we've been very consistent on our views in that world. We are not seeing any signal of seat compression from customers. If anything, we are seeing the opposite. We are seeing strong expansion numbers, strong cross-sell numbers between collections, strong usage of AI and strong commitment to the Atlassian platform. Many, many competitive wins, a huge amount of consolidation happening into the Teamwork Collection. So we have a lot of green lights in a lot of different places. Similarly, you can see that NRR maintained north of 120% and even ticked up again for, I think, the third or fourth quarter in a row. We have a lot of reasons why that is. Firstly, I would go to high R&D investment in just great quality software, right? That does matter. It always gets ignored in a lot of context, wrong choice of words, in a lot of quarters. But we build amazing applications that deliver great value for our customers. Secondly, the context we have in the Teamwork Graph and the critical business processes continue with AI to blur the boundaries between teams and between roles. That means our platform and our offering between service teams on one side that connect to finance and HR, marketing and in through ops teams to technology teams with business teams and leadership teams. The same context across all of those teams allows us to expand into those nontechnical roles at an increasing rate, right, which shows why we are getting that seat expansion in different collections, in different areas and just the continues in our business. Fundamentally, customers are opting for more and more workflows on the Atlassian platform. Operator: Your next question comes from Brent Thill from Jefferies. Brent Thill: Mike, you called out the largest competitive replacements. I think I don't know if you've seen or just you were mentioning that. What are you seeing? What's driving this now where you're seeing that increasing rate? Michael Cannon-Brookes: Thanks, Brent. Yes, we had a great quarter for competitive displacements, especially in the Service Collection, especially -- look, we continue to be incredibly strong in the mid-market area. As you can see from many years of investment in the enterprise pillars of our business, we are starting to go really, really strongly in the enterprise and strategic segments across service management in particular. That's not just in ITSM, although in ITSM, we are growing really strongly, it is in broader employee service management. We're seeing that -- we get the statistic of the 75% of the Fortune 500 uses Service Collection. 60% of Service Collection customers use us outside of IT on HR and marketing in other areas. This is just a fantastic example and why we're getting those competitive displacements. It was our largest quarter ever for those. And it's because, again, I would go to the quality of the software, the state with which you can get up and running on the Service Collection continues to be a strength. The high level of user experience quality continues to be a strength. The comprehensiveness of our data and the Teamwork Graph and bringing that to their Service Collection fundamentally allows you to operate those services cheaper, quicker, better answers because we have access to a better knowledge graph across your organization. And AI continues to win every which way. We're incredibly AI forward. It's one of the largest areas of usage of agents in automation and automated workflows because it allows the service teams to run more quickly. And we're only just getting started in customer service and had a great quarter in that area as well. And our asset management platform, again, assets moving into the platform as a whole, part of that overall Teamwork Graph. It's just an incredibly strong customer story. And so we're really excited about how we keep taking share in that space. And $1 billion of ARR is a great milestone. We thought it was worth celebrating. That's just a fantastic milestone for that business while continuing to grow incredibly fast. Operator: Your next question comes from Allan Verkhovski from BTIG. Allan M. Verkhovski: Mike, it's great to see the AI momentum here. I'd be curious if you could share what drove the decision to announce the data collection changes you're making? And what are you looking forward to from a product capability perspective on the other side of it? Michael Cannon-Brookes: Yes. Thanks, Allan. Look, Atlassian continues to be incredibly driven by its values and its long-term philosophy. I say that because our data collection, the largest part of that is clarifying exactly how it is that we use customer data what the data is in the different segments, I think we have an absolutely world-class policy there. We are as clear as any vendor out there about what the different categories of data are, where they are used, what the benefit is to the customer for that, and what the customers' option sets and other things are. So think of it as broadly a large clarification of what it is that happens at different points and the value that's delivered to the customer from those. The increasing usage of AI allows us to build ever more powerful features. We are seeing a lot of customers. If you look at the DX business, for example, one of the greatest advantages is being able to see how my engineering organization compares to others in my industry, compares to others of my size, et cetera, and this requires a lot of those changes. Similarly, the usage of different types of SaaS tools is how we build the Teamwork Graph. So it's all about that open company, being very clear with customers what it is, what the advantage is and trades are. And we've had, I would say, a really positive customer relationship, customer response because we put trust and openness at the core of that relationship and explaining to them what they get from that. And those usage patterns of customers are incredibly important to building fantastic software, which is our highest overall. Operator: Your next question comes from Raimo Lenschow from Barclays. Raimo Lenschow: Perfect. In your letter, you talked a lot about momentum in ITSM. Can you talk a little bit about what you're seeing there? What's driving it? And how skilled customers like how meaningful this is for you? Michael Cannon-Brookes: Sure, Raimo. Yes, we are seeing great momentum in the Service Collection, again, as I mentioned earlier, celebrating the milestone of passing $1 billion in ARR. We try in the shareholder letter to put a different focus each quarter. So last quarter, you saw us talking about the Teamwork Collection. When we passed 1 million seats and 1,000 customers, less than 6 months into that offering, so showing some momentum in that area, that continues. This quarter, we've chosen to focus on the Service Collection because of the milestone that it passed, which is a great milestone. The strength we're seeing is across the regions. So we had a great quarter in EMEA, the business, but also in the Service Collection a lot of large wins in Europe, Middle East and Asia region of increasing strategic customers and enterprise-level customers. We are seeing a big strength as we mentioned in non-IT use cases as well in the Service Collection. So that blurring of roles is really, really important to understand in the Atlassian platform and importance to business as having less -- one tool for the IT team, one tool for the employees, one tool for the HR team, our ability to connect the teams in an organization is really powerful as your organization becomes increasingly service driven. And lastly, as I mentioned, we have a huge amount of AI features that are delivering real value from AI ops in the IT area to be able to diagnose and fix problems more quickly, all the way through to how you can use Rovo as a broad platform and our increasing adoption by customers of our MCP servers and our CLR Command Line Interfaces. We'll talk a lot more about this next week, but especially in the Service Collection, you're seeing that enabling customers to get access to the contact craft it's built in their service offerings, which lets them just get, again, a fantastic results, a better value proposition for the customer and the service part of the business execute more quickly and at a lower cost. Operator: Your next question comes from Alex Zukin from Wolfe Research. Arsenije Matovic: This is Arsenije on for Alex. So Mike, what is working best with customers when adopting service and Teamwork Collections that's kind of driving that stronger cross-sell growth contribution in cloud? And then a brief follow-up, James. I think you mentioned it earlier, but when we're thinking about next year and the DC revenue growth decel comment, do you think we could get more color on how DC ARR is trending? Or clarify whether we'll get any DC ARR figure exiting the year to better understand for growth when we kind of lap some of these tougher comparison periods next year? Michael Cannon-Brookes: Thanks, Arsenije. What is working best? Good question. It's all working really well. Look, I think I've covered the Teamwork Graph as a whole and the data we have. The speed of adoption and user experience, again, we have customers that have 500-plus different service desks from a new organization, for example. The ability to get new service desks up and running with all of the data from your organization to create incredibly efficient offerings for your finance team, for your operations and workplace teams, for your HR teams, that is going really, really well. It's because of our investment in user experience overall. We continue to do really strongly in the HRSM space. So in service management around HR and other business functions that continues to be a source of strength for the service question. And our traditional connectivity between the dev team and the IT team between your technology teams and your business teams has always been a source of strength for historically for Jira Service Management, we've seen that continue to deepen and improve with the Service Collection because both of those 2 teams are getting more and more AI driven. And that AI-driven nature of things and our ability to connect different teams across the organization with a single context graph with a single AI offering and take that offering out to all of the other products that a customer uses makes all of those service-driven parts of their business just quicker to operate and faster to run. So I would say we're seeing strength across the board. And lastly, our newest addition to the service suction in customer service management, internally, we're having huge success there, right? Again, we got a statistic that more than 70% AI resolution rates are being hit internally across hundreds of thousands of conversations in our internal adoption of customer service management. So it lets us run our business more efficiently and customers are seeing that, too, as the customer service offering continues to roll out with fantastic set of features. James Chuong: Arsenije, thanks for the question. As it relates to FY '27, right now, it's too early to discuss any guide at this point, we'll, of course, provide that guidance out in August, our Q4 earnings. But as it relates to ARR, as I mentioned a little bit earlier, right, we're seeing that lumpiness in the revenue recognition in the year on the data center side. And next week, we're going to be able to share some of the historical subscription ARR across the overall business to help really smooth out those timing effects that we talked about. And I think that will give folks a better understanding of the underlying strength in the business. But maybe just as a reminder, too, for the data center end of life announcement, right, we began to recognize great upfront term license revenue and that results in greater upfront revenue recognition in the period, but there's a corresponding drawdown in RPO and in particular, CRPO as well. So it's worth sharing then that when you normalize for the impact of ASC 606 here, our RPO would have been north of 40% in the quarter, in Q3. And our CRPO would have been north of 30% year-over-year in Q3, much more in line with some of the recent trends that we're seeing, and again, underscores the strength in the backlog that we're continuing to build. Operator: Your next question comes from Fatima Boolani from Citi. Fatima Boolani: I wanted to ask you about diversifying some of your pricing strategy, collections has been a huge step in the direction of consolidating adjacent capabilities into more intuitive selling motion. But a lot of your peers in other enterprise software complex are sort of investigating or testing the path of usage-based pricing. So I'm curious what you think about that approach and particularly how pertinent it could be for the service collection, for instance, and to the extent you're A/B testing any of this with certain products, I'd love the perspective. And then a quick one for James. There has been a tremendous amount of focus on driving efficiencies in the business and is leveraging AI to help Atlassian become even more efficient. So I was curious about what type of qualitative learnings and quantifiable yields you're seeing as you more sort of move down the path of deploying AI internally? Michael Cannon-Brookes: Fatima, look, I'll take the first one on pricing and James can talk about efficiencies next so the efficiency is an incredibly important part. What does sound pricing broadly look? Our philosophy has always been to meet customers where they're at. Let me start there. Customers, in general, like the way we price our offerings and we wish to continue to be customer-led and meeting them where they are. The largest amount of value delivered today is through the seat-based pricing model. The collections have been a major transformation in how we do that, for sure. And in that, you are getting a broader amount of value that you can see there.. So we talk about that when people move to the Teamwork Collection, which we're seeing great momentum in. We talked about the cross-sell and the expansion earlier. The Teamwork collection gives you an amazing amount of software value across Jira, Confluence and Loom and all of the platform assets, goals and projects, et cetera, gives you access to Rovo, but it gives you an increased Rovo credit allowance. And we see that in the Teamwork Collection customers using more than twice as many Rovo credits per user, right? We want to make sure that we're building amazing features that use those Rovo credits, that the customers see value in using those credits. They also have more than twice as many active agents. So the Teamwork Collection comes with a larger pool credits, which customers are then using increasingly. And that's leading Rovo driving customers to have twice the ARR growth rate of non-Rovo customers, which is all a good set of long-term clients' direction and areas for us. We have a series of consumption or usage-based pricing meters now. I think we're over 10 or 12 meters from assets to customer service, index subjects, extra Rovo credits. Forge has a series of different offerings for extensibility, Bitbucket Pipelines. So I would say that we continue to be customer-led in how we deal with that pricing as long as customers continue to consume our AI offerings and continue to grow, which I believe they will. We have a great track record of doing that, growing that token usage of 20% month-on-month. is an incredible achievement by our team, and it shows value of the offerings that we are delivering. And fundamentally, it's about selling the outcome to the customer, then understanding the value that they're getting from our software. You've seen that in them broadly increasing the length of their commitment to the Atlassian platform and increasing their overall dollar-based commitment. You can see that in our strong RPO growth, as James pointed out, normalizing for the Ascend revenue recognition north of 40%, that is customers voting for the long term for the Atlassian platform with our pricing models continue to adapt to their needs underneath that. So I feel we're really strongly placed for that. James, I'll leave it to you to talk about the second half of the question. James Chuong: Yes, Fatima, as it relates to margin expansion, I think we're just in this unique opportunity right now where we're seeing a lot of demand signals, and we're going to continue to reinvest I think on the AI side, on the enterprise sales side where we see a lot of opportunity. But at the same time, we're going to do that while balancing a very disciplined fiscal approach. You saw that in the shareholder letter where we elevated driving durable, profitable growth as a strategic priority for the company, alongside AI, enterprise and system of work. So again, that margin expansion is going to come twofold through those types of efficiencies as well as continue to drive value for our customers on that top line. Michael Cannon-Brookes: Fatima, if I might just add on that. Look, we're seeing an amazing result of investments in the business, right? James talked about durable profitable growth. That's been a long-term Atlassian aim. We've run an incredibly capital-efficient business for our entire history. And I appreciate you calling out we've had some great quarters about as we look to continue the durable, profitable growth story as one of our strategic priorities. At the same time, we've had a number of wins across the R&D investments that we've had in terms of the engineering at scale. You can see that in our continued strength in our COGS numbers, in the cost of operating our platform which is an incredible achievement because that platform is operating with the larger customers that are also expanding at larger and larger scale than ever before, and we are running the platform at a cheaper and cheaper rate without any reliability hiccups. So that's a huge credit to our engineering team and the work that we've done across every level of the stack to continue to build that durable profitable business, every reason that we should do that in the future.and we're seeing that in the fantastic results that we have. So I just wanted to add on, there's an R&D story, there's a finance story, and we're feel really strong about that in terms of durable profitable future. Operator: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for some closing remarks. Mike? Michael Cannon-Brookes: Thank you all, everyone, for joining us on the call today. Thanks to the Atlassian team for a fantastic quarter. As always, to all of you, we appreciate the thoughtful questions. I believe one of our long-time friends, Keith Weiss, is retiring after this call. So Keith, thank you very much for all the questions over time in person and virtually. We appreciate your thoughtful questions, especially today. And to everyone else, hopefully, Keith, hopefully you will join us next week in Anaheim for Team '26. We have a series of incredibly exciting announcements as well as an investor forum. So whether we see you online or in-person in Anaheim, we'll see you next week. And otherwise, hope you have a kickass weekend.
Operator: Good day, and welcome to the CRH First Quarter 2026 Results Presentation. My name is Krista, and I will be your operator today. [Operator Instructions] At this time, I'd like to turn the conference over to Jim Mintern, CRH Chief Executive Officer, to begin the conference. Please go ahead, sir. Jim Mintern: Hello, everyone. Jim Mintern here, CEO of CRH, and you're all very welcome to our Q1 2026 results presentation and conference call. Joining me on the call is Nancy Buese, our CFO; Randy Lake, our COO; and Tom Holmes, our Head of Investor Relations. Before we get started, I'll hand over to Tom for some brief opening remarks. Tom Holmes: Thanks, Jim. Hello, everyone. I'd like to draw your attention to Slide 2, shown here on screen. During our presentation, we'll be making some forward-looking statements relating to our future plans and expectations. These are subject to certain risks and uncertainties, and actual results and outcomes could differ materially due to the factors outlined on this slide. For more details, please refer to our annual report and other SEC filings, which are available on our website. I'll now hand you back to Jim, Nancy and Randy. Jim Mintern: Thanks, Tom. Over the next 20 minutes or so, we will take you through a brief presentation of our first quarter results, highlighting the key components of our performance for the first 3 months of the year as well as providing you with an update on our expectations for the year as a whole. We are also going to discuss our recent portfolio management and capital allocation activities and why we believe our superior strategy will continue to deliver industry-leading growth and value creation for our shareholders. First, on Slide 4, some key messages from our results announcement. I am pleased to report a strong first quarter performance backed by our superior strategy, unmatched scale and connected portfolio of businesses. Overall, we delivered further growth in revenues, adjusted EBITDA and margin compared to the prior year period, reflecting good momentum from early season project activity, disciplined commercial execution and positive contributions from acquisitions. We remain focused on allocating and reallocating capital for higher growth as we continue to build a connected portfolio. In the year-to-date, we have agreed to divest of 3 noncore businesses for a total consideration of $1.9 billion, reflecting our relentless focus on the active management of our portfolio to maximize shareholder value. We have also announced that we are investing approximately $900 million in 9 value-accretive acquisitions. The largest of these is an agreement to acquire Axius Water, further strengthening our position as a leading U.S. water infrastructure player, and I will take you through that in further detail later in the presentation. We also continue to return significant amounts of cash to our shareholders. Our ongoing share buyback program has returned approximately $400 million so far this year. And today, we are commencing a further quarterly tranche of $300 million to be completed no later than the 28th of July. I am also pleased to report that the Board has declared a quarterly dividend of $0.39 per share, representing an increase of 5% on the prior year, in line with our strong financial position and policy of consistent long-term dividend growth. Notwithstanding the current macroeconomic uncertainty, the underlying demand environment across our key markets remains positive, and we are pleased to reaffirm our financial guidance for 2026, reflecting a strong start to the year as well as the net impact of divestitures and acquisitions agreed in the year-to-date. Assuming normal seasonal weather patterns for the remainder of the year and no further major dislocations in the geopolitical or macroeconomic environment, we expect full year adjusted EBITDA to be between $8.1 billion and $8.5 billion, representing another strong year of growth and value creation for CRH. Turning now to Slide 5 and our financial highlights for the first 3 months of the year. Overall, a robust performance and a good start to the season with revenues, adjusted EBITDA and margin all well ahead of the prior year period. Total revenues of $7.4 billion were 9% ahead, supported by good underlying demand, disciplined commercial execution and contributions from acquisitions. This translated into adjusted EBITDA of $586 million, 18% ahead and a further 70 basis points of margin expansion, reflecting continued operational improvements and strong cost discipline across our businesses. Turning now to Slide 6. And here, you can see our growth algorithm, which drives our performance year after year. As the leading infrastructure player in North America, we are uniquely positioned to capitalize on 3 large and growing megatrends: transportation, water and reindustrialization, which we believe will support significant growth and value creation for our business going forward. Next, the CRH Winning Way, the force multiplier that enables us to capitalize on these growing infrastructure megatrends. This is what really sets CRH apart. Through our Winning Way, we execute our superior strategy with discipline and focus, driving leading performance across 4,000 locations through a culture of continuous improvement. As responsible stewards of our shareholders' capital, we leverage our proven growth capabilities to build leadership positions of scale in attractive high-growth markets. All of this is supported by 4 key enablers: customer centricity, empowered teams, unmatched scale and our connected portfolio of businesses. Overall, our growth algorithm underpins our proven track record of consistent long-term delivery and our position as the leading compounder of capital in our industry. Now at this point, I will ask Randy to take you through the performance of each of our businesses. Randy Lake: Thanks, Jim. Hello, everyone. Turning to Slide 8 and starting with Americas Materials Solutions, which is supported by our strategic alignment with growing infrastructure megatrends. Overall, our business had a strong start to the year. Total revenues were 21% ahead of the prior year period, with robust volumes across all product lines, reflecting good early season project activity, strong commercial execution and contributions from acquisitions. In Essential Materials, first quarter revenues were 31% ahead. Our aggregates volumes increased by 14%, while pricing was 1% behind, reflecting geographic and project-related mix effects. On a mix-adjusted basis, our aggregate pricing was 5% ahead. Cement volumes were 10% ahead, while pricing declined by 1%, reflecting regional variances across our operating footprint. In Road Solutions, growth in both asphalt and ready-mixed concrete volumes, along with increased paving activity, resulted in Q1 revenues 16% ahead of the prior year period. Now let me take you through some examples of the projects that have been really driving good early season activity across our business, leveraging our scale, capabilities and connected portfolio. In our Road Solutions business, we're involved in the widening and reconstruction of I-95 in South Carolina, supplying over 0.5 million tons of asphalt and 250,000 tons of aggregates. In the reindustrialization space, we're active in the construction of a large chip plant in Boise, Idaho, where we're supplying over 0.5 million tons of aggregates and cementitious materials through our fully connected offering. We're also participating in the construction of a large data center facility in Michigan, delivering over 1.2 million tons of aggregates in the first quarter alone. Of course, it's worth noting that this is the seasonally less significant quarter for our Americas Materials Solutions business. But looking ahead and as the construction season gets fully underway across many of our markets, I'm encouraged by the positive momentum we're seeing in our bidding activity and our backlogs. Next to Americas Building Solutions on Slide 9, where our business delivered a solid performance in the first quarter despite contending with adverse weather conditions in many regions and subdued new-build residential activity. Revenues in our Building & Infrastructure Solutions business were 4% ahead of the prior year, supported by positive data center and utility infrastructure demand. In Outdoor Living Solutions, while the underlying demand environment for residential repair and remodel activity remains resilient, a delayed start to the season due to adverse weather resulted in Q1 revenues 3% behind the prior year. Moving to International Solutions now on Slide 10, where our business delivered a strong first quarter performance, supported by good pricing momentum and disciplined cost control. Total revenue growth of 5% translated into 32% increase in adjusted EBITDA and a further 130 basis points of margin expansion, reflecting improved operational efficiencies and contributions from acquisitions. In Western Europe, activity levels were supported by infrastructure and reindustrialization demand, while in Central and Eastern Europe, activity levels are recovering following adverse winter weather across the region. In Australia, our business continues to perform very well, benefiting from positive underlying demand, operational improvements and synergy delivery from recent acquisitions. So overall, a strong start to the year for our business. And at this point, I'll hand you over to Jim to take you through our recent capital allocation activities in further detail. Jim Mintern: Thanks, Randy. Active portfolio management is a continuous process in CRH. We are constantly allocating and reallocating our capital to maximize value for our shareholders. As you can see here on Slide 12, in the year-to-date, we have agreed 3 strategic divestitures of noncore businesses for a total consideration of $1.9 billion. In addition to the previously announced divestiture of Construction Accessories, we have reached agreements to divest of our Lawn & Garden business, a manufacturer and supplier of mulch, soil and decorative stone, for $1.1 billion and also MoistureShield, a manufacturer of composite decking. The divestiture of MoistureShield closed in early April, while the Construction Accessories and Lawn & Garden transactions are expected to close in the second quarter of 2026, subject to customary closing conditions and regulatory approvals. Together, these transactions demonstrate our commitment to the active management of our portfolio and the reallocation of capital into higher growth, more connected businesses to maximize value for our shareholders. At this point, on Slide 13, I would like to provide an overview of our U.S. water infrastructure platform, 1 of our 4 key growth platforms, which we highlighted during last year's Investor Day. We are a leading player in this attractive high-growth market, benefiting from resilient public funding and nondiscretionary investment. Reindustrialization and an aging water infrastructure network with significant investment needs are the key drivers of demand. And with approximately 1/3 of the U.S. water infrastructure more than 50 years old, the need to upgrade the systems that collect, transport and treat water is critical. Our national reach and expertise give us a significant advantage as investment in this area accelerates. And as you can see on the slide, we have strategically focused on 2 key areas: water transmission and water quality, the fastest-growing segments of the over $100 billion U.S. water ecosystem. In addition to a robust funding backdrop, the market also remains very fragmented with significant runway for further growth through value-accretive acquisitions, enabling us to leverage our unmatched scale, connected portfolio and proven growth capabilities. Our water infrastructure platform is also closely connected to our leading aggregates, cementitious and road platforms. Over 80% of the products we produce in our water business consume aggregates and cementitious materials. And since over 85% of roads require water management systems, the strength of our water platform reinforces the benefits of our connected portfolio and shared customer base. Turning now to Slide 14. In the water quality space, we are pleased to announce the expansion of our existing water infrastructure offering with an agreement to acquire Axius Water, a leading provider of water quality and nutrient removal solutions in North America for approximately $700 million. This acquisition will further strengthen our existing position as a leading water infrastructure player in the United States. With a strong, experienced management team and best-in-class customer-centric design and engineering capabilities, it is an excellent fit and highly complementary to our existing water platform. Integrating Axius into our connected portfolio will enhance our customer offering and drive significant commercial, operational and self-supply synergies. It will also strengthen our IP portfolio across the water value chain through its extensive R&D capabilities. Subject to customary closing conditions and regulatory approvals, the transaction is expected to complete in the second quarter of the year, and we will keep you updated as that progresses. Overall, our agreement to acquire Axius, along with a further 8 value-accretive acquisitions completed in the year-to-date, demonstrates the continued build-out of our connected portfolio and our commitment to allocating capital into attractive high-growth markets. I will now ask Nancy to take you through why we believe our superior strategy will continue to deliver industry-leading growth and value creation for our shareholders. Nancy Buese: Thanks, Jim. Hello, everyone. As you can see here on Slide 16, we believe our unmatched scale and connected portfolio delivers higher and more consistent long-term growth. As the #1 infrastructure play in North America, we benefit from increased exposure to publicly funded construction, which is less volatile and more predictable compared to other areas of construction. We've built leading positions in attractive high-growth markets aligned with 3 secular megatrends: transportation, water and reindustrialization, which together represent one of the most compelling growth opportunities in decades. We drive performance excellence through a culture of continuous improvement, replicated at scale across each of our 4,000 locations. You can see this in our first quarter performance with further margin expansion driven by the operational improvements and strategic growth CapEx investments we've made across our business. Supported by our strong balance sheet and cash generation capabilities, we expect to have approximately $40 billion of financial capacity over the next 5 years to invest for future growth and deliver further returns to our shareholders. Our fully connected offering across aggregates, cementitious, roads and water also enables us to become more deeply embedded with our customers, driving higher pull-through demand for our Essential Materials and capturing a greater share of wallet on construction projects. It also results in lower capital intensity and a more variable cost base, enabling us to adapt quickly to any challenges that come our way while maximizing growth, cash generation and return on capital. Combined with our unmatched scale, the connected nature of our portfolio provides us with superior growth opportunities, multiple avenues to grow both organically and through acquisitions. We have a strong recurring M&A pipeline and the ability to deliver enhanced synergies supported by our proven growth capabilities. In fact, when we look at our track record of synergy delivery in recent years, we typically achieve a 2 to 2.5x reduction in our entry multiple, which really highlights the value we can create for our shareholders. A recent example of this is our 2024 acquisition of the Hunter cement plant in Texas, which has delivered synergies well ahead of our original expectations and our typical run rate. This was driven by operational improvements, increased self-supply and logistics optimization. Similarly, although earlier in the integration process, our 2025 acquisition of Eco Material is also performing strongly with some good early wins on synergy delivery. Overall, our unmatched scale and connected portfolio enables us to deliver higher and more consistent long-term growth. On Slide 17, you can see the consistency of our performance over the last decade. In addition to growing our top line, we have delivered 15% compound annual growth in adjusted EBITDA, approximately 110 basis points of average annual margin expansion and 18% compound annual growth in diluted earnings per share. Our track record across each of these financial metrics demonstrates our ability to deliver consistent long-term growth and performance. And as you can see, from a total shareholder return perspective, the story is just as compelling. Over the same time frame, we've generated a compound annual total shareholder return of 19%, highlighting our position as a leading compounder of capital and a powerful platform for shareholder value creation. Jim Mintern: Thanks, Nancy. Now before I provide an update on our financial expectations for the full year, let me share our latest thoughts on the outlook across our markets. On to Slide 19 and first to transportation, where the demand backdrop is robust, supported by the continued rollout of federal funding through the IIJA, where approximately 50% of highway funds are yet to be deployed. State-level funding is also strong with 2026 DOT budgets up 6% on the prior year. In fact, 2026 is expected to be a record year for investment in transportation infrastructure, which bodes well for our business given our unmatched scale and market-leading position. We remain encouraged by the progress being made in Congress regarding a multiyear reauthorization of highway funding with continued bipartisan support for increased infrastructure investment in the years ahead. In our International business, we expect robust demand in infrastructure to continue, supported by significant investment from government and EU funding programs. We also expect to see continued demand for water infrastructure with strong growth projected in the areas of transmission and water quality. In reindustrialization, we expect continued strong demand for our large-scale manufacturing and data center investment in both the U.S. and our international markets. And with the benefits of our unmatched scale and connected customer offering, we are well positioned for growth in this area going forward. In the residential sector, we expect repair and remodel demand in the U.S. to remain resilient, while new-build activity remains subdued as a result of ongoing affordability challenges. As we have said in the past, this is not a demand issue, and we believe the long-term fundamentals in this market remain very attractive, supported by favorable demographics and significant levels of underbuild. In summary, the overall trend is positive for our business with our strategic focus on growing infrastructure megatrends and the benefits of the CRH Winning Way, leaving us uniquely positioned to capitalize on the strong growth opportunities that lie ahead. Turning now to Slide 20. And against that backdrop, we have reaffirmed our financial guidance for 2026, reflecting a strong start to the year as well as the net impact of divestitures and acquisitions agreed in the year-to-date. Assuming normal seasonal weather patterns for the remainder of the year and no further major dislocations in the geopolitical or macroeconomic environment, we expect full year adjusted EBITDA to be between $8.1 billion and $8.5 billion, net income between $3.9 billion and $4.1 billion and diluted earnings per share between $5.60 and $6.05, representing another strong year of growth and value creation for CRH. It's still very early in the construction season, but we will update you on our expectations as the year unfolds and as the season gets fully underway across our markets. So that concludes our presentation today. I will now hand you back to the moderator to coordinate the Q&A session of our call. Operator: [Operator Instructions] We'll take our first question from Adrian Huerta with JPMorgan. Adrian Huerta: Congrats on the results. My question is just if you can provide further color on your guidance for this year, especially after these transactions that you did and the underlying assumptions that you have. Jim Mintern: Good to hear you. I might ask Nancy maybe to come back at the end just on some of the detail, the puts and takes in terms of the full year guidance, but very pleased this morning to be reaffirming our full year guidance, which is really reflecting the strong start we've had to the year in Q1. And at this stage of the year, what we look for is that all the key building blocks are really in place early in the season to deliver on the guidance. And what we're actually seeing across our markets right now is a positive demand backdrop. We've seen it in the Q1 performance and into March and April with strong early season project activity. And we're seeing good growth across areas such as our roads and reindustrialization, which are performing well. I think, again, the guidance is supported by the continued rollout of the IIJA and very strong local state funding. And that's providing us with really good backlogs at this point of the year, which are nicely up year-on-year. In addition, we've had a really good start from a pricing perspective. Pricing momentum across all our businesses has been good in the first quarter with really strong execution across our commercial teams. And we've had a very good winter maintenance program as well this season. And that kind of gives us the confidence in terms of giving the guidance today and for another year of margin expansion. So putting all that together, pleased to reiterate the guidance for the year with adjusted EBITDA between $8.1 billion and $8.5 billion. Nancy? Nancy Buese: As Jim said, it's been a really busy start from a portfolio perspective. We've had $1.9 billion of divestments announced and about $900 million of acquisitions. So when you think about the scope impact for 2026, we would expect about $200 million of net incremental EBITDA contribution. And just as a reminder, that's unchanged from our previous guidance. So with all the ins and outs, the previous guidance had already included the divestment of the Construction Accessories business. So now that's also reflecting the impact of the further acquisitions and divestments that we announced today. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: I wanted to ask you about just what we're seeing in energy costs. And with the energy price spike, how are you thinking about the impact on your vertically integrated business model and the extent to which your hedging programs allow you to mitigate that impact? Jim Mintern: David, yes, clearly, we've seen a lot of volatility and spikes in energy in recent months. But maybe first to kind of contextualize it and kind of size it, for us, energy is approximately about 5% of our total annual revenues. And as we would have said on kind of previous earnings calls, we have a very well managed, well -- kind of, very mature hedging policy in place, and we typically cover out on a kind of rolling 9-month basis. And that -- what that gives us is really good visibility for our energy costs for the year ahead. And right now, we're kind of focusing on our guidance, that we just reaffirmed this morning, and really looking for another year of margin expansion. I might ask Randy, though, maybe just to give a bit of a flavor as to how the teams -- the commercial teams are responding in the field to this recent energy spike. Randy Lake: Yes. I'd say the team, certainly, we do this on a market-by-market basis, but really experienced commercial teams who focus certainly on value delivery, and we've dealt with periods of volatility before where we've seen significant spikes and shocks. But our focus really is on a market-by-market basis, making sure that we recover the increases, any increase we would experience in input costs, and fundamentally protecting margins. It's about advancing those to our expectations that we're calling out even today in terms of growing margins. Additionally, I'd say we have already started kind of midyear price increases in a very targeted way. If that uncertainty continues, we'll continue to evolve that strategy. But we're playing off the front foot, being very proactive in the area, and the teams have done a terrific job, again, about protecting those margins. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: Jim, just circling back to your full year guidance, could you talk a little bit more about sort of the underlying assumptions for aggs and cement volume and price assumptions for the year? Jim Mintern: Sure. Absolutely, Anthony. Good to hear from you. Listen, I'll ask Randy maybe to give you the specifics by market and volume and prices. But as I said kind of in the opening question, a really good start to the year, with overall strong underlying demand. We see it in our backlogs and a really good start to the year across all the businesses from a pricing perspective. But maybe, Randy? Randy Lake: Yes. I think we called it out in the presentation. Certainly, Q1 is off to a really good start. So volumes up on agg, 14%; cement, 10%. I think Jim mentioned it, the volume within the context of our backlog, that really gives us that 6- to 9-month window in terms of underlying activity levels. And we continue to see both bidding activity, importantly, what we're winning, both on a revenue and then volume standpoint, improve year-over-year. So it really reaffirms kind of what we called out at the beginning of the year, which we anticipated from an agg standpoint, low single-digit improvement in volume and supported by mid-single digit in pricing. And maybe just calling out the price on the agg side. I think for me and our commercial teams, the most important metric in Q1, because you can get some volatility, is really around the adjusted -- mix-adjusted pricing, and we see that at 5%. That's indicative of what we should expect to see for the full year. So that -- the teams have done a terrific job. It's a metric we lean heavily on at this time of year. So good to see the progress there and really supports our midyear single-digit price expectations for the full year. Looking at cement in the Americas, in particular, again, good momentum, good backlog, good early start to the season. Certainly, you saw the pricing move back a bit in totality. You're going to see regional differences. We're coming off 3 exceptional years, strong years in terms of pricing. But when we look at the backlogs, again, I'd say we would expect low single-digit improvement in volumes and low single-digit improvement in pricing as well. So teams are doing a nice job there. On an international basis, Europe and Australia, the weather certainly impacted our business in Europe, in particular, in January and February, but it's recovered very nicely in March and April, reflecting good project backlog and underlying demand that really gives us visibility in terms of the full year, again, low single-digit volume improvement in our International platform and mid-single-digit improvement in pricing. And you can see that coming through in Q1, a 3% improvement from last year. So all the signals are strong and really does iterate -- and reiterate kind of our focus and the guidance we gave in terms of the demand picture. Operator: Your next question comes from the line of Trey Grooms with Stephens. Trey Grooms: As typical, you guys continue to be very active in portfolio optimization. Jim, maybe you could give us maybe a little additional color on the year-to-date divestments? And then also, how should we be thinking about divestitures or divestments going forward? Jim Mintern: Sure, Trey. Good to hear you. Yes. Listen, a very good first quarter in terms of portfolio activity, right? We're very pleased with it. And when we look at portfolio activity in CRH, it's a continuous process. It's not a one-off event. It's something we continuously do. And we announced this morning that 3 strategic divestitures of noncore businesses for a total consideration of $1.9 billion. Now every capital allocation decision, whether it's on the investment side or the divestment side or growth CapEx, in CRH is always looked at through the lens of trying to maximize shareholder value. Now these were good businesses that we're divesting of, but we really had the opportunity, we took the opportunity, to recycle the proceeds into faster-growing and connected platforms. And in this case, taking the opportunity to increase our exposure to the kind of faster-growing water infrastructure sector. And I think going forward, it should be more of the same, Trey. You should expect us to continue to look for opportunities to optimize our portfolio. Operator: Your next question comes from the line of Michael Dudas with Vertical Research Partners. Michael Dudas: You mentioned -- Jim, I think as you mentioned in your prepared remarks, a positive outlook on the next reauthorization of IIJA. Maybe you could share -- you or Randy can share a little bit of view on what you're hearing from your contacts, size of what will be provided, maybe timing? Would there be any issues you think that would disrupt later this year into early next, any project bidding if there's a continuing resolution, or Congress doesn't get its act together before September 30? Randy Lake: Yes. Good question. I guess maybe take a step back first. Jim called it out in the opening remarks in terms of the underlying funding with IIJA yet to be deployed, almost 50% has yet to hit the street. And you combine that with really the proactive measures that the states have taken over the last number of years, and you have a really strong view in terms of not only short-term but long-term funding and the demand environment. I mentioned on the pricing side, what gives us the optimism around the ability to deliver is certainly our backlogs. We are seeing, and we track this every week, kind of the quantum that we're bidding continue to grow. We're winning our fair share. Revenues and overall volumes are improving year-over-year. So you're seeing the benefits of both IIJA and the states coming through nicely. I think what we're hearing is, there's positive conversations, both from the administration and from Congress, both in the House and the Senate. I think fundamentally, there's this understanding and appreciation of the need for the investment. It's historically been bipartisan. There's no change in terms of the conversations that are happening today in and around that. I think there's also an understanding that there needs to be a meaningful step-up in the investment in core infrastructure, which is great for us when we talk about roads and bridges and highways, that's core infrastructure. And so there's alignment both in the administration and Congress around that. So I think we're optimistic that a bill will get passed in the second half of the year. In terms of the quantum, I mean, there's numbers all over the place. I think fundamentally, what we believe and what we hear is that it will be a step-up, certainly a meaningful step-up from what we have today. And I think more importantly is the underlying understanding that we need to have that kind of level of investment. I guess, to your question, if they can't reach a new piece of legislation? We've been here before, we call -- go into what they call continuing resolution. I think what would be interesting about that is that we're coming off peak levels of investment in terms of the IIJA, a significant step-up in '26 from '25. So you're coming from record levels that will continue into '27. That gives us a lot of surety -- and more importantly, our customers, the states, a lot of surety in terms of not only volume and demand in '26, but into '27 as well. So again, I think there's great support, good momentum and conversations. All those things will lead one way or the other to higher level of investment and good outlook for our business. Operator: Your next question comes from the line of Colin Sheridan with Davy. Colin Sheridan: You had covered off the energy side pretty well on the cost front. I was just wondering if you could maybe give us an update on the more general cost environment and maybe an update on the winter-fill program as well. Jim Mintern: Yes. Sure, Colin. Listen, as we said in February and really seen us continue to see it, we're seeing inflation in other cost items beyond energy also. And it's mainly in the same areas, again, in terms of labor, raw materials, maintenance and subcontractors. And again, overall, we're continuing to expect kind of mid-single-digit inflation in 2026 across those categories. Now that really highlights the importance of the continued price momentum that we've been touching on earlier in the call as well. And that together gives us that outlook of margin expansion for the year. Now in terms of the winter-fill program this year, in 2026, yes, if you take a step back first, it is one of our key competitive advantages that we have as part of our Roads business. And it is unique to CRH, our off-season storage capability at scale. We have the ability and we do -- we store about half our annual liquid requirement we accumulated off-season. And we've built up that capacity over several decades at this point in time. And it really is one of the benefits of having that scale in our Road business and our connected portfolio. Now what does it give us? It gives us kind of 2 key strategic advantages, right? First is on the procurement side, right? We have the ability to acquire at scale, off-season with good procurement advantages, and we will get certainty of cost before we head into the season. And it also gives us security of supply, right? In certain parts of our business, you have a kind of limited enough paving season that runs from about now to Thanksgiving. So it's important that we have the product available to meet the kind of backlogs and demand we have. So this year, we've had a very well-executed winter-fill program. We are exactly where we want to be right now as the season kind of shifts into top gear, and we're well positioned for another strong year of growth in our Roads business in 2026. Operator: We have time for one more question, and that question comes from Kathryn Thompson with Thompson Research Group. Kathryn Thompson: As we close today's call, just one follow-up really more on getting further clarification and color, more importantly, on your acquisitions year-to-date. And as you think about the divestitures, which were, as you said, noncore and then the addition of Axius, how does the current pipeline of acquisitions look? And maybe give a little bit more color of how that fits into the broad strategy that you outlined in your Investor Day last September. Jim Mintern: Sure, Kathryn, absolutely. Yes, listen, we've had a good start to the year in Q1, right, from an M&A perspective with 9 acquisitions announced for a total consideration of $900 million. And really, they're spread across the 4 connected platforms, across aggregates, cementitious, roads and water. And all of these platforms, they're beneficiaries of large and growing infrastructure megatrends that we called out on our Investor Day. Now maybe first, just before we talk about Axius, just briefly to give an overview of our kind of water infrastructure platform. For us, it's a highly attractive and a core growth platform. And it operates in high-growth markets, which are supported by very strong secular tailwinds. It's also a sector with very significant investment needs, particularly in the U.S. after decades of underinvestment in this particular space. And it's a sector which has robust public funding backdrop. Now over the last 50 years, we've been building out a leading position in the water infrastructure place, primarily for us, focusing on 2 key areas around transmission and water quality. Now this morning, we announced the acquisition of Axius, so maybe looking at that. It's an excellent fit for existing water infrastructure business, and it's really consistent with our connected water strategy and kind of strengthens our customer offering in the water quality area in particular. What it does is making us more deeply embedded with our customers. It's increasing our share of wallet on water infrastructure projects and particularly on Axius, from a synergy perspective, Kathryn, there's really good opportunity primarily from the commercial side, but also on the operational and in terms of self-supply synergies across our connected portfolio by being able to supply across some of the other platforms into Axius as well. Now maybe the last part of the question. I think the pipeline right now. It's strong, Kathryn, right? I think, again, with our unmatched scale and the connected portfolio, we have significant optionality for where we deploy capital. And you've seen that over the last 12 months, right, where we've continued to invest across each of the 4 platforms. In the U.S., in terms of aggregates, we announced a deal of North American Aggregates last year. The deal last year was Eco Material, cementitious deal towards that in September 2025. Talley Construction in the Roads business last year. And in terms of the water platform, we did the investment in VODA.ai and now the Axius deal. So the pipeline is strong right now. What we're doing consistently is that we're continuing to build backlogs of optionality across each of those 4 platforms. But again, every capital allocation decision will be looked at through the lens of maximizing shareholder value. And over the next 5 years, with an estimated $40 billion of the financial capacity, we're really well positioned to continue to deliver growth and value creation by continuing to deploy that capital across those 4 growth platforms and regions. Well, that is all we have time for today. Thank you for all your attention. And as always, if you have any follow-up questions, please feel free to contact our Investor Relations team. We look forward to updating you again in July when we will report our results for the second quarter of 2026. Thank you, and have a good day and stay safe. Thank you. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to Roku, Inc. 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, please 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. I would now like to hand the conference over to Conrad Grodd, Vice President, Investor Relations. You may begin. Good afternoon. Welcome to Roku, Inc.'s first quarter 2026 earnings call. Conrad Grodd: Joining us on today's call are Anthony J. Wood, Roku, Inc.'s founder and CEO; Dan Jedda, our CFO and COO; Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. On this call, we will make forward-looking statements which are subject to risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. We will also present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against our results for the comparable 2025 period. With that, operator, our first question, please. Operator: Thank you. Please press star 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brent Nabaughan with Bank of America. Your line is open. Brent Nabaughan: Good afternoon. Thank you. Maybe just to start, can you explain some of the drivers for the strong first-quarter results and help us bridge that to your second quarter and full-year guidance, especially given all the momentum you have and political in the second half? Then as a follow-up, can you also discuss the impact rising memory prices are having on the devices segment and how you are thinking about total device segment investment? Thank you so much. Anthony J. Wood: Hey, Brent. Thanks for your question. I will turn it over to Dan in a second to answer your question directly, but let me say a few things. First, I am very happy with the trajectory of our business. We are on a great path, and I am excited about how things are going. We delivered an outstanding quarter and are executing against our monetization initiatives. For example, advertising revenue grew 27%, and our third-party partnership strategy is working. Adoption of Ads Manager is growing, and overall we are building a highly performant connected TV ad platform. Subscription revenue grew 30%, driven by premium subscription sign-ups, and we are expanding our tier-one partners in premium subscriptions. We recently added Apple TV in March, and this week we announced Peacock. We also recently passed 100 million streaming households, which is a huge milestone. We are focused on execution and are very well positioned. Dan will take your exact question. Dan Jedda: Thanks, Anthony, and thanks for the question, Brent. As Anthony mentioned, Q1 was an outstanding quarter for us. Platform revenue grew 28%, coming in ahead of our outlook, benefiting from the Olympics and the Super Bowl, which contributed to an increase in subscription and M&E spend. EBITDA margins more than doubled year over year to nearly 12%, and our $148 million of free cash flow for the quarter was our second-highest free cash flow on record with free cash flow margins of nearly 16%. Regarding the bridge from Q1 to Q2 and to the full year, keep in mind a few things. First, we start to lap the Friendly acquisition in Q2. Excluding Friendly in Q1, subscription revenue growth was 23%. Second, Q1 had the easiest comp with advertising growing 12% year over year in Q1 of last year. That growth stepped up to 19% in Q2 of last year, and we are comping this higher growth rate for the rest of the year in advertising once you back out political in 2025. Third, as I mentioned, Q1 benefited from the Olympics and the Super Bowl. All that said, we expect Q2 platform revenue to grow at a strong rate of 20% year over year, and I expect subscriptions and advertising both to be around this level of growth. For the full year, we increased our platform revenue guidance by over $100 million, or approximately three points of growth, to nearly 21%. We are increasing our EBITDA and EBITDA margins, and I fully expect free cash flow to again be above adjusted EBITDA for the full year. We have much stronger visibility into Q2 versus the second half, given the macro environment. As we gain better visibility into political and other initiatives, we will provide updated guidance for the second half. We are being a little conservative on our second-half outlook. Anthony, you want to start on the second question? Anthony J. Wood: Your second question was about memory prices in our devices segment. First, I want to highlight that the Roku, Inc. TV operating system uses significantly less memory and storage than competing platforms. We spend a lot of effort building a highly customized OS designed specifically for television, with bill of materials cost as a major focus. One way we achieve lower bill of materials cost is using less memory and being more versatile in the types of memory we can use. In the TV business, every dollar matters. It is a hugely price-competitive market. So although memory prices are going up—something we need to manage in our first-party business—most of our business is actually third-party products. As memory prices go up, the bill of materials advantage we have versus competitors gets bigger, which attracts TV OEMs and retail partners. That helps us win more accounts and retail placement. While there are issues around memory that we have to manage, it is generally good for our business because our cost advantage widens. Dan will talk more about the specifics. Dan Jedda: The most important thing to know is that we remain confident in our ability to keep expanding EBITDA margins in 2026 and beyond. We have confidence in growing our platform revenue double digits while managing our device investment across both gross profit and operating expenses. Device revenue is generated from the sale of our players and first-party TVs. It does not include revenue from the sale of third-party Roku, Inc.-made TVs by our OEM partners, which is the largest portion of our overall device unit volume. We look at total device investment across both device gross profit and distribution costs, which sit in sales and marketing. Despite expectations for elevated memory costs in the second half of this year, the amount of our overall device investment and unit sales factored into our full-year outlook has not changed from last quarter. Our prior outlook already accounted for increasing memory prices. We maintain strategic flexibility to optimize the mix of units across players, first-party TVs, and third-party TVs. No one knows what will happen to memory prices beyond this year or how the CTV market will react. Even if memory prices remain elevated beyond this year, we are confident that strong platform revenue growth and our device and operational flexibility put us in a position to continue to expand our EBITDA margins. Operator: Thank you. Our next question comes from the line of Sean Diffely with Morgan Stanley. Your line is open. Sean Diffely: Great. Thanks very much, team. I was hoping you could talk about what you are seeing with your third-party DSP strategy and Amazon in particular. I think you extended the partnership with them earlier this year, so I was hoping you could elaborate on what you are seeing there. Anthony J. Wood: Hey, Sean. Charlie will take your question. Charlie Collier: Hey, Sean. Appreciate the question. I will talk a little about Amazon, but stepping back, all of our DSP partnerships are important and serve different customers and segments. Our strategy is to be open and interoperable and deeply integrated with every major DSP so that when clients want to transact, we meet them wherever they choose to transact—whether on the Amazon DSP or, for example, through the extension of our DV360 deal with Google. We aim to be everywhere buyers want to transact. Strategically, our medium-term goal is to be the most performant CTV ad platform in the industry. While I will not break out specifics, first quarter results show our third-party DSP strategy is working. The majority of our video delivery is now through third-party programmatic partners, and we are growing quickly. These take time to ramp. We feel very good about how Amazon is doing and how our other partnerships are going. You are seeing the results in Q1 and in our compounded share of programmatic revenue. Combined, Amazon DSP, The Trade Desk, Yahoo, FreeWheel—all of them—advertisers can now access our premium inventory through virtually every major buying platform. Our job is to drive outcomes and performance for marketing partners, and we are bullish on our position as the open and interoperable partner in a marketplace with so many walled gardens. Operator: Thank you. Our next question comes from the line of Justin with KeyBanc. Your line is open. Justin Patterson: Great. Thank you very much, and congratulations on the 100 million household milestone and the Laguna Beach special. Conrad looked pretty excited repping that hat at Nasdaq. Two quick ones if I can. First, I was hoping to hear about how you are thinking about the role of Roku, Inc. Originals today. Second, we have seen many companies achieve meaningful productivity improvements from GenAI tools. How are you thinking about the pace of product innovation, improvements to discovery and recommendations, and what guardrails you have against rising token costs? Anthony J. Wood: Thanks, Justin. Charlie will take the question on originals and then I can take your second question on AI. Charlie Collier: Thanks, Anthony. Justin, first of all, that was a great hat, and we are really happy with Laguna Beach—he looked great. On content and specifically originals, our overall strategy in the content ecosystem is differentiated and has been honed over the years. Our original programming strategy has not changed. It is a targeted and powerful part of our offering, but remains a relatively small part of the overall content budget. In the upfront we say Roku, Inc. has the hits and the habits. The hits are ours—like the Laguna Beach 20th reunion, which became our largest unscripted series ever—and everyone else’s are on the platform. The habits are the massive daily viewing that makes up so much of U.S. TV viewing. With 100 million households and nearly half of streaming happening on our platform, our scale as a programmer is meaningful to every type of partner. Specifically for originals, we program across four pillars. We complement everyone’s hits and build the lead-in to their hits. We program against sports—an important vertical—and serve as a lead-in to major sporting events. We program seasonally—custom holiday movies with sponsors, World Cup specials, and similar. And we do UI programming—when Wicked launched on demand, we had original programming in our UI and brought Demi Lovato to do a concert on a Roku City rooftop. We also just launched a UI original, Roku City Dash, an interactive game. While the majority of our spending builds daily reach—because we see our viewer 25 days a month—we love when our originals take advantage of that. Anthony? Anthony J. Wood: On AI, at the highest level, AI is a big opportunity for Roku, Inc. It is a powerful tailwind for our business. We are integrating it across our entire technology stack. In our products and platform, we use AI to improve discovery and increase engagement, improve advertising performance, and unlock new monetization opportunities. We have used AI in the platform since the beginning, but over the last year or two we have been moving algorithms to modern generative approaches, improving performance. The more we personalize the experience, the more engagement we get, the more ad viewing we can drive, and the more subscription sign-ups we can drive. On engineering, we are rapidly adopting AI. It is accelerating feature development and enhancing engineer productivity. In content, AI is lowering the cost of content creation for both entertainment and ads, which should drive more engagement on our platform. On the advertising side, generative AI is helping us build the most performant connected TV ad platform—our big goal. We are leaning into performance across integrating AI, team and hiring, and product. Ads Manager is only possible because of generative AI. It opens an entirely new market of performance advertisers and SMBs. That product is built end-to-end on generative AI, including creative video generation. We also use AI across the company to drive operational efficiency and productivity. It strengthens our platform, improves monetization, and enhances performance. In terms of controlling costs, we are watching carefully. AI-driven efficiencies improve productivity and will show up in OpEx. Costs are very manageable at this point. Operator: Thank you. Our next question comes from the line of Vasily with Cannonball Research. Your line is open. Vasily Karasyov: Dan, I have a question about subscription revenue and how we should be thinking about forecasting it. You have given us five quarters now. Are there factors we should keep in mind when looking at quarter-on-quarter growth throughout the year? Any seasonal factors? Are there bumps from adding tier-one apps into The Roku Channel? Anything to help frame the trajectory would be helpful. Thank you. Dan Jedda: Thanks for the question, Vasily. There is some seasonality to subscriptions. During sporting seasons—like the NFL—there will be a jump in subscriptions. Price increases are also positive for partners and for us. But the most important factor is scale: we monetize tens of millions of subscriptions, so seasonality does not move the needle much quarter to quarter. What is most impactful from a revenue perspective is launching not just tier-one, but also tier-two and tier-three premium subscription partners, which we are doing very well. That brings incremental subscribers and revenue as we continue to launch new partners. As Anthony said, we recently launched Apple and Peacock. We will have more launches in the future. We also launched premium subscriptions in Mexico and will launch more countries. We think the subscription growth rate is being driven by adding more tier-one, tier-two, and tier-three partners. We are also adding new features and new subscription products that will help over time. The growth rate we see is indicative of the success in premium subscriptions and our direct-to-consumer subscription business. I believe this growth rate is sustainable given the pipeline. Vasily Karasyov: Thank you. Can you give an example of tier one versus tier two—how you classify that? Dan Jedda: We do not have a strict definition. Think of the largest content partners as tier ones. We will mention some larger launches—Peacock, Apple; Paramount+ is a premium subscription partner; we launched Apple in Mexico. There is also a relatively long torso and tail in this business. We monetize tens of millions of subscriptions across our subscription business, and all are growing well for us. Premium subscriptions are just growing faster. Operator: Our next question comes from the line of Michael Nathanson with MoffettNathanson. Your line is open. Michael Nathanson: Great. Thanks for the added disclosure—it is really helpful. On that line, if you look at gross margin on advertising, it has picked up nicely—probably an all-time high. What is driving that and is it sustainable, maybe even higher from here? And for Anthony, I would love to dig into first-party versus third-party OEMs. Are there differences in monetization or performance? Why would you not lean more to third party if it is more efficient? Anthony J. Wood: Thanks for your question. Dan will answer on advertising gross margin, then I will talk about OEMs. Dan Jedda: Advertising gross margin at just over 60% was very strong in Q1—up over 400 basis points year over year. We feel very good about advertising gross margins. We focus on growing revenue and improving gross margins. We have many tools: higher-margin ad products coming to market—think home screen monetization, like adding video—have been very positive. We are efficient in how we deliver campaigns. We continually optimize to maximize gross margin alongside revenue. On sustainability, I believe this level is sustainable for the rest of this year and thereafter. It could potentially come up. We have ongoing optimizations and new ad products that help margins. We are focused on both overall advertising revenue and GP. I believe it will sit at this level, maybe even come up. Anthony J. Wood: On first party versus third party, to level set, first-party products are our streaming players and streaming sticks—products we build, sell, distribute, and market ourselves—as well as first-party TVs sold under the Roku, Inc. brand and the Hero brand. Third party means working with other OEMs like TCL and Hisense, among many others. In terms of monetization, they are pretty similar. There are slight differences by retail channel because different retailers have different customer mixes, which can result in slightly different monetization. TV size also affects monetization a bit—bigger TVs monetize slightly higher—and players versus TVs differ somewhat, but none of these are particularly large. We would not focus on it. Why not lean more into third party? We already lean into third party a lot. The vast majority of Roku, Inc. TVs sold are third-party TVs. We do both because TV distribution is complex—different countries, regions, retailers, brands, models, features, price points. Offering a variety across third party and first party gives us maximum flexibility to maximize distribution and gives retailers options. For example, Hero is currently exclusive to Target, which helps distribution there. There are many similar reasons. Operator: Thank you. Our next question comes from the line of Richard Scott Greenfield with LightShed Partners. Your line is open. Richard Scott Greenfield: Hi, thanks for taking the question. A couple. One, you have been expanding tests of a new home screen—looks like half the screen is content boxes, apps pushed down, and a persistent video box on the right. How soon does this roll out more broadly, and what are you seeing early in terms of impact on subscription uptake or advertising? Any business impacts would be great. Two, there is talk from Antenna that Audi hit 1 million subscribers. Whether or not that is true, Audi is clearly bigger than expected. How big can Audi be? Do you need original programming? The future of Audi would be great to hear. Anthony J. Wood: Thanks, Rich. On the home screen, we have been testing the new design for a while. It is a big change—every Roku, Inc. customer will get the new home screen when it rolls out, so we want to ensure customers are happy and prefer it. It is easy to get most customers to like it more, but we aim for almost all customers to like it more. We have focused on improving monetization—subscriptions and ads—and engagement, and preserving our iconic look. Most connected TV platforms look similar; our home screen looks unique and more delightful, and we do not want to lose that. The test is in a fairly large number of homes and will roll out to everyone soon. Results are encouraging: more engagement, improved viewer satisfaction, increased monetization. For example, the marquee ad is visible on first launch in the new design—previously you had to scroll—driving higher click-through rates and making the unit more valuable. Making content more prominent is something consumers want; it drives engagement and allows us to promote subscriptions and ad-supported content. We are also making app tiles more user-friendly—more likely to see the app they want near the top. There are many detailed changes to improve satisfaction and monetization. It is going to be a good change for us. On Audi: for those who may not know, Audi is our owned-and-operated subscription streaming service. Our main O&O service is The Roku Channel, which is free and ad-supported and is the number two app on our platform with over 6% of all streaming viewing in the U.S. Audi is newer and not as big as The Roku Channel, but it is doing extremely well. It is an ad-free SVOD at $3 a month—very affordable. It targets a segment not well served today as services have raised prices and increased ad loads. We intend to stay focused on that affordable segment, which we think is very large. The content will keep getting better as we grow, enabling more investment and a positive flywheel. I think it can be very large. On originals, we do not have plans right now for big-budget originals. Those are expensive and generally require a more expensive service. That said, as we improve content quality and the audience grows, we will likely have originals someday. We do have Roku, Inc. Originals today—like Laguna Beach—which tend to be unscripted rather than big-budget scripted. For now, we are focused on improving content quality and promoting it in our UI and off-platform. We recently launched on Amazon Prime and in Mexico, and those are doing really well. Operator: Thank you. Our next question comes from the line of Peter Supino with Wolfe Research. Your line is open. Peter Supino: Hi. Question on your DSP relationships. If you could discuss the growth contributions you are seeing in the context of this great acceleration of ad sales. Could you rank order the growth contributions from The Trade Desk, Amazon, and others? And I believe your relationship with DV360 is somewhat different than with Amazon. If that becomes a contributor, should it have a different impact? Thank you. Anthony J. Wood: Hey, Peter. Thanks for the question. Charlie will take it. Charlie Collier: Thank you. I answered some of this earlier. Each relationship is different and important, and we start with the customer. Customers want to transact in different ways and have different goals, so our strategy is to serve them by being open, interoperable, and deeply integrated with every major DSP, meeting clients everywhere they want to transact. On top of that, our goal is to be the most performant CTV platform. On DV360, we expanded in ways that are slightly different—each DSP relationship is different. We signed up with Campaign Manager 360, which matters for three reasons. First, Roku, Inc. is the first streamer to participate in Publisher Match—we like being an early mover. Second, it enables holistic management of YouTube for the first time, which means advertisers can activate Google's first-party data and their own first-party data on Roku, Inc. Media inside DV360—audiences that previously only worked on YouTube in isolation. Third, Campaign Manager 360 measures Roku, Inc. Media regardless of where the advertiser's buy lands, providing proof of Roku, Inc.'s outstanding performance up and down the marketing funnel. As we seek to be known as the most performant CTV platform, this further proves it across all sources of advertising platforms. Operator: Thank you. Our next question comes from the line of John Hodulik with UBS. Your line is open. John Hodulik: Maybe talk about subscription revenue gross margin. It looks like, different from advertising, you saw some pressure over the last few quarters on gross margin there. What is driving that? Is it mix shift? Any outlook on that margin would be great. And I see that non-M&E ad spend on the home screen reached 30%. Where can that number go, and what categories are having success on the home page? Anthony J. Wood: Dan will take that. Dan Jedda: Thanks, John. On subscriptions, at just north of 40%, subscriptions gross margin is down, and it is mix-driven. We have different subscription activities that mix to higher revenue growth but slightly lower gross margins. I expect it to stay at the 41% to 42% level for the rest of this year. We also have higher-margin activities that we think will grow in Q2 and for the rest of the year. Premium subscriptions are driving margins down a little, but I expect it to level off here. Along with advertising margin at just north of 60%, I think platform gross margin will be closer to the high end of the 51% to 52% range. I do not expect it to go down from there—if anything, maintain or come up a little. On non-M&E, non-M&E brands represented nearly 30% of the Roku, Inc. Experience advertising revenue in Q1—an all-time high and a deliberate outcome of years of demand diversification work. Adding video to the home screen has been important, and the new home screen—which collapses the left nav—has the ad unit front and center on launch, increasing impressions and effectiveness. This diversification lets us expand availability of that unit, a positive for both revenue and gross margin. There are other home screen areas to monetize as well, but that unit is particularly impactful. Charlie Collier: To add, as I look at M&E now, when the M&E market is healthy, there is a tailwind for Roku, Inc., and when it is soft, the rest of Roku, Inc.'s book now carries us. That is a major difference between this year and prior years. Operator: Our next question comes from the line of Laura Anne Martin with Needham. Your line is open. Laura Anne Martin: Hi. I have two. First, you are aggregating the most expensive content—film and TV—and we are hearing from Netflix that they will add lower-cost content, maybe high-quality YouTube influencers. What is your vision for aggregation and driving engagement long term, which may take different kinds of lower-cost content? Second, on devices: device revenue is down 16% with a negative 14% margin. Does it matter whether that is sticks versus your Roku, Inc.-branded TVs? Or did Walmart buying Vizio affect shelf space? Could you go granular into what is driving the downdraft on the device line? Anthony J. Wood: Hey, Laura. On content, we talked about the Netflix announcement—they will do clips. We do have that kind of content in many places. We are primarily a distribution platform for third-party services; we carry YouTube, which has a lot of lower-cost content. In our own services, we distribute clips—from Saturday Night Live to movie trailers to sports highlights from multiple leagues. We have a “best of clips” strategy in our owned-and-operated services. We are not trying to compete with YouTube; we carry YouTube and it is a great product. With Audi, we are focused on offering a low-cost service, so we look for both high-quality more expensive content and high-quality lower-cost content, including content made lower-cost through AI production and unscripted formats. We are focused on a broad array of content, including lower-cost content. Dan Jedda: On devices, what is driving revenue and margins down is primarily ASPs in streaming players continuing to come down, along with higher memory costs. That impacts overall margins. From a unit perspective, we are on track with where we expected to be for total units across all devices. To be clear, we are not kicked out of Walmart. We still sell a lot of units at Walmart—third-party units and first-party TVs. First-party TVs are growing quite well year over year. It is not a volume issue per se; it is ASP pressure and higher memory pricing, especially in the back half, consistent with our guidance. Mustafa Ozgen: We feel good about diversifying our distribution and are on track with overall device unit sales targets for the year. We recently surpassed 100 million streaming households worldwide, a major milestone highlighting our scale and momentum. In the U.S., we are in more than half of broadband households. Customers love our products and experience, and retailers want to sell them. We continue to have a great relationship with Walmart—our products fit well for their customer base, and shoppers love them. We are successfully broadening and diversifying retail distribution. We grew our presence at Target—Anthony mentioned the Hero brand TVs supporting that partnership. We are growing at Best Buy, Amazon, and regional retailers, and we expect to add more retailers in the second half. We are actively expanding and diversifying TV OEM licensing agreements, including with long-term partners TCL and Hisense. Increasing memory costs across the industry are helping us—we are becoming more attractive to OEMs and retailers. We expect to see the impact of updated partnerships in second-half sales. Overall, we are well positioned. Our portfolio—streaming sticks, first-party TVs, third-party TVs—gives us flexibility to lean into products based on market and cost conditions. Roku, Inc. TV unit sales may go up or down quarter to quarter, but overall we expect to continue growing our scale. Operator: Thank you. Please stand by for our next question. Due to the interest of time, our final question will come from the line of David Carl Joyce with Seaport Research Partners. Your line is open. David Carl Joyce: Thank you. As you continue to deepen your integrations with DSPs and maybe add a few more, what could that do to the cadence of the advertising gross margin? I know you talked about overall where you think it could be, but what might the impacts be over the next few quarters? Anthony J. Wood: Thanks, David. Dan will take your question. Dan Jedda: The way we integrate with demand-side platforms impacts the volume of impressions we get depending on where the advertiser wishes to transact, but not margins—with one caveat. Amazon, where it is at the platform level, will be positive. The remaining DSPs—where we integrate and adopt their identifiers like hashed email—do not impact our margins either way. What impacts margins is how we fulfill: the ad units we have—like the home screen—and how we complete campaigns internally. We are very good at optimizing fulfillment, and we keep getting better. That is not a function of how demand comes in; it is a function of how we fill it with our platform. Operator: Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to Anthony for closing remarks. Anthony J. Wood: Thanks. It was an outstanding quarter. I would like to thank our employees, customers, advertisers, and content partners, and thanks to all the listeners for joining. Operator: That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the FinWise Bancorp First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce the FinWise team. Please go ahead. Juan Arias: Good afternoon, and thank you for joining us today for FinWise Bancorp's First Quarter 2026 Earnings Conference Call. Earlier today, we filed our earnings release and investor deck and posted them to our investor website at investors.finwisebancorp.com. Today's conference call is being recorded and webcast on the company's investor website as previously mentioned. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Forward-looking statements represent management's current estimates, expectations and beliefs, and FinWise Bancorp assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements, including factors that may negatively impact them contained in the company's earnings press release and filings with the Securities and Exchange Commission. Hosting the call today are Kent Landvatter, Executive Chairman; Jim Noone, CEO; and Bob Wahlman, CFO. Kent, please go ahead. Kent Landvatter: Good afternoon, everyone. I want to briefly comment on the executive transition we recently announced. Earlier this month, Jim Noone assumed the role of CEO of FinWise Bancorp in addition to serving as President and CEO of FinWise Bank. This reflects the successful execution of a deliberate multiyear succession plan developed by our Board, with Jim progressing from Bank President in 2023 to company CEO today. As Executive Chairman, I will remain actively involved in long-term strategy, Board governance and Investor Relations. This transition does not change our strategic direction and both the Board and I have full confidence in Jim's leadership. With that, I will turn it over to Jim to discuss our first quarter results. James Noone: Thanks, Kent. Before discussing our results, I want to say that I'm honored to step into the role of CEO of FinWise and grateful for the trust the Board and Kent have placed in me. This was a thoughtfully planned transition, and I've been fortunate to work closely with Kent for many years. With a strong team, clear strategy and disciplined operating model, I will remain focused on executing our strategic plan and building long-term value for our stakeholders. So I want to start by addressing our earnings shortfall this quarter. It was primarily driven by an increase in charge-offs in our SBA portfolio, concentrated in a narrow set of legacy credits. While we are confident in our overall portfolio, we expect these charge-offs to remain elevated over the next few quarters as those credits continue to be actively managed. I'll walk through more details of that segment during the credit section. I also want to provide my perspective on the business. FinWise has multiple growth engines, and they're at different stages of maturity. We manage 16 lending programs today. Our credit enhanced portfolio scaled from virtually 0 to over $100 million in under a year, and cards and payments are just beginning to contribute. This quarter, originations were strong at $1.7 billion, and core expenses held flat, enabling us to grow tangible book value per share to $14.34 at the end of Q1. But from a broader perspective, our partner pipeline continues to strengthen, the platform is scaling and the long-term trajectory of this business is exciting. Turning to quarterly trends. First quarter loan originations totaled $1.7 billion, up 38% year-over-year. Performance reflected contributions from both established maturing partners and newer launches. Our strategic partners platform continues to scale effectively. This enables us to pursue larger and increasingly impactful opportunities and offers the flexibility to absorb partner and product changes over time. As with any growing platform, quarterly volumes will vary with partner mix and seasonality, but the underlying trajectory is clear. As a reminder, 2025 was a very strong year, during which we announced 7 new strategic partners across lending, cards and payment programs, including our first major credit card program. Our partner pipeline is growing materially, both with new partners and new products from existing partners. We are increasingly sourcing more mature loan origination opportunities, and we are gaining traction with new card and payment programs. To support this effort, we recently added 2 seasoned professionals to our business development team, both of whom bring deep industry relationships and are well positioned to manage the opportunities that are coming in. Credit enhanced balances at quarter end stood at $109 million, an increase of $1 million during the quarter. We recognize this was below our guided pace of $8 million to $10 million per month, and I want to address that directly. The slower sequential growth this quarter was driven by the pace at which newer partners ramped originations. This is not a change in demand for the product or in our partners' commitment to the program. We continue to expect organic growth of $8 million to $10 million per month on average for the full year, with the growth now skewed toward the middle and back half of 2026, as Bob will detail in his outlook. The long-term economics and growth potential of this product remains central to our plans. Turning to our BIN and payments business. We continue to build traction. Earlier this month, we announced a new program with Vera, an early-stage fintech led by an experienced management team. The introduction to Vera originated through Zeta, a card processing partner of the bank, and we are encouraged by the opportunity to further develop our relationship with both companies over the long term. As fintech partners increasingly value broad product capabilities, we are expanding relationships through both new programs and incremental cross-selling. The growth in interchange income this quarter to $703,000 from $310,000 last quarter reflects the early contributions from our credit card portfolio and reinforces the cross-sell thesis as this came in conjunction with a credit-enhanced balance sheet partner. On the AI front, we have established a dedicated AI and innovation team to centralize and accelerate use cases already in demand across the bank. Initial deployments are focused on developer productivity, automation and increasingly operational workflows. We will continue to provide updates on our progress throughout the year. Turning to credit quality. Quarterly net charge-offs were $9.4 million in Q1 compared to $6.7 million in the prior quarter. Net charge-offs included $4.8 million from strategic program loans with credit enhancement, $2.3 million from strategic program loans without credit enhancement and $2.2 million from our core portfolio, primarily SBA 7(a) loans retained balances. I'll now provide a bit more detail on each net charge-off category. Starting with SBA net charge-offs, these were concentrated in a small subset of legacy credits, primarily within the e-commerce vertical and certain origination years. This largely reflects a backdrop of still elevated interest rates continuing to impact certain origination years and to a lesser extent, certain industry and loan attributes that we have implemented material policy tightening and restrictions on. Importantly, as I noted earlier, these charge-offs are likely to remain elevated over the next few quarters. We remain confident in the overall portfolio, and we'll continue to update you on this. With respect to charge-offs from strategic program loans with credit enhancement, the sequential increase in charge-offs primarily reflects the normal seasoning of a rapidly scaling portfolio and FinWise is fully reimbursed for any losses. Each fintech partner with credit enhancement is required to maintain a cash reserve deposit at FinWise, which is used to recover these charge-offs. As a reminder, the credit enhanced portfolio grew materially from virtually 0 12 months ago to over $100 million today. It is reasonable to expect charge-offs to rise as the portfolio matures and grows. Before a fintech partner is approved for the credit enhanced program, we thoroughly analyze their high water loss experience and stress it by 50% and 100% to confirm the cash flows from the loans are sufficient to absorb losses even under those stress scenarios. Lastly, net charge-off activity in strategic program loans without credit enhancement reflects normal repayment behavior for the balances we are managing. Net charge-offs for this portfolio were $2.3 million in Q1 versus $2.6 million in the fourth quarter of 2025. Provision for credit losses was $10.6 million for the first quarter compared to $17.7 million for the prior quarter. This decrease reflects elevated provisioning in the prior quarter related to the ramp-up of credit-enhanced loan programs with credit enhanced balance growth moderating in the first quarter. Of the $10.6 million in provision this quarter, $5.9 million was from credit enhancement loans, with the remainder reflecting the previously described net charge-offs within our core and strategic program portfolios. As a reminder, the provision for credit losses on the credit enhanced loan portfolio differs from the core portfolio as it's fully offset by the recognition of future recoveries recorded as credit enhancement income in noninterest income. The estimated future recoveries are reported as a credit enhancement asset on the balance sheet. From a reserving standpoint, we continue to take a conservative approach. Our allowances for classified loans reflect the projected net realizable value of collateral and are reviewed at least quarterly. During Q1, NPL balances increased by $6.1 million sequentially, bringing our total NPL balance to $49.8 million at the end of the quarter. Of that total, $26.7 million or 53% is guaranteed by the federal government and $23.2 million is unguaranteed. Quarterly SBA 7(a) loan originations increased sequentially, driven by the normalization of business activity following the typical Q4 slowdown and the reopening of the government after the November shutdown. During Q1, we continued selling the guaranteed portion of our SBA loans, though at a slower pace than the elevated level in Q4. We expect to continue selling guaranteed portions as long as market conditions remain favorable. Our SBA guaranteed balances, strategic program loans held for sale and our credit enhanced balances, all of which carry lower credit risk, collectively accounted for 47% of the total portfolio at the end of Q1. So just looking ahead, the platform is scaling, the pipeline is strengthening and the trajectory of this business has not changed. Charge-offs were elevated this quarter. We identified the segment, have updated our policies and we'll continue actively managing it. We have the capital, the partners, the team and the infrastructure to support continued growth, and that is exactly what we intend to do. I will now turn the call over to our CFO, Bob Wahlman, to provide more detail on our financial results. Robert Wahlman: Thanks, Jim, and good afternoon, everyone. FinWise reported net income of $2.7 million for the first quarter and diluted earnings per share of $0.20. Key positive drivers during the quarter included strong loan originations, growth in net interest income and interchange income and continued disciplined expense management. First quarter results were adversely impacted by lower gain on sale income, a negative change in our BFG investment valuation and a large provision for credit losses with our traditional banking portfolio. Net interest income grew to $28.1 million from the prior quarter's $24.6 million, primarily due to a change in our estimate of the allocation of interest received on credit enhanced loans in excess of the interest FinWise retains referred to as the excess spread. From origination costs, which are reported as net with interest income to credit enhanced servicing and guarantee expenses as well as an increase in average credit enhanced balances in the held for investment portfolio, lower average balances and reduced interest rates paid on CDs. Net interest margin increased to 12.9% compared to 11.42% in the prior quarter. The increase was driven by the change in estimate of the credit enhanced loans excess spread allocated to origination costs, which is a reduction of income to credit enhanced servicing and guaranteed expenses as well as an increase in average balances in the credit enhanced portfolio. Net of the adjustment for credit enhanced program expenses, net interest margin was 7.15% compared to 7.85% in the prior quarter, consistent with our ongoing risk reduction strategy and fourth quarter 2025 onboarding of a new credit enhancement program for which our compensation includes both interest income generated by credit cards and a portion of the interchange generated by the card usage. As we've noted on prior calls, we suggest thinking about our net interest income and net interest margin in 2 distinct ways, including and excluding excess credit enhanced income. Noninterest income was $14.6 million compared to the prior quarter's $22.3 million. The sequential quarter decline was primarily driven by lower credit enhanced income and gain on sale revenue as well as a decline in the fair value of our BFG investment, reflecting a broader pullback in private company valuations observed in March following heightened global market volatility. As a reminder, credit enhancement income mirrors the provision for credit losses on credit enhanced loans. Partially offsetting the sequential decline in noninterest income was higher interchange income, driven largely by a full quarter of contribution from the credit card portfolio acquired in mid-November 2025. Noninterest expense was $28.3 million compared to $23.7 million in the prior quarter. The increase was primarily due to higher credit enhancement guarantee and servicing expenses resulting from the change in estimated allocation of excess spread on credit enhanced loans from contra income origination costs to servicing and guarantee expenses as described earlier, as well as an increase in average balances of credit enhanced loans and the resulting growth in the excess spread. Excluding credit enhancement-related items, core operating expenses remained well controlled. The reported efficiency ratio for the quarter was 66.3% versus 50.5% in the prior quarter. Excluding the offsetting accounting effects of the credit enhanced loans, the efficiency ratio was 65.0% for Q1 2026 and 60.6% for Q4 2025. Total assets were $899.4 million as of the end of the quarter compared to $977.1 million in the prior quarter. The decline was primarily due to decreases in interest-bearing deposits with small declines in loans held for sale and loans held for investment. Total end of the period deposits were $674.9 million compared to $754.6 million in the prior quarter. The decline was primarily due to runoff of funding, principally noninterest-bearing deposits and brokered CDs that were not needed to support the lower level of assets. Finally, we continue to operate with a very strong capital position, reflected in a bank leverage ratio of 16.8%, nearly double the current well-capitalized minimum requirement to be well capitalized. Let me provide forward outlook on some key metrics as we've done in prior quarters. Loan originations for Q2 2026. Originations through the first 4 weeks of April are tracking at a quarterly run rate of approximately $1.4 billion. Loan originations for the full year 2026. While there may be variability quarter-to-quarter, we are reaffirming $1.4 billion in quarterly loan originations as a baseline, reflecting typical seasonality from student lending partners. Annualizing this baseline and applying a 5% growth rate provides a reasonable outlook for full year 2026 originations. We will continue to update our originations outlook each quarter as the year progresses. Origination levels are influenced by several variables, including new partner additions and contributions from both established programs and newer launches. Credit enhanced balances for full year 2026. We remain comfortable with organic growth in credit enhanced balances of $8 million to $10 million on average per month for 2026. Quarterly results may be lumpy with growth skewed toward the middle and back half of the year. SBA loan sales. We will continue to follow our strategy of selling guaranteed portions of our SBA loans as long as market conditions remain favorable. That said, we expect this quarter's gain on sale of loans to better reflect a sustainable quarterly run rate for the year. Quarterly net charge-offs. We anticipate an approximate range of $4 million to $5 million in net charge-offs for noncredit enhanced loans is a good quarterly number to use in your models for the remainder of this year. Nonperforming loan balances for Q2 2026. We think there is potentially as much as $10 million in watch list loans that could migrate to nonperforming loans in the second quarter. Net interest margin. We remain comfortable with our prior outlook that when including credit enhanced balances, the net interest margin is expected to increase, driven by growth in credit enhanced balances and efforts to lower funding costs. This upward trend is expected to persist until growth in these balances begins to moderate. Conversely, excluding excess credit enhanced income, we anticipate a gradual decline in margin consistent with our ongoing risk reduction strategy. The efficiency ratio. We remain focused on driving sustainable positive operating leverage with a long-term goal of steadily lowering our core efficiency ratio, that is excluding the credit enhancement accounting effects. That said, there may be periods in which the efficiency ratio may increase. Tax rate. While multiple factors may influence the actual tax rate, we suggest using 27% in your modeling. With that, we would like to open the call for Q&A. Operator? Operator: [Operator Instructions] And our first question we will hear from Joe Yanchunis with Raymond James. Joseph Yanchunis: So I was wondering, can you help us size the remaining pool of these legacy SBA credits? And how should we think about the difference between proactively cleaning up the specific cohort versus there being some fundamental softening in the industry? And then also, I understand that you called out the e-commerce industry, but is there any specific vintages you could point to where they're concentrated? James Noone: Yes. So let me just walk through -- Joe, this is Jim Noone. Let me just walk through, I think, the couple of pieces there. So to just bound it, it's about $50 million in performing outstanding balances at the end of Q1 that carry these attributes. As far as what the attributes are, we had a surge in SBA originations back in '22 and '23, specifically in some of the consumer-focused businesses like e-commerce. There are 6 attributes from a few cohorts there that we zeroed in on. Like I said, it's about $50 million in remaining outstanding and performing balances at the end of Q1. Really importantly, these attributes are what has led to 75% of the MCOs and a similar amount of the unguaranteed NPAs over the last 3 years. So we feel like we've identified it, we've segmented it. We're actively managing it. So I think we're in good shape with it. Joseph Yanchunis: Okay. So shifting gears here, just kind of want to understand or make sure I'm thinking about what's going on with the NIM here. So it benefited from the change in estimates on that excess interest allocation within the credit enhanced portfolio, but that also flowed through higher servicing and guarantee expenses. So one, is that right? And two, what's the cleanest way to think about it kind of the normalized earnings contribution from the credit enhanced portfolio after this change? Or has there been any change to that outlook? Robert Wahlman: So Joe, I think that you are understanding it properly. The change in estimate grosses up or increases the interest income and flows through all the way through net interest income. And an exact offsetting amount is recorded as an expense. And so that grosses up the expense. So you understood it exactly. In regards to the performance of the credit enhanced portfolio, nothing really changes from this change in estimate. It's just -- when we first started the program, we thought that this would be the distribution of the expense, particularly a portion that relates to origination, which offsets net income -- which offsets interest income. But a year later, now we have some experience with it, and we're looking back at it, we changed that estimate, and we've shifted those expenses entirely to guarantee expense and servicing expense. Joseph Yanchunis: Okay. And was that changed? Was that recommended by like your accounting firm or any of the regulators? Or was this just done kind of internally? Robert Wahlman: This was done based upon our own review, but it has been reviewed and discussed with our external accounting firm. Joseph Yanchunis: Okay. Just a couple more for me here. So with respect to your credit enhanced strategic partners, what's the general duration of these loans? And have your partners changed their credit box? Or were there any partners that experienced outside losses that might have surprised them? And then just also some color on the health of these fintechs that are supporting these loans. James Noone: Yes. So there's 5 programs right now that are live in that program, Joe. As far as the average term, they vary because there are 5 different programs and products that are being managed there. But I would tell you that they are on the shorter end generally. I would say, on average, it's probably like 15 months if you look at the pool in total. As far as like the health of the partners that are there and the results in this quarter, we grew this from virtually 0 to $100 million in a year, and we were able to beat the high-end guidance at the end of '25. But we were -- I was disappointed in the Q1 balances that they didn't grow from year-end. The product is still central to our long-term plans, and we know our business well enough that we know this stuff is lumpy sometimes. The guidance is intact for the full year. We are expecting one of our partners to grow meaningfully in that program here in Q2 and Q3. We'll update you again next quarter. As far as the other partners, they did moderate during the quarter. So where the growth is going to come from of those 5 partners over the next, call it, 2 quarters is likely from one of our partners. The others have kind of slowed down on their -- on the growth in that product or at least they did in Q1. Robert Wahlman: I'd like to add one other point... Joseph Yanchunis: Slowdown because of -- that slowdown be because of demand for the product or appetite around kind of the current credit environment or the losses that we're seeing in the portfolio? James Noone: No, it has to do with normal balances and kind of like the trajectory of that product with those 3 partners. They -- we knew about where they would start to plateau out in their balances, at least for the products that we have with them right now. So that's the answer. Joseph Yanchunis: Okay. And then last one for me here. So if we were to look out 2 to 3 years where you can pick a duration, where do you see credit enhanced loans as a percent of loans held for investment? James Noone: There's no way for me to forecast that for you, Joe. I would just tell you that the balances were virtually 0 9 months ago. We are still on the beginning of that growth curve. But it's incumbent on me to bring additional partners in and work with our business development team and our fintech team to bring those partners in to grow our balances. This is central to the strategic plan that we have that's been approved by the Board that we've talked to investors about. And I feel good about the program. Like I said, our guidance for the year is still intact, but we didn't have the growth that we thought we would have in Q1. We had more growth than we thought we would have for fiscal year '25. Operator: And next, we'll move to Andrew Terrell with Stephens Inc. Andrew Terrell: So just thinking on the last point, if I were to take the kind of original 8 to 12 a month kind of guide, you should, by the end of the year, be $215 million or so to $250 million on credit enhanced balances. Do you still feel like you can achieve that by the end of the year? Robert Wahlman: That is still our expectation, Andrew. Andrew Terrell: Okay. And Bob, are you able to quantify the -- I think I understand what's going on with the excess spread. We talked about it a minute ago, but are you able to quantify the dollar amount that, that impacted the guarantee and servicing expense lines by this quarter? Robert Wahlman: I certainly can, but I don't have that with me, Andrew. Andrew Terrell: Okay. I can follow-up. I think last quarter, Bob, we talked about a 56%, 57% type efficiency ratio in 2026. I know the excess spread kind of change impacted a little bit of efficiency, but even accounting for that, running well north on efficiency versus those expectations. So I just wanted to hear from you updated kind of expectations around either full year efficiency or where you think you can manage efficiency moving forward? Robert Wahlman: Certainly, I can do that. I think the important part to note first is that by increasing the revenue and the expense when you do the efficiency ratio, that portion of it is one for one. So that does make the -- getting the efficiency ratio down to the level that we had previously stated or previously forecasted, it makes it more difficult. But I do think that the key -- we have been controlling our expenses, I think, very well over the past 3 or 4 quarters. And we believe we continue to explore expenses. The key then to getting that efficiency ratio down is going to be growing our revenues, which we are focused on at this point in time. Given the expense numbers that we have right now, considering that they're inflated, it would require us to have about a $2 million increase in revenue to get that efficiency ratio down to 60%. I think that's still possible. I think that's very possible for this year. And I would expect to be able to continue that going forward. When we are bringing on -- when we're bringing on new partners, we are looking at the efficiency ratio, the operating leverage ratio, and most of those partners will be coming on well below that, call it, the 50% mark. And so I think that we'll continue to work on it. We'll get it down to -- it's just going to take a little bit longer, but we will get it back down to the mid-50s. Andrew Terrell: Okay. Understood. Maybe for Jim, I think in your opening remarks, I think you made a comment to the tune of you were increasingly sourcing more mature lending opportunities or lending partner opportunities. Can you maybe unpack that a bit for us, both on the lending side, but then more broadly, just what you're seeing top of funnel, how the SKU is changing from smaller to larger, if it is? And I know there's -- it takes some time to onboard new partners, but just want to get a sense of kind of what you're working on, how you feel about the pipeline right now? James Noone: Sure. Yes. So based on what we're seeing, Andrew, the lending pipeline is stronger than I've seen it in my 8 years at the bank. We intend to keep executing to convert that pipeline into contracts and announcements. We announced a new product with Albert at the end of February. We're very supportive of Yinon and Malcolm and their team there. They do a great job. And just generally, our business development team has their hands full right now. As far as like color on the growth in pipeline there, I would say where historically, we had invested in cards and payments. And historically, we continue to have success from lending partners that wanted cards and payments rather than those as stand-alone products. I think that, that's likely to continue to be the case for another quarter or 2, but we are starting to see meaningful opportunities on both of those new products. Overall, I'd characterize the pipeline as probably about 50% lending, 50% split between cards and payments. And I think by the end of the year, we'll have some good announcements on winning a couple of partners here. So I should be able to give you a better update next quarter. Operator: And next, we'll move to Manuel Navas with Piper Sandler. Manuel Navas: Just a quick follow-up on that last -- some of that last commentary. Where will we see card and payment wins? Is that only in the interchange line? Where else will we see that on the fee and fees? Robert Wahlman: So with the cards and payments, you will see -- I mean, on the payments, it's going to be coming through that fee line. On cards, it's going to come through depending upon a couple of different things. One, if they are interested in the credit enhanced balance sheet and balance sheet, some of that, we will see some of that come through in interest income. If they are -- it's -- that they -- and in that particular case, if they're doing credit enhance, they'll also need to supplement that with some interchange. So we'll see some revenue there. Other than that, it will be processing fees. I also want to mention one other very important thing, particularly on the payment side, that business is frequently accompanied by significant deposits. And so we would look to see significant deposit increase, which will allow us to change our funding structure some. If we can get several of these new partners in here, we could significantly decrease our broker deposits and our cost of funds. Manuel Navas: Okay. I appreciate that. Can you give any color on what was the makeup of originations this quarter? And what pieces of it kind of step down towards the lower rate for the rest of the year? James Noone: Yes. No problem, Manuel. This is Jim. So the originations were really strong in the quarter at $1.7 billion. That exceeded our guidance of $1.4 billion, and it's up 38% year-over-year. As far as the composition, it's the seasonality of student lending that surged, and that was a big portion of the quarterly uptick. The higher rate lenders were down in the quarter, which is also typical in Q1. And then the rest of our lending partners, it was kind of a mix with nothing that stood out one way or the other materially. The one thing I would point out, you're continuing to see this gradual step-up. And I just want to remind everyone, we were at $850 million in originations 3 years ago, in quarterly originations 3 years ago. So I'm really happy with the consistent increase that we've managed in getting to $1.7 billion this quarter. Manuel Navas: What -- I appreciate that. Where is some of the higher headcount linked quarter? Is it compliance, operations? Robert Wahlman: You're talking about the increase in the headcount in the quarter? Manuel Navas: Yes. Yes. Robert Wahlman: The headcount that we had in the quarter, we brought on a few additional people focused on facilitating growth, as Jim has talked about, and also to facilitate improved efficiencies through AI adoption. So when you take a look at the particular areas, we saw that the fintech business development, so that would be the marketing side increased. You also saw a little bit of an increase in technology for that is the AI as we are emphasizing that across the organization. And you also see a few headcount increase in the onboarding program -- excuse me, in operations where we have the onboarding program for the new programs we anticipate coming through here in the next couple of quarters. Operator: And next, we'll take a follow-up question from Joe Yanchunis with Raymond James. Joseph Yanchunis: So I just wanted to revisit your guide for originations. So on an annual basis, you annualize the $1.4 billion, you slap a 5% growth rate on that. But then when you remove what happened in 1Q, it seems like you're kind of calling for $1.4 billion over the next few quarters, which would include the seasonal step-up in student loan originations that occur in the third quarter. I mean, is that just a conservative view? Or is there something that might have impacted or that could impact that seasonal uptick that we see in the September quarter? James Noone: You're correct, Joe. The $1.4 billion is the baseline that we proposed to use for modeling, it strips out the student lender -- the student lending seasonality and then you annualize that, apply 5% growth, and that's what we've used as far as guidance for the year. So you're correct in that it's the student lending seasonality that we are not accounting for. Joseph Yanchunis: Okay. So assuming that seasonality does occur, that annual guide is probably lower than what you're kind of expecting? James Noone: That's seasonality would pull from 2Q and 4Q of '26. Yes. There's nothing specific to student lending that would -- that indicates that private student lending is certainly going to be in any sort of contraction mode. I think it's the opposite. But what we are comfortable with giving us guidance is $1.4 billion quarterly with a 5% growth rate as far as the annual 2026 originations. Operator: And we do have a few questions via e-mail. Then I will turn the call over to Juan Arias, Head of Investor Relations. Juan Arias: We got a couple of questions that came in. The first one, can you comment on if you see a potential impact to your business from fintechs pursuing bank charters? James Noone: Yes, no problem, Juan. There's been a number of developments with fintech banking and charters the last 3 months. So I think it's good to address a couple of the items first. Generally, the industry of bank sponsorship, it's always changing. Right now, there's some large diversified fintechs that are seeking bank charters during a window that appears open. That path works for a handful of large diversified players. But for the vast majority of fintechs, partnering with an experienced sponsor bank remains the faster, more capital-efficient path. And that's driving a growing wave of inbound interest towards banks like ours. Charters pull a few large players out, but I would say, simultaneously, they also -- they validate the model and drive dozens of others towards sponsor banks. And the investments that we've made over the past several years position us really well to capture that demand. I did want to just say, Upstart filed its bank charter in March and OppFi announced its agreement to purchase BNC National Bank on Wednesday. There is no immediate change to our business from the regulatory applications they have filed, and we were in contact with both of them ahead of the public announcement. As they work through the regulatory process, we will continue to support them. And I don't know how many fintechs in our industry will apply for charters nor how many will receive them. But the lending pipeline at FinWise is stronger than I've seen it in my 8 years here, and that is what we manage to. Juan Arias: Thanks, Jim. We got another question, it's actually for you. As you look ahead to your first 12 months in the CEO seat, what are your top 3 priorities? James Noone: Thanks, Juan. Happy to address that. I think first, some context on the transition itself. This was deliberate. It was a multiyear succession plan developed by the Board. I've worked alongside Kent for many years, and I'm grateful to him and the Board for their trust and confidence. My role as CEO is straightforward, align our quarterly and annual execution with the strategic plan approved by our Board and filed with our regulators and set the tone across the organization to deliver on it. And I want to be direct about my commitment. I moved my family across the country 8 years ago because I believed in this company and wanted the opportunity to be in exactly this seat. We had $65 million in assets at the time. We now have the capital, the partners, the team, the products and the infrastructure. My focus is making sure that those pieces work together with discipline and speed to create meaningful value. In terms of specific priorities, you heard much of it in our prepared remarks. First, we need to support the momentum that's already coming through our business development team. Originations were $1.7 billion in the quarter, and our pipeline for both new partners and new products is strong. Second, we will continue to empower our credit and compliance teams to identify and prune risk proactively. You're seeing that right now in the segment of our SBA program, but this is not new for us. We took similar disciplined actions in our fintech programs in 2019 and again in 2022. Active oversight and risk management is part of who we are, and it will continue. And then third, being a multiproduct platform carries enormous value for our bank and our shareholders. We saw this with credit enhanced lending, where we built the product capability, onboarded the partners and in 12 months, grew that portfolio from 0 to over $100 million. That same model, building the infrastructure, piloting it, marketing it and then beginning to launch the right partners is just now turning the corner in cards, payments and deposit sponsorship. So in the same way that our compliance investments positioned us during a previous cycle, these product investments are positioning us for exactly the cycle we're now entering. And then finally, with more fintechs seeking sponsorship and our platform now offering lending, cards, payments and deposits, I believe that we are entering a very strong period for new partnerships over the next 12 to 24 months. So to answer your question simply, the strategic direction doesn't change. What's changing is the pace of opportunity in front of us. And it's my job to make sure we capitalize on it for the long-term benefit of our shareholders. Operator: And that will conclude today's question-and-answer session. In addition, it does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.
Operator: Please continue to standby. The conference will begin in approximately one minute. Again, please continue to stand by, and thank you for your patience. Good afternoon, and welcome to the Beazer Homes USA, Inc. earnings conference call for the second quarter ended March 31, 2026. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at bezier.com. At this point, I will turn the call over to David I. Goldberg, Senior Vice President and Chief Financial Officer. Thank you. David I. Goldberg: Good afternoon, and welcome to the Beazer Homes USA, Inc. conference call discussing our results for 2026. Joining me today is Allan P. Merrill, our Chairman and Chief Executive Officer. After our prepared commentary, we will open up the line and Allan and I will be happy to take your questions. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings that may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors. I will now turn the call over to Allan. Allan P. Merrill: Thanks, Dave, and thank you for joining us. I am going to organize my comments today around three topics: the highlights from our second quarter results, our responses to a challenging demand environment, and a review of our progress toward our multiyear goals. Relative to the second quarter, despite some new challenges in the macro environment, we were encouraged that our community count, sales pace, ASP, and gross margin all came in right around our expectations. Of particular note, getting our sales pace back over two per community per month was important, as was the improvement in our Houston business, which was up nicely year over year. Digging a little deeper into the quarter, we were able to drive to-be-built sales higher, to 43% of gross sales, the highest level since 2024. Our new communities, which we define as beginning sales after March, represented 34% of gross sales, up sequentially from 24% last quarter. Both of these positive mix dynamics will contribute to higher ASPs and margins in the back half of the year. From a balance sheet perspective, we have maintained a robust lot pipeline with a healthy 60% controlled by options. During the quarter, we increased liquidity by upsizing our revolver, and we grew book value per share by buying back more than 1 million shares at about 60% of book. Bottom line, our results reflected solid execution in a challenging operating environment. Last quarter, we described the environment and operational results that would be necessary for us to grow EBITDA this year. Among other items, this included a sales pace above 2.5 in the second half of the year and 300 basis points of margin expansion by the fourth quarter. Several macro headwinds developed since then, notably higher mortgage rates and surging energy costs. Both are readily evident to potential homebuyers and both undoubtedly contributed to the recent drop in consumer sentiment. While these challenges may prove temporary, they have left us more cautious and reduced the likelihood of achieving sufficient pace and margin expansion to support full-year EBITDA growth. We now think a sales pace above two for the balance of the year and margin expansion between 200 and 300 basis points by the fourth quarter are more likely and achievable outcomes. With the additional benefit of a sizable mix-driven increase in ASPs and a modest ramp in community counts, we are positioned to sequentially improve profitability and returns in the next two quarters. In this environment, we could probably achieve a higher sales pace by increasing spec starts and offering more incentives. We think that would do little more than spike revenue for a few quarters and burn through our valuable option position. More importantly, it would undermine the progress we are making in getting paid for delivering a more efficient home and the industry's highest-rated customer experience. Our positive margin progression remains intact, but it is built on more than just lower construction costs. It also reflects a growing share of closings from both our newer and our higher-priced existing communities, where we are effectively competing on quality and value. While our sales pace is not where we want it yet, we are actively building awareness with buyers, realtors, and appraisers that our homes are different, perform better, and cost a lot less to operate. We believe this approach will yield greater and more durable returns than simply putting more low-feature specs on the ground. Beyond improving margins, we believe the capital allocation decisions we are making will also improve our returns. Land prices remain quite resilient, and yet our share price implies our existing assets are worth a lot less than we paid for them, which we know is not the case. That is why our 2026 capital allocation approach has been to improve the efficiency of our land spend, sell non-strategic assets at or above book value, and buy back stock at a meaningful discount to book value, all while preserving our growing community count. On our last call, we committed to completing our existing $72 million repurchase authorization this year, and we executed $30 million in the second quarter. Upon completion of the full authorization, we will have bought back nearly 20% of our shares since early fiscal 2025. Taken together, growing profitability and efficiently allocating capital will increase book value per share this year. Now, looking further out, we are still heading toward our longer-term multiyear goals for growth, deleveraging, and book value per share accretion—a combination we believe produces the best path for shareholder value creation. While progress is not easy to synchronize in a difficult environment, we continue to pursue each goal. With 169 communities at quarter end, we are still targeting more than 200 active communities by the end of fiscal 2027. Sales paces in existing communities and the attractiveness of incremental land purchases will determine our path to reaching this goal. We remain focused on deleveraging to the low-30% range by the end of fiscal 2027. However, as we indicated last quarter, we are prioritizing share repurchase activity in fiscal 2026 and expect to make progress on our leverage goal next fiscal year. Growing book value per share into the fifties remains our goal through both earnings and stock buybacks. At quarter end, book value per share was up versus last year, finishing at nearly $42 using weighted average shares and nearly $43 using period-end shares. With that, I will turn the call over to Dave. David I. Goldberg: Thanks, Allan. During the second quarter, we sold 1,048 homes with a pace of 2.1 sales per community per month, with pace increasing from January to February and plateauing in March. On a positive note, our spec sales mix continued to move lower at 57% in the quarter. This is down from 61% in the first quarter and well below the mid- to high-70% range we saw in 2025. This shift toward more to-be-built supports our margin expansion opportunities in the second half. Of note, the impact of the headwinds we mentioned earlier has not been an increase in cancellation rates. Instead, we simply did not see our normal seasonal lift in traffic and leads in March. Our average active community count was 167, representing 3% year-over-year growth. Our homebuilding revenue was $397.7 million; 757 homes closed at an average price of $525,000. As anticipated, our ASP continues to move higher given the positive mix shifts we have referenced. In fact, with an ASP in backlog over $580,000, this trend should accelerate. Homebuilding gross margin was 15.6%, essentially in line with our first quarter results. SG&A was $64 million, approximately $4 million below last year. Surprisingly, taxes represented nearly an $18 million benefit. This reflected an adjustment in our quarterly interim tax treatment. Interim taxes are not intuitive in GAAP, so we have added disclosure in our 10-Q discussing this change. All told, the second quarter diluted loss per share was $0.03 and adjusted EBITDA was $2.6 million. Now let us walk through our third quarter expectations. We expect to sell more than 1,000 homes, up nearly 20% versus last year's third quarter. This implies a sales pace roughly in line with the second quarter. We expect to finish Q3 with about 170 active communities, flat to slightly up sequentially. We anticipate closing about 900 homes with an ASP between $535,000 to $540,000 as our New York communities contribute a larger share of closings. Adjusted homebuilding gross margins should be up more than 50 basis points sequentially, reflecting both direct cost savings and mix benefits. SG&A dollars should be about flat with last year's third quarter. From a land sale perspective, expect to generate about $30 million of revenue in the quarter and still expect $150 million for the full year. Altogether, this should result in total adjusted EBITDA of $5 million to $10 million in the third quarter. Interest amortized as a percentage of homebuilding revenue should be about 3%. Given the variability of our interim tax rate, we are not giving tax or earnings guidance for the quarter. For the full year, we expect our energy efficiency tax credits will drive a net tax benefit of over $10 million and, more importantly, we expect to pay minimal cash taxes for several years as a result of these credits. Finally, we expect further growth in book value per share in the third quarter. Coming into the year, we had two goals related to land spend. First, we wanted to sustain an investment level that supports community count growth. At the same time, we wanted to make our balance sheet more efficient and facilitate share repurchases. We feel pretty good about both. Our total land spend this year, net of land sale proceeds, should be roughly in line with the dollar value of what we are delivering. That would typically lead to a flat community count, but we have been able to improve deal structure and timing and carefully grow our use of developer and land bank options. The resulting balance sheet and land spend efficiencies are helping us turn our assets more quickly and supporting both our growth outlook and buyback activity. Finally, our balance sheet remains strong with approximately $400 million of total liquidity. This includes $116 million of unrestricted cash and $285 million of revolver availability, and we have no maturities until October 2027. During the quarter, we expanded our revolver by $160 million to $525 million and extended its maturity by two years to March 2030. With that, I will turn the call back over to Allan. Allan P. Merrill: Thank you, Dave. To wrap up, I would like to summarize the reasons we are so confident we will create substantial value for our investors. We have a clear and differentiated strategy. We have chosen to compete by offering a home built to lower homeownership costs as the key attribute. This is different from other builders, and we think that is a good thing, and a lot less risky than trying to outmuscle all of the companies building lower-feature homes. We are building momentum toward greater profitability. Our sales pace improved this quarter. Our gross margins are headed in the right direction. Our average sales prices are trending higher, and our community count is growing. Together, this creates a powerful setup for operational leverage. Our balance sheet is strong. We have plenty of liquidity, no looming maturities, ready access to the capital markets, and lots of tax credits that will shield a significant amount of our future profitability. Finally, we have been disciplined capital allocators. Prior to and during the pandemic, we grew our active land portfolio significantly, setting us up for sustained community count growth. In recent quarters, we have improved the efficiency of our balance sheet to facilitate substantial share repurchases. We are not spending time worrying about the macro or hoping for a turn in the market. We are executing against a differentiated strategy that is poised to deliver growing profitability and shareholder returns. Let me finish, as always, by thanking our team for their ongoing efforts to create value for our customers, our partners, our shareholders, and each other. We will now open the call for questions. With that, I will turn the call over to the operator to take us into Q&A. Operator: Thank you. To ask a question, please press star followed by the number one. To withdraw your question, you may press star followed by the number two. Please unmute your phones and state your name when prompted. Once again, that is star one. Our first caller is Natalie Kulasekere with Zelman & Associates. Your line is open. Natalie Kulasekere: Good evening, and thank you for taking my question. Could you tell us what your targeted share of to-be-built sales is in the long run, and can we expect this 43% to climb higher over the coming quarters? If so, what are some changes that you made in the business to accommodate this, and any detail around that would be helpful. Allan P. Merrill: Sure, Natalie. I would answer that a few ways. Longer term, we would like a majority of the homes that we sell to be to-be-built. That is not going to happen over the next several quarters, so that is a longer-term goal to be a majority to-be-built company, like we were, frankly, before the pandemic. In terms of the next couple of quarters, we are going to keep working to drive that percentage, but typically what has happened in the fourth quarter is we have a slight increase in spec sales close to fiscal year-end. So it is not a straight line, but I think we will be able to do period-over-period comparisons over the next year and see slow, steady progress comparing quarters to one another, year over year, where I think we will be able to show increases in to-be-built sales. Natalie Kulasekere: Got it. And what has this share been trending over, say, the past four quarters? Allan P. Merrill: A year ago, it was in the thirties. Now it is 43%. It is the highest it has been since early 2024, and it held in nicely this spring. I do not have each quarter off the top of my head, but it is up over 10 points year over year. Natalie Kulasekere: That is helpful. And just one more for me. What are the margins you see in your backlog right now? Also, is your guidance of 300 basis points of margin expansion in the fourth quarter based on what you are seeing in the backlog and the kind of interest you are seeing with your to-be-built sales? David I. Goldberg: Yes, Natalie. I would tell you the margins in backlog are supportive of the guidance that we have given for the next two quarters. Obviously, we have a lot more visibility on Q3 just given that we are in the middle of Q3 now. The reason we went to 200 to 300 basis points is based on what happens with specs and specs that we sell and close in the next few quarters. Natalie Kulasekere: Alright. Thank you. Operator: Our next question is from Tyler Anton Batory with Oppenheimer. Your line is open. Tyler Anton Batory: Good afternoon, everyone. Thanks for taking my questions. First, can you give some more detail on what you saw in March and April, and how sales in those months compared with normal seasonality? Allan P. Merrill: March was fine, but it was not great. January was kind of normal. February was up a little bit. We were feeling reasonably optimistic. There was weather here and there, but it felt pretty good. In March, it was fine, but we did not see what we normally see—an increase sequentially from February to March in traffic and leads. It did not collapse, but it did not move up, and that is one of the things that made us a little bit more cautious as we look at the next couple of months. April has been very similar to March. Tyler Anton Batory: Perfect. And then I am really trying to understand the EBITDA guide here. Your $5 million to $10 million in Q3—there was some talk earlier about EBITDA perhaps being pretty close to where you were in the prior year for the full year. If that were still the case, it would imply a pretty significant ramp in Q4. I am assuming there are some moving pieces, perhaps on the land side of things. I understand that the environment is a little bit weaker than when we came into the year, but can you help us understand any onetime items that might be moving around Q3 and Q4, and how you see EBITDA for the full year playing out? David I. Goldberg: We are not giving a full-year EBITDA guide, but what we did last quarter was all about trying to create a path and show people what a path could look like to get to growth in EBITDA year over year. As Allan said in his opening comments, in a tougher sales environment—if we are not doing the 2.5 sales pace in Q3 and Q4—that becomes more difficult. There is not a significant change beyond what we just talked about. Our land sale guidance is still around $150 million of land sales. But when you compound having lower sales paces in Q3 and Q4, it has an impact on EBITDA, and there is a lot of operating leverage. The good news is, as Allan talked about in his scripted remarks, there is also a lot of operating leverage the other way. I am happy to take it offline if you want to, but there is no change other than what we outlined in the script. Tyler Anton Batory: Last one for me. Strategically, thinking about getting fair value in the markets for what you offer—you have made some changes to marketing and whatnot. Talk about the sales process and consumer adoption, and whether people are appreciating the value you provide in your homes. Allan P. Merrill: Energy costs are much higher in consumers’ minds than they have been in many years, and that is great for us. What is really resonating is the simple math. One of our new home counselors explained it in a way that is both true and simple. She said that if we save somebody $100 a month or $200 a month in their utility bills—and we can look at homes in the community and the third-party ratings that we get—the purchasing power that creates is enormous. She likes to tell people, “$10,000 in price costs $50 a month. So if we save you $200 a month, how does that $50 a month feel?” The idea about energy efficiency that has been elusive for most consumers is the notion they have to sacrifice something. Having an energy-efficient home is not a sacrifice. Another challenge is people ask, “What is the payback?” We like to talk about it as the payback being in weeks—any difference in monthly payment is less than the savings on the utility line. When you get it that simple for folks, it is easy. There are people who will say, “How did you do that?” and that gives us a great chance to nerd out. What we have gotten better at is not nerding out first and then explaining the benefit, but talking about the math. Then, when they want to know how we did it, we have lots to talk about. Tyler Anton Batory: That is good detail. That is all for me. Thank you. Allan P. Merrill: Thanks, Howard. Operator: Thank you. Once again, if you would like to ask a question, you may press star one. Our next caller is Julio Alberto Romero with Capital Company. Your line is open. Julio Alberto Romero: Good afternoon. My first question is, if demand were to worsen in the second half, what levers do you have to pull on the margin front? Allan, you mentioned you can likely increase sales pace through incentives and increasing spec starts, but are there any other levers as potential offsets to help with margins? Allan P. Merrill: Obviously, those are things that would move margins the wrong way, and we have decided that in this environment, that is not what we want to do. If the market gets a lot tougher, we are going to evaluate—like I think any builder would—everything. Are there changes we need to make to our product? Do we need to restructure the way we do our incentives? We have a full suite of tools available to us, and we have proved reasonably resilient over the last couple of years trying to match what the sentiment in the market is. I wish I could give you the exact thing that we would do, but the trick is Southern California is different from Indianapolis, which is different from Maryland. So the adjustments would vary by market. Julio Alberto Romero: Understood. And circling back on the to-be-built mix from earlier, how do you envision the fiscal 2027 mix of to-be-built to look? Allan P. Merrill: It is not a guide, but my belief is that with the new communities and the enthusiasm around what we are doing, I am hopeful we will have year-over-year improvements in the mix of to-be-built sales. There will be quarter-to-quarter sequential volatility because we typically have a higher share of spec sales in our fourth quarter, but year over year our goal is to be higher than we were in the same quarter the year earlier. That is the plan over the next year or two. Julio Alberto Romero: Got it. I will pass it on. Thank you. Operator: Thank you. Our last question comes from Alexander Rygiel with Tech Capital. Your line is open. Alexander Rygiel: Thank you. Good evening, David and Allan. A couple quick questions here. Can you talk to incentives and, directionally, where they were in the first quarter versus prior periods and where you feel like they are going in the fiscal third quarter? David I. Goldberg: Sure. On an overall basis, incentives were down sequentially in the quarter, but a lot of that had to do with mix and what was coming through from a spec perspective. On a go-forward basis, we think incentives are going to be down a little bit, but again, not at the house level—it is mix-driven. We think we peaked in Q4 and have seen some improvement since then. We do not have a big expectation that house-level or community-level incentives are going to change; it is more mix-related. Allan P. Merrill: And let me just add that at the house level, as I think about March and April, there was a slightly higher cost to buy downs as rates ticked up. We do not control the mortgage rate or what a buy down costs. We feel very good about the pull-through of the things that we can control to drive margins higher, but there is a bit of a headwind from higher rates in the cost of buy downs that will affect the third and fourth quarter, and that is baked into what we have talked about for the rest of the year. Alexander Rygiel: Secondly, it appears that your cancellation rate declined a bit. I suspect that is also due to mix, but are you seeing any other positive trends from that? David I. Goldberg: I would not tell you there is a big change in cancellation behavior. The number does look good. It has not really concerned us in the last couple of quarters, even being a little bit higher. We typically run the business between a 15%–20% cancellation rate, so I do not see that being a big factor on a go-forward basis. Alexander Rygiel: Great. Thank you. Operator: Thank you. At this time, I am showing no further questions. Allan P. Merrill: I want to thank everybody for joining us on our second quarter call and look forward to speaking to everyone for our third quarter call in a few months. Thank you very much. This concludes today's call. Operator: Thank you. Thank you for participating on today's conference call. You may go ahead and disconnect at this time.
Operator: Good afternoon, and welcome to Arthur J. Gallagher & Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions] Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. The company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and Risk Factors section contained in the company's most recent 10-K, 10-Q and 8-K filings for more details on such risks and uncertainties. In addition, for a reconciliation of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin. J. Gallagher: Thank you very much. Good afternoon, and thank you for joining us for our first quarter '26 earnings call. On the call with me today is Doug Howell, our CFO; and other members of the management team. We had a terrific first quarter. For our brokerage -- for our combined Brokerage and Risk Management segments, our two-pronged revenue growth strategy, growing both organically and through acquisitions, delivered revenue growth of 28% in the first quarter. Organic growth was 5%, and M&A contributed 23%, driven by strong results from AssuredPartners. On a segment basis, Brokerage revenues were up 30%, of which organic was 5%. We saw strong growth across retail, P/C, wholesale, reinsurance and benefits. Our Risk Management segment, or Gallagher Bassett, posted revenues up 14%, of which organic was 10%. We saw excellent new business and strong client retention. And we continue to generate excellent profits. Our Brokerage and Risk Management segments combined reported net earnings growth of 12% and adjusted EBITDAC growth of 18%. This quarter marks 24 consecutive quarters of double-digit adjusted EBITDAC growth. And we had another quarter of solid underlying margin expansion, which Doug will break down for you in a few minutes. Today, I'll touch on all 4 of our strategic pillars, growing organically, growing through mergers and acquisitions, improving our productivity and quality and our culture. First, organic growth. Our client retention, new business win rates and client business activity continue to be tailwinds. And in today's environment, insurance rates are still contributing to organic growth, but to a lesser extent than over the last few years. Carriers are continuing to behave rationally and looking to grow in lines and geographies where there's an acceptable return, yet remaining disciplined by seeking rate increases where needed to generate an appropriate underwriting profit. Good loss experience accounts can typically see premium relief, while accounts with poor experience are seeing increases. Breaking this down by businesses. Within our global retail P/C businesses, the first quarter '26 market environment is materially unchanged from the prior quarter. Insurance renewal premium change, which includes both rate and exposure, continued to increase in the low single digits in the first quarter, with property decreases more than offset by increases across most casualty classes. By product line, we saw the following in our global P/C retail businesses: Property down 7% with rate pressure most pronounced in cat-exposed and larger risks. Professional lines, including D&O and cyber, up 2%; workers' comp, up 2%; personal lines, up 4%; package up 2%; and casualty lines, which includes general liability, commercial auto, and umbrella, up 4% overall. Excluding property, renewal premium changes increased 4% in the quarter, with higher increases in the U.S. versus international markets. We continue to see significant differences in renewal premiums by client size with our larger accounts driving much of the downward pressure in premiums. Our customers are opting in and buying more coverage as their prices decrease, whereas over the last few years, they were opting out of coverage when their prices were increasing. Within the U.S. excess and surplus market, we continue to see a bifurcated market. We're seeing submarkets behaving differently after several years of a very strong hard market. E&S property, particularly cat-exposed risks, is the most competitive area right now. That reflects a pricing reset, not a demand issue. Policy counts and submissions remain healthy and E&S continues to be the right solution for complex property risks. E&S casualty remains firm. Renewal premiums are up mid-single digits. Capacity is disciplined and demand is steady across general and excess liability as well as umbrella. E&S professional lines are largely stable with renewal premiums up low single digits and better underwriting discipline than in prior cycles. The fastest-growing part of E&S continues to come from emerging specialty risks such as data centers and AI-related infrastructure as well as other complex exposures. These risks don't fit well in the admitted markets and represent a structural multiyear growth opportunity for E&S. Moving to reinsurance. The market remains well capitalized and renewal activity continues to reflect ample capacity. In the first quarter, we saw strong growth across lines and across geographies with another excellent quarter of new business overcoming rate headwinds. At the 1/1 renewals, we saw rate decreases across property and specialty lines with lower layers holding up better than the top end of the reinsurance towers. Within casualty, pricing was broadly stable as most reinsurers remain cautious around U.S.-focused casualty risks given loss cost trends and prior year loss development. Outside the United States, additional capacity put some downward pressure on pricing in selected markets. The 4/1 renewals showed similar conditions with a bit more downward pricing pressure on the Japan-specific renewals. Outside of Japan, we saw continued interest from carriers in managing earnings volatility and supporting growth through additional protection. Geopolitical developments, including the conflict in the Middle East, are impacting specific coverages such as marine war and political violence and terror, though it's too early to assess any broader ultimate impact on reinsurance pricing. Today's dynamic market is ideal for our reinsurance team to demonstrate our expertise, product knowledge and data-driven capabilities to ensure the best coverage for our clients. Turning to London Specialty. Similar to U.S. E&S market, pressure continues in North American cat-exposed property, while competition in D&O, professional lines, financial institutions and cyber is moderating. Related -- war-related risks remain the clear exception. Marine, aviation and political violence exposures tied to active conflict zones are seeing significant repricing and more selective deployment of capacity. War cover remains available, but it requires careful structure and coordinated execution across markets. Our teams across London, the U.S. and our international network are working closely together to secure capacity under current market terms and help our clients to navigate this rapidly changing environment. Moving to employee benefits, which continues to perform very well. We're seeing steady demand from employers across health, retirement, voluntary benefits, executive benefits, life and HR solutions. Our clients are still actively hiring and remain focused on talent attraction and talent retention. And there is more and more demand for our experts to provide creative solutions to help our clients control their escalating benefits costs, driven by general procedures, innovative medical treatments and as well as prescription drugs, as clients compensate us based on our advice, advocacy, creative plan design and cost management strategies, all of which support both demand and retention across our benefits business. Last but not least, Gallagher Bassett posted another strong growth quarter. We continue to see strong new business and excellent client retention. The team is adding new products, new services and embracing new technology, including AI and machine learning to further improve the claims experience for our clients. Gallagher Bassett is positioned for fantastic growth again in 2026. Next, let me provide you some comments on our view of the economy. The U.S. labor market continues to show strong demand for new workers with the number of job openings still ahead of the number of people looking for work. Our daily revenue indications have historically been a terrific indicator of economic activity. Our proprietary data from audits, endorsements and cancellations continues to show solid business activity through the first quarter and actually through yesterday. This data shows that exposure units such as revenues, payroll headcount or trucks on the road to name a few, are still in positive territory, and our clients' businesses are continuing to grow. So to wrap up my thoughts on organic growth prospects, today, pricing -- property pricing is moderating. That's well understood. But property is only one part of our very large and very diverse portfolio. Casualty, benefits, reinsurance and Gallagher Bassett are all strong, and that strength is broad-based across geographies, client sizes and products. In addition, our client exposure growth is solid. Our retention is stable, and we are seeing excellent new business wins, all positively contributing to our organic growth. The demand for our expertise continues to grow because clients value our advocacy, our analytics and our ability to navigate complexity. This gives us confidence in the durability of our results and provides further confidence in our 2026 full year organic growth outlook of 6%. Now shifting to our second strategic pillar, mergers and acquisitions. During the first quarter, we completed 9 new tuck-in mergers, representing around $60 million of estimated annualized revenue. Looking at our pipeline, we have over 40 term sheets signed or being prepared, representing around $400 million of annualized revenues. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher family of professionals. Good firms always have a choice, and it would be terrific if they chose to partner with Gallagher. As for the AssuredPartners acquisition, we are following our proven integration playbook developed from doing over 750 mergers over the last 20 years. We are on plan without exception. The cultural alignment has been exactly what we expected, a culture with a strong client-first mindset and a genuine excitement for leveraging our expertise, tools and capabilities. We are 8 months in, performance is terrific, and we are already better together. Let me move to our third strategic pillar to continuously improve our productivity and quality. We view AI, digitization and automation as a continuation of that long-standing strategy. It builds on decades of work standardizing processes, centralizing our global data and improving execution, all to help our people provide the very best advice and service to our clients. At our March 17 Investor Day, we spent considerable time discussing how we were already deploying AI across Gallagher. I invite you to listen to this webcast still on our website. Let me summarize a few key points from our March commentary. First, we expect AI to be minimally disruptive when it comes to selling insurance, providing consulting services and managing claims. Our business is advisory-led, complex and relationship-driven. Second, AI actually should accelerate our growth. AI enhances our ability to deliver faster, higher-quality advice and more tailored client solutions, improving our speed to market, win rates, retention and provides better client experiences. Third, operational change is not new to Gallagher. For more than 2 decades, we've standardized processes and centralized our proprietary data across the company. That foundation allows us to deploy AI today across P/C, claims, reinsurance benefits and mergers and acquisitions because we have embedded operational excellence into our DNA. We already have the brains and financial resources to quickly deploy AI. In our view, we're ahead, and that advantage compounds over time. Fourth, AI is already deployed across many of our core platforms and workflows. It helps our teams make better decisions and spend more time advising clients while continuing to raise productivity and quality. And finally, and most importantly, AI strengthens, not replaces the broker and adviser model. AI is another tool that strengthens how we serve clients. It does not change the fundamental nature of our business. AI makes every single one of our professionals better at what they already do by amplifying our expertise, our data and our market access. Let me wrap up by spending some time on our fourth strategic pillar, our culture. We are a growth culture company. If you spend some time reading our mission statement and the 25 tenets of The Gallagher Way, you might come to realize that they are all really about supporting growth, but growing the right way, the collaborative way, the professional and respectful and ethical way, all the while holding ourselves accountable for execution and growing shareholder value. We are a long-term growth culture that recognizes we grow because of the relevance of our advice, our analytics and our ability to navigate complexity, not because where we are in an insurance pricing cycle. We've proven we can grow through any cycle, and this one is no different. Culture is also what allows us to scale. As we grow organically and through mergers, we don't change who we are. Our culture promotes welcoming new colleagues into a model that emphasizes collaboration, entrepreneurship and shared success, all supported by strong processes, data and tools. And importantly, culture is what makes our investments in talent, technology and AI work. Our people embrace change when it helps them better serve their clients, improve quality and deliver stronger results. So when we talk about Gallagher's performance, our culture isn't separate from the numbers. It's embedded in them. Okay. An excellent quarter behind us, a terrific future ahead of us. I'll stop now and turn it over to Doug to walk through the financial details. Doug? Douglas Howell: All right. Thanks, Pat, and hello, everyone. Today, I'll spend about 3 minutes flipping page by page through our earnings release and give some quick highlights. I'll then spend about 5 minutes on the CFO commentary document we post on our website and then close with a minute on cash, M&A and capital management. Overall, the punchlines you'll hear today, and you've probably already seen that in your review of our information, we are right in line and in many cases, better than what we forecasted in our March IR Day. Okay. Let's go to the earnings release, Page 1. Just step back for a minute, adjusted revenues, EBITDAC and EPS, all up 30%. You'll get to those percentages when you remove from prior year numbers $143 million, that's $0.41 of interest income we earned on the funds we are holding to buy AssuredPartners. You'll read that in the footnote at the bottom of this page. That's an amazing quarter and demonstrates our 4 strategic pillars are delivering terrific shareholder value. Moving next to Page 2. Brokerage organic at 5%, right in line with our March IR Day expectations. One call out here, supplementals and contingents combined up nearly 10%. As you've seen in the past, there can be some geography between those 2 lines, especially in first quarter as we renegotiate contracts to start a new year. Then at the bottom of the page, you'll see we had a solid start to the year for our tuck-in M&A program. Our two-pronged growth strategy combined, that's organic and M&A, posted 28% total revenue growth this quarter for our Brokerage segment. That would be 33% if you remove the $143 million of interest income on the AP funds. That's absolutely terrific. Moving to the top of page -- moving to Page 3 and the top of Page 4. As we discussed during our last few earnings and IR Day calls, current quarter percentages at the bottom of these tables are not really all that helpful when compared to prior -- because prior year had that interest income from the AP funds I just highlighted. It really clouds comparability. So I think it's better for me to defer comments on our margin until I get to Page 7 of the CFO commentary document. When I do, you'll quickly see that our productivity and quality strategic pillar delivered strong underlying margin expansion this quarter, right in line with our March IR Day forecast. Moving now to the bottom of Page 4, an excellent quarter for our Risk Management segment, Gallagher Bassett. Organic at 10% and M&A added another 2.5 points, bringing total reported revenue up 14% and adjusted revenue up 13% for this segment. This too shows the power of our 2-pronged growth strategies. So moving now to Page 5. Risk Management showed continuous compensation and operating expense ratio improvement, leading to an adjusted EBITDAC margin up 130 basis points. There is no noise in this segment from interest on funds held to buy AP. So it's very easy to see the excellent growth in our revenues, improvements in our productivity and our growth in our adjusted EBITDAC, all better than our IR Day commentary and forecast. Flipping to Page 6. The Corporate segment adjusted results were -- in total, were pretty close to the midpoint of the range we provided during our March IR Day. So there's no new news here. Last, on Page 7, about halfway down, you'll read we repurchased about 1.4 million shares for approximately $310 million this quarter. All right. Let's leave the earnings release and go now to the CFO commentary document. Starting on Page 3. Most items are very close to what we provided in March. So just double check that these items are considered in your models. Going to Page 4. This is the new organic growth table we started providing last December. Here are the punchlines. First, we saw solid first quarter organic growth across each business and geography with each posting organic at or above our March IR date commentary. Next, we've now added our second quarter outlook and see similar performance for each of our businesses. These percentages incorporate all the information Pat just provided, such as net new business wins, customer buying behaviors, the rate environment and the economic landscape. These are our midpoint best estimates ground up as of today. Third, same with our full year outlook, which has not changed from March. We post that and '26 will be another excellent year of organic growth. Moving to Page 5, the investment income table. Three comments here. First, our '26 forecasts reflect current FX rates and changes in fiduciary cash balances. Second, our forward estimates now assume future 25 basis point rate cut in September. Third, this is a helpful table to show you a full historical view of the amount of interest income we earned on the funds we are holding to buy AP. And it's a reminder as a heads up when you build your models, second quarter had $144 million of interest earned and then $76 million in the third quarter of '25, which will again cause comparability noise throughout our results when we post our next 2 quarters' results. Staying on Page 5, but shifting down to the rollover revenue table, which excludes AssuredPartners. Four quick comments here. First, the first quarter '26 sub total of $126 million for Brokerage came in pretty close to our March estimate. Second, looking forward, the pinkish columns to the right include estimated '26 revenues for brokerage M&A closed through yesterday. And of course, you'll need to make a pick for future M&A also. Third, one modeling heads up to make sure you adjust your prior year revenues for the divestiture and other line before you apply your organic growth assumption. And fourth, you'll see the same information down below for our Risk Management segment. All right. Let's move to Page 6, information on AssuredPartners. A few comments here. They're mostly modeling helpers, and then I'll add some qualitative comments at the end. First, remember that forecasted numbers we provide in this table are at the midpoint of our estimates. As we convert locations onto our systems, there could be some small movements between quarters and some additional small netting like we saw last quarter. Second, the footnote there reminds you that noncash figures shown on this page, which reflect depreciation and earn-out payable are included within our estimates on Page 3. So please don't double count. Third, this table does not include any revenue or expense synergies. So those would be incremental to the numbers you see here, and you would need to model them separately. The footnote says that we still see annualized run rate synergies of $160 million by the end of '26 and then up to $300 million by early '28. That said, more and more, I'm feeling there could be some additional upside to these numbers. Maybe I'll have an update during our June IR Day. Fourth, a reminder that you can use for modeling the second quarter '26 column as is, but for third and fourth quarters, you should only add the delta between the pink numbers and the blue '25 numbers. Fifth, as for financial performance, an excellent first quarter, which came in fairly close to our March IR Day estimates. Only a few small changes to our outlook for the rest of the year also. Qualitatively, our clients are happy and client retention is excellent. The integration plan is tracking to our expectations. Our teams are energized and coming together. We're having some terrific new business wins showing that we are indeed better together, and our employee and producer retention is strong and right at historical norms. All of this gives me confidence in our '26 financial performance outlook. Moving now to Page 7, the Brokerage segment margin bridge. Favorable comments continue to come in that this picture is worth a thousand words. It's very easy to see all the components that influence our margin change period-over-period. Let you quickly dig out that our productivity and quality efforts are delivering underlying margin expansion. You'll see that on the second to the last line of the table. We had terrific expansion this quarter of 50 basis points. And you'll see to the far right, we're still forecasting full year 40 to 60 basis points of underlying margin expansion. Both of those are right in line with what we had discussed during our March IR Day. And despite sounding like a broken record, worth another call out that the first line of this table shows you the impact of investment income earned on the funds we held to buy AP. That's what will again cause the headline headache for the next 2 quarters. Then thankfully, it should be an easier compare. All right. Let's move to Page 8, our Corporate segment. You'll see that our adjusted first quarter as well as our outlook for the rest of the year are very close to what we presented in March. Just 2 call-outs here. The upper right box shows you the changes in FX, which caused the corporate line to bounce around a bit. But remember, these unrealized gains and losses are noncash. Now look at the lower right box. This is new and a bit of housekeeping here. We removed the separate page that recapped our historical clean energy investment cash flows. This box tells the same story just shorter. It shows you that we had $655 million of tax credit carryovers that we will use over the next few years. Second, it also shows you that we have about $11 billion of tax deductible amortization expense, which we will deduct in the future. Together, these 2 items are worth about $3.4 billion of cash tax savings, which gets you to the punchline we've added in this box. Our cash taxes paid will be around 10% of EBITDAC for the foreseeable future. You model that and you'll get close. All right. Finally, a few comments on cash, capital management and M&A funding. When I look at available cash on hand, expected free cash flows and future investment-grade borrowings, over the next 2 years, we might have close to $10 billion to fund M&A before using any stock. Our M&A pipeline remains strong and is full of targets at attractive multiples, which we are seeing coming down a bit. It still creates an immediate shareholder value through nice arbitrage. I mentioned earlier that in the first quarter, we repurchased approximately $310 million of our shares. We continue to believe our equity is woefully undervalued by the market, so this repurchase was opportunistic. But our priorities really haven't changed. We'll continue to invest in organic growth. We'll remain active in mergers and acquisitions, staying consistent in our approach and disciplined in our pricing, and we will deploy excess capital in a way that maximizes long-term shareholder value. So those are my comments. A great quarter to kick off what looks like could be another terrific year. Back to you, Pat. J. Gallagher: Thanks, Doug. Operator, I think we're ready for some questions. Operator: [Operator Instructions] And our first question comes from the line of Charles Lederer from BMO Capital Markets. Charles Lederer: I appreciate Pat's comments on the strength outside of property lines. Just looking at Slide 4 of the CFO commentary, can you expand on what your expectations for the higher organic growth in Americas Retail in the second quarter? I guess it's just a little surprising given the greater property mix in 2Q. Douglas Howell: So the question you're asking about, if I look here in the second quarter, we believe there's 5% in our Americas Retail Brokerage segment. Is that what you're looking at? Charles Lederer: Yes. Douglas Howell: Yes. All right. Fine. So if you really look at what last year, what happened is Canada actually had a slightly smaller quarter in the second quarter last year. So that's why it gets it closer to that 5% number as we're going forward here. Charles Lederer: Got it. And then can you talk a little bit more about whether the M&A environment has changed over the last couple of months? And how much of that's factoring into your buyback decisions? And can you share how much you've repurchased so far in the second quarter? Douglas Howell: So the question here is what's under that. We've been in a quiet period the entire second quarter. So we have not repurchased any shares thus far this quarter. As for the environment on M&A, multiples are coming down. We are seeing that. We're seeing that sellers are becoming a little bit more rational on that. First quarter is historically always our smallest quarter, so you can't really read much into that. We typically have a wrap up to the -- a little bit more to the end of the year. We'll show more in the later quarters. And then finally, I think that when it comes to balancing M&A versus share repurchases, if there's a terrific opportunity out there right in the middle of the fairway that makes us better together that is a long-term buy, we still think there's value in that number over our shares. So it's -- but it's got to be at the right multiple in today's world. Operator: And our next question comes from the line of Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question is on the core commission and fee organic growth, the 4% in the quarter. In your minds, does that represent a floor? Douglas Howell: I'm sorry, does that make -- Elyse, I just didn't hear you, say it again. J. Gallagher: Does it represent a floor? Elyse Greenspan: Yes, like a floor to where you see the growth from here, the 4%, yes. J. Gallagher: Yes. As we look out for -- at this point in time, as we said in our prepared remarks, as we look forward, we see a pretty good year coming at us. Elyse Greenspan: And then my second question, right, you guys obviously provide a lot of guidance and disclosure by line, right? So it looks like organic growth, right, in brokerage, you're looking 4.5% in the Q1, 5% you're looking for in the second quarter, and you left the guide for 5.5% for the full year. So that does imply a pickup in the back half. Doug, I think last we spoke, you were just talking about incremental reinsurance demand as being somewhat of a driver there. So I mean, I know it's being a little nitpicky relative to half or maybe 1 point in the back half of the year. But is that still your expectation that, that's what will drive improving organic growth in the second half of the year relative to Q1 and Q2? Douglas Howell: Yes. Let me give you a couple of reasons why I think that -- we have a really successful new business pipeline right now, and we're seeing that in reinsurance, retail, bond and specialty and then our -- really in our kind of captive business right now. We've also done a good job of getting in raises on our fee accounts. So that's a little bit of a tailwind. I think that we're going to see some pretty strong growth in supplements and contingents for the rest of the year. You've seen the numbers the carriers are posting that should bode favorably for us. And then I think there's -- just in general, we're seeing some pretty good success that's going to push through a property market. Now property sells off over the next 60 days in a big way, that's going to be a whole different discussion. But it's in that 5% range. So it's plus or minus a little bit on that. I think we're in great shape. Elyse Greenspan: And this guidance assumes consistent property declines for the rest of the year relative -- property price declines relative to what you saw in the Q1? Douglas Howell: That's correct. Operator: And our next question comes from the line of Dean Criscitiello from Wolfe Research. Dean Criscitiello: So just sticking on organic growth real quick. Your full year estimate for the specialty and U.S. wholesale growth is 6%, which implies sort of a pickup of organic in the back half of the year. So I was sort of curious whether your expectations under -- because of the pricing environment is obviously not great sort of your expectations as to why you think it will pick up? Douglas Howell: All right. So the question is -- here's the thing. Property is going to take its biggest hole in the second quarter. So I think in the second half of the year, we've got a pretty good view on property right now, at least -- we're a month into it right now. We'll see what happens in the May and June renewals. We've got a good eye towards that. For the rest of the year, we just don't have that much property stress. Dean Criscitiello: Got it. And then my follow-up, I noticed in the CFO commentary that the multiples that you list for tuck-in acquisitions, the lower end of that range came down a bit. So I was curious maybe if you could add a little bit more color of what you're seeing in the market on multiples and kind of why you think that is? Douglas Howell: Yes, that's just what we're seeing right now. I think the term sheets that we've got in the hopper are they're recognizing that the multiples are coming down a little bit. So yes, yes, we did put that on Page 3 of the CFO commentary, and I may mention it when I was wrapping up on cash. So yes, you're reading that the right way. J. Gallagher: And why? Look at our stock price. Our multiple is down. Pretty simple. We're not here to dilute our shareholders. Operator: And our next question comes from the line of David Motemaden from Evercore ISI. David Motemaden: Just one question on the -- I believe, Pat, you had talked about insurance rates still contributing to growth in the quarter, but just to a lesser extent. You guys in the past, you guys have broken out some of the different components of organic between net new and then like price and exposure growth. So just wondering if you could unpack that maybe within this quarter and how you're thinking about that within the outlook for the 5.5% for the full year? Douglas Howell: Listen, I think the way to look at it right now is new business will exceed lost business. Customers will opt in, which will come through as rate and exposure growth as exposures grow, our customers' business. So let's say it's a 6% year. We're probably in a period right now, we're going to get net-net-net from rate 1%, 1.5%. When you think about new business forward thrust, we'll probably get 2.5%. And then you're probably going to get exposure growth in there of another 1.5 points, something like that. I think that might add up. So I'm not saying it's 1/3, 1/3, 1/3. I think that rate might be on the lowest end of that growth piece. So it's going to be net new business wins and then our clients' exposure units growth and our clients opting in and buying more insurance. And then rate will be what it is. David Motemaden: Got it. And sorry about that. And then just on the property pricing, maybe just thinking about the down 7% for this -- or the down 7% RPC. If that were to get down to like, let's say, down 10% or 11%, how -- could you help sensitize the organic growth to that sort of RPC movement? Douglas Howell: All right. I'd have to think about that here a second and do the mental math. It might put a point of strain overall for a full year on it, something like that. But that might have to go to closer to 12% or 13%. It might almost have to be a double on that. Remember, a lot of our property also is done on a fee, some of our big property schedules. So that mitigates that a little bit. That's why the impact of the floor completely falling out of it from what we can see right now, it may be 1 point for the full year. I mean... J. Gallagher: And rates are approaching a pretty low level right now. In some instances, we're seeing rates approaching 2017 pricing. So I don't think there's a structural big time jump further beyond that, could be. Douglas Howell: And again, just rates are one thing. But remember, our revenues are based on exposures, opting in, growing risk profile. Casualty is still tough. I know your question had about property, but it's not just rate for us. It is highly sensitive also to exposures, which are growing right now. Operator: And our next question comes from the line of Meyer Shields with KBW. Unknown Analyst: This is [ Jing ] on for Meyer. My first question is on the E&S. You call out the data center and AI-related infrastructure as the fastest-growing part of the E&S market. Could you kind of help us size kind of what percentage of the submission today is kind of related to that and going forward? Douglas Howell: Yes. As a percentage, it's a very small item. It's not anecdotal, but it is also illustrative that specialty market comes in 5 different type of buckets. So you got to think about these as a headwind in that -- as a tailwind in that vertical that as these things come online, they're going to have to go to the specialty and E&S market in order to get that cover. In terms of what we're doing on it, boy, we've got a terrific practice in that. I think that the way we're coming together, the way we've got a bespoke model that brings the right experts for the various covers that go along with the data center is pretty remarkable. J. Gallagher: And let's not get it wrong. I mean there's great growth opportunities for us across the whole data center effort. And as Doug said, the E&S market is responding to that. It takes world markets to complete those. It takes great expertise, which we have. But as a percentage of the overall market, this is not earth shattering. Unknown Analyst: Okay. Got you. Very helpful. My second question is on the Middle East conflict. I think you flagged a significant repricing and more selective capacity deployment in marine war, political violence, terror, et cetera. For Gallagher specifically, is this a net organic tailwind given your London specialty and reinsurance positioning? J. Gallagher: Yes, it is. And we've got to be very sensitive about that. First of all, just because war rates are there and the cover is available, doesn't mean ships are sailing. You got a very big caution light on making sure that the crews are safe and shippers are not necessarily going to take the risk. But the market is available. It takes a lot of skill and a lot of diligence to put these together. But in the end, when they bind, yes, they're a net positive. Unknown Analyst: Got it. And just one quick follow-up. Does the capacity constraint like placement difficulties that limit your ability to capture that or... J. Gallagher: No, not at the present time. Operator: And our next question comes from the line of Yaron Kinar from Mizuho. Yaron Kinar: One question for me. The AssuredPartners estimates, I see revenues down a little bit again and margins up a tad more than that. Is that the same real estate moves that we had talked about in the March 17 investor meeting? Or is there something else driving those? Douglas Howell: All right. So that's a great question. First of all, remember, those revenue numbers are a midpoint of our range. They do move around a little bit as we put them on to our system because we get deeper insights to the source of revenues. For instance, last quarter, we're going to have some netting. And the old accounting on AssuredPartners, sometimes they put a -- some branches would put a co-broker as an expense versus a contra revenue like we do. So that will cause that number to move around. It did move, what, $10 million this quarter on an $800-some million estimate. So it's a 1% kind of variance. The reason why this isn't an issue for us is that we purchased cash flow. And that's the great thing about the AssuredPartners acquisition. There was no questions in their cash flow. The gross up of the revenues or the -- and expenses in some branches and the netting in other branches was an irrelevancy -- it was irrelevant to us because that's why you see the EBITDAC estimates holding right up to what we're talking about. We purchased that cash flow. We call it EBITDAC, and it's delivered right where it'd be. There's going to be a percentage point bounce around a little bit on the revenue numbers as we completely sort out the netting of co-broker revenues branch by branch. And we're going to -- we put a ton of branches up just this last weekend, and I think we're doing a -- we're in terrific shape of getting that rolled on to our books in the next 15 months. Yaron Kinar: Got it. And those bounces between the line items, that will no longer be the case once the business rolls over into organic curve, I think. Douglas Howell: Yes, that's right. Yes. I mean once we have a better insight into whether these numbers are coming to us gross or net. Remember, they're all on individual agency systems. When you do it on a client-by-client basis, you'll see whether or not there's a co-broker number going through the operating expense. And again, the cash flows are the same. It's just the accounting. Operator: And our next question comes from the line of Mark Hughes with Truist Securities. Mark Hughes: A number of your competitors or a couple of your competitors have talked about challenges with new business, and it sounds like you're seeing things go pretty well. Is there any reason why, say, at this point in the cycle with property down and maybe a little more pressure on casualty perhaps, why would new business be more difficult? And again, just from a kind of a broad cyclical perspective or anything else that might be contributing to that? J. Gallagher: So Mark, we look at that closely. And a couple of things you might remember from discussions in the past. We have found over the last few years that if we digitize the relationship with the client, it will actually increase our retention by a full point. Now that means it takes it from something like 94.5% to 95.5%. I would contend that, that's pretty close to renewing 100% of eligible, not measured, not for sure, but darn close. Now those same tools are increasing our hit ratio. So I can tell you that if we take our Gallagher Drive product out in a prospect call, when I started selling 50 years ago, my hit ratio was about 32%. Before we got our tools going over the last decade, our hit ratio was about 32%. So it was all about getting at bats. With our tools now, we know this statistically, we're approaching 45% hit ratios when, in fact, we use the tools. And we have a number of them. It's not just Gallagher Drive. This week at RIMS, we'll be announcing Blueprint, which is all about improving the risk and insurability of our clients, making their profile better. Our reinsurance people have got a workbench product that uses AI to show clients all kinds of different approaches, et cetera, et cetera. These tools, we're spending hundreds of millions of dollars, and they're really getting traction. And I think that is a differentiator. It's a differentiator, especially when you remember that 90% of the time, when we go out to compete, we're competing with somebody substantially smaller than we are. And they all walk in and go, well, we've got AI. Look at our ChatGPT. That's not the point. Let us just show you what we do with your risk profile, which we can now categorize numerically that says, as you exist today, you score on our profile 65. That's not great. But if you work with us on loss control, on improving your risk profile, on the things you need to do, we can take that, we think, to 87. Now that translates directly to an improved position in the marketplace, better pricing, which frankly, today is easier to get and bigger orders. So our hit ratio is increasing. We've got a lot of at bats, and I feel really good about our new business. Mark Hughes: Excellent. Is there any kind of structural or cyclical reason why putting your advantages to the side, it might be harder to sign up new business in this kind of environment since prices are going down, it's harder to tempt people away or easier perhaps because you can offer lower pricing? J. Gallagher: No, I think it's -- frankly, it's interesting. I've said before, the brokerage business is a tough business. You've got to go out and convince somebody to leave somebody they're happy with. And that's difficult. And it's a very strong relationship business. The reason they're with people is they like them and they trust them. We are trusted advisers. So we have to go and make a very strong case for the fact that they benefit their shareholders, most of the time, their family by making a move to Gallagher. And we're just getting stronger and stronger at that. So it's not easier for sure when there's a softer market because there's less pain. But at the same time, I think we've got confidence in the step of our producers that if they can get a shot at something, they've got a pretty darn good chance of writing it. Operator, I think that's our last question. So let me just make a few comments here to wrap up. Everyone that's on the call, thank you for joining us this afternoon. As you can tell, I remain extremely confident in where Gallagher is headed. Our strategy is consistent. Our execution is strong, and our culture continues to differentiate us. To more than the 72,000 colleagues around the world, thank you. We've had a great quarter. Your talent and dedication are what makes this company great, and that is the Gallagher Way. Thank all of you for being on, and have a great evening. Operator: Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2026 IMAX Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jennifer Horsley, Head of Investor Relations. Please go ahead. Jennifer Horsley: Good afternoon, and thank you for joining us for IMAX's first quarter 2026 earnings conference call. On the call today to review the financial results are Natasha Fernandes, our Chief Financial Officer; and Rob Lister, our Chief Legal Officer. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the Investor Relations section of our site. Our historical Excel model is posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Today's call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information, future events or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures are contained in this afternoon's press release and our earnings materials, which are available on the Investor Relations page of our website at imax.com. Before we begin, Rich would like to provide a brief update on his recovery, and then the call will turn over to Natasha. Richard L. Gelfond: Thanks, Jennifer, and good afternoon, everyone. Thanks for joining us today. Natasha will handle today's call and Q&A session. But before I turn it over to her, I wanted to provide a brief update on my recovery from pneumonia. I'm happy to share that I'm making excellent progress, and I'm gradually resuming oversight of the business and involved in all key strategic decisions. Our management team is doing an outstanding job and will continue with their day-to-day responsibilities as well. I want to send my sincerest thanks for your well wishes and kind words of support over these past few weeks. I greatly appreciate it. And I appreciate your time and attention today. With the incredible start to the second quarter and a fantastic slate ahead, I'm as excited as I've ever been about the IMAX business. With that, I'll turn it over to Natasha. Natasha Fernandes: Thanks, Rich. With the heart of our formidable slate now rolling out, we remain very confident in our 2026 guidance, including a record $1.4 billion in global box office this year. Our story is one of strong growing momentum. It is clearer than ever that IMAX is evolving into something bigger, a global platform for blockbuster films, events and experiences, with the most defined by our technology, relationships and brand, enabling a diversified dynamic content portfolio across Hollywood, local language, documentaries, music, sports, gaming and more. Project Hail Mary, a film for IMAX release delivered an emphatic conclusion to the first quarter and has now earned more than $90 million in IMAX, more than double our initial projections. This excellent performance alongside Avatar Fire and Ash lifted our global box office outside of China, up 67% year-over-year in Q1 and partially offset our lower Greater China box office, where we faced a significant comp against last year's massive Ne Zha 2. That includes growth of 75% in North America and 60% in rest of world markets. Our platform has kicked into high gear. IMAX global box office in the current quarter-to-date is over $100 million, up over 10% year-over-year. We scored 3 consecutive global opening weekends of over $20 million with 3 very different titles for very different audiences. This is the kind of strength across genres, demos and geographies that drove our record performance in 2025. We delivered over 18% of the global box office for Project Hail Mary, including 30% market share in China, proving again the strong indexing we command there for Hollywood's biggest blockbusters. The Super Mario Galaxy Movie was our second biggest animated debut of all time as we continue to grow with family audiences, one of the fastest-growing segments of the box office. And Michael delivered our biggest debut all time for a musical biopic with strong 14% indexing in North America. In local language, Toho's latest Detective Conan in Japan earned a franchise best $3.2 million in IMAX and Dhurandhar 2 notched our second biggest opening weekend ever in India. Our promising slate was on full display at the annual CinemaCon industry convention this month, including an exclusive look at Christopher Nolan's The Odyssey, the first film shot entirely with IMAX film cameras. Everything we've seen and know tells us that it will be something truly special and another incredible entry into our partnership with the Nolans that has yielded over $700 million in IMAX box office worldwide, and a sneak peek at the first 7 minutes of Dune: Part 3, which was also shot with IMAX film and looks to be visually stunning as anything Director Denis Villeneuve has brought to screen. Tickets to select IMAX 70-millimeter screenings of the film recently sold out in minutes, 9 months ahead of its release. Both filmmakers joined us for our recent CEO forum in April, perhaps the most successful in the 13-year history of the event. At the annual event and exclusive gathering of global exhibition CEOs representing at least 3/4 of the world's box office, we also hosted Tom Cruise, Timothee Chalamet and Jon Favreau. It has truly become a signature event for our company and the only C-level gathering where exhibitors, filmmakers and talent and studio chiefs from around the world can engage in strategic off-the-record dialogue about the industry. It also underscores the power of our team and our brand to connect and lead across the ecosystem and deliver value to our partners in countless ways beyond our technology. The Odyssey and Dune stand alongside Jon Favreau's The Mandalorian and Grogu and Greta Gerwig's Narnia at the top of a list of major tentpole films leaning heavily into IMAX in 2026. That includes 1 week run to launch highly anticipated releases, including film for IMAX release Mortal Kombat 2, Steven Speilberg's Disclosure Day, a return to Sci-Fi for the legendary director, Toy Story 5, which will look to continue Pixar's resurgence, Super Girl, also film for IMAX, a follow-up to last year's hit Superman, Minions & Monsters, the latest installment of this franchise phenomenon and the live-action version of Moana following the animated sequels billion-dollar performance in 2024. And we see great potential in other film for IMAX titles, including Zack Cregger's Resident Evil, Street Fighter and the End of Oak Street as well as upside in Tom Cruise's Digger and J.J. Abrams' The Great Beyond. We have a growing lineup of expected Chinese films this year, including 2 releases, Penghu and the film for IMAX title Once Upon a Time in the Middle East that shifted from Chinese New Year and are expected to release later in 2026. We also expect to play Spider-Man: Brand New Day and Avengers: Doomsday across our locations in Greater China and our first film for IMAX releases from Japan and India, Godzilla Minus Zero and Ramayana Part 1 and next year's Varanasi anchor an excellent local language slate internationally. We've also added several high profile releases to our slate, including the film for IMAX sequel to Brendan Frasers, The Money in 2027 and highly anticipated film for IMAX titles in 2028, including Paramount and Activision's live-action feature film, Call of Duty, directed by Peter Berg and written by Berg and Taylor Sheridan, Joe Kosinski's Miami Vice 85 starring Michael B. Jordan and Austin Butler and A24's Elden Ring video game adoption. We also continue to program experiences beyond feature films to strengthen our offering from Formula 1 to some supersonic music projects in the pipeline. Formula 1 is exceeding our expectations with strong presales heading into this weekend's first race in IMAX, The Miami Grand Prix. As we've seen with Project Hail Mary, Baz Luhrman's EPiC, Apple's Formula 1 coverage and The Mandalorian and Grogu, content owners are increasingly leaning on IMAX as a powerful global launch platform with exclusive advanced releases, previews and events. Audiences know that the IMAX experience begins well before and extends far beyond our immersive visual and sound technology. We work directly with the greatest filmmakers in the world on image capture with our proprietary film and certified digital cameras. We offer more picture through our exclusive IMAX expanded aspect ratio. We remaster every film, event and experience we distribute to ensure the highest quality presentation. We monitor all 1,865 of our locations around the world for quality control in real-time 24/7. And as a result, we have incredibly passionate loyal fan base. Our audience engagement scores consistently rival blue-chip brands like Netflix, Nike, Marvel and Amazon. In short, there is no better platform for blockbuster success than the IMAX global platform. This simple fact continues to drive strong global network growth. Last year, we grew IMAX's footprint by 4% in the U.S. and more than 8% in the rest of world markets. Our momentum reflects how exhibitors worldwide view IMAX and the long-term productivity of the network. With IMAX still less than 50% penetrated globally in our latest zoning analysis, we continue to see meaningful runway for growth. Year-to-date, we signed agreements for over 40 new and upgraded IMAX systems worldwide across 10 countries with 18 partners, most recently with our biggest deal ever in one of the most productive markets in the world, our 10-system agreement with HOYTS in Australia and New Zealand, which will nearly double our footprint in the region. Importantly, our sales activity is well distributed geographically with 3 domestic signings, 9 in Australia, over 10 in China, 7 in Japan and 7 across EMEA, including Spain, France, Germany, the Netherlands and Egypt. With more than half of our signings representing new IMAX locations, which are a meaningful driver to our network economics. At the same time, we are selectively upgrading high-performing locations where we see clear opportunities to drive incremental box office. We are seeing particular strength in key high box office markets like Japan, where we have already signed 7 systems year-to-date, continuing the momentum of our 13 signings in 2025. We also expanded our relationship with VieShow in Taiwan with upgrades that will transition the entire circuit to IMAX with laser. We continue to broaden our exhibitors onboarding new partners in Spain, Germany and France. And looking ahead, we are engaged in numerous additional opportunities with leading exhibitors across key markets. We look forward to keeping you updated on our progress. Let's turn now to our first quarter results. Starting with the bottom line, first quarter adjusted net income grew 33% to $10 million, while adjusted EPS grew $0.17, up $0.04 year-over-year. IMAX delivered revenues of $81.4 million, a decline of $5 million year-over-year, driven by decreased revenues in Greater China. Revenue outside of Greater China grew by $15 million. Gross margin declined to $46 million from $53 million in the prior year. Operating expenditures, which includes R&D and SG&A, excluding stock-based compensation, was $28 million for the quarter compared to $30 million in the prior year, reflecting our continued strong cost discipline and timing of spend. Adjusted EBITDA declined in line with revenue, down $6 million year-over-year to $31 million. As a result, adjusted EBITDA margin was 38% compared to 43% in the prior year. We remain confident in our forecast of total adjusted EBITDA margin of more than 50% in the coming year. In our Content Solutions segment, revenues declined 8% to $31 million due to the tough comp in China against last year's massive hit in Ne Zha 2. Box office grew significantly outside of China, including 90% growth in EMEA, while China box office declined 62% due to an exceptionally strong Q1 in the prior year and the timing of major releases this year. We expect IMAX box office in China to be more evenly spread throughout the year versus 2025, where 46% of our China box office came in the first quarter, well beyond the 30% we normally see. Content Solutions delivered gross profit of $18 million, a decline of $5 million driven by lower box office and gross margin declined to 58% versus 69% in the prior year. Turning to our Technology Products and Services segment. IMAX delivered revenues of $48 million, a decline of 4%, driven by lower box office-related system rental revenue in China. Gross profit margin of 56% was in line with gross profit margin of 57% the prior year. We're off to a solid start with system installations installing 19 systems in the first quarter compared to 21 in the prior year and 15 in Q1 of 2024. Of those 19 systems, 11 were joint revenue sharing systems and 8 were sales arrangements, 11 were upgrades and 8 were new locations. These new locations again showcased our diversifying network footprint spread across Japan, England, France, Singapore, South Africa, China and the U.S. Turning to cash flow and the balance sheet. IMAX cash flow from operations was $4 million compared to $7 million in the prior year and includes $8 million in higher year-over-year lease incentives provided to exhibitors to support the building of new IMAX auditoriums. This investment reflects the continued prioritization of our use of available capital to invest in growth, including partnering with exhibitors to expand and upgrade our network through joint revenue sharing arrangements. This strategy will empower IMAX to take full advantage of our expanding brand and market share and the promising slate that continues to take shape for the years ahead. We maintain a strong capital structure, thanks to our asset-light model, and focused execution as well as the work we did last year to refinance our convertible notes and expand our revolving facility. As of March 31, we held $146 million in cash and $300 million in debt with a net leverage of 0.86x. To conclude, the best is yet to come in what we believe will be a record year for IMAX, and our momentum is building. Our exhibitor partners share our excitement for IMAX, our slate and the value we deliver, which is why we've added more than 30 partners worldwide in the past 2 years and continue to dramatically diversify our footprint. As our global box office and network grows, our increased scale will drive expanding margins and cash flows. And we will remain focused on keeping operating expenses substantially flat. We remain very well positioned to achieve our 2026 guidance, including record global box office of $1.4 billion, 160 to 175 system installations worldwide and adjusted EBITDA margin in the [mid-40s percent] at -- with at least 45%. There has never been a better time to be in the IMAX business. We continue to deliver clear evidence that IMAX is not just outperforming the market, but helping to expand it, attracting audiences, growing incremental box office and driving value throughout the ecosystem. Thank you. And with that, I will turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question is going to come from Drew Crum with B. Riley Securities. Andrew Crum: Rich, good to hear you on the call. Natasha, just on the adjusted EBITDA margin guidance with a floor of 45%, does that assume a global box office of $1.4 billion? And if so, just trying to understand how the margin would be flattish year-on-year with an incremental $100 million plus in box office? Natasha Fernandes: Drew, so yes, margins really -- it does fluctuate normally quarter-to-quarter. But as you look at the whole year, $1.4 billion box office, I understand the incrementality will come through, but we've chatted about this even on the last call as well is that there's always a mix between the regions of box office, whether you have local language or Hollywood and the amount that we're investing into marketing in this year. There are a lot of Hollywood titles that are significantly larger titles than last year. And as we look towards that, our goal would be to lean in heavily into IMAX and marketing, the titles as well. And so that's where the margins can ebb and flow. And of course, you can capture more than the 45%, but this is just from a guidance perspective, providing that guidance with respect to the floor of the 45%. But of course, there's opportunity in that. Andrew Crum: Okay. That makes sense. And then any disruptions created by the U.S.-Iran conflict during late 1Q or early 2Q? Anything -- you've seen anything contemplated in your annual outlook? Natasha Fernandes: No, not at all. It's not for us. We know we have about 35 locations within the region in the Middle East and majority are continuing to operate. We haven't experienced anything significant that has -- will impact our plans for the year as well. And as you heard, we continue to expect to install 160 to 175 systems as well. So if you look at the way that we're building out our entire worldwide network, there's many countries that we're leaning into. And one of those is Australia that we just signed the deal with this week and announced as well. Operator: Our next question will come from Michael Hickey with StoneX. Michael Hickey: Rich, Natasha, congrats guys on a great quarter, good -- great start to the year. Obviously, a lot more to come. Just on the Australia deal, nice to see some growth from that region. Just curious if you could sort of frame it for us, Natasha, the growth opportunity network-wise in Australia and Japan? And then the follow-up, I'll give you now, just what you see from those regions as well in terms of relative PSAs and local language development in terms of films? Natasha Fernandes: I think it was a really important deal for us. I mean, for the longest time, we had only about 2 locations this past year in 2025, we ramped up and installed some more locations in time for Avatar and started the year with about 10 locations and now adding this new deal. We're sitting with the potential to double -- more than double our footprint in Australia. Australia is one of the strongest performing regions and countries for us. Some of the locations have TSAs up to $4 million, which is absolutely amazing. And I think that that's the opportunity is the ticket price varies over there as well. And so knowing that you have the opportunity to have outsized performance from a mix of not only growing your network, but you're also getting the leaning into IMAX and the higher ticket prices. I mean it's been one of our priority markets as well. We're only about 13% penetrated. So there's a lot of growth and opportunity there. And as you look at Japan, we signed another 7 systems in Japan this quarter. Last year, we signed 13. And off of the success of Demon Slayer in local language in Japan, we're continuing to do that. I did announce in the prepared remarks, and it was heavily shown at CinemaCon as well, Godzilla Minus Zero, as our first local language film for IMAX title in Japan, which they're leaning in very heavy into IMAX with that as well. And Japan is only 47% penetrated. So a lot of opportunity there. And those per screen averages remain just as strong as they've ever been, which is very good because I think as we start to expand in Japan and continue to grow that network, you contemplate whether or not the per screen averages will move, but they've actually shown considerable strength there. Operator: And the next question is going to come from Eric Handler with ROTH Capital. Eric Handler: Natasha, starting at your Investor Day last year, you did mention how IMAX was selectively looking at opportunities to maybe put some more capital into their deals above and beyond just sort of like the cost of the screen installation. This $8 million of higher lease incentives, is that part of that strategy? How do you measure ROI with those investments? Natasha Fernandes: It is, Eric, actually. it was a significant expenditure for us in the quarter, and I'm sure you saw that it impacted our cash from ops, but I see that as a good thing. Investing the $8 million to help grow the network faster ahead of the fantastic slate that we still have ahead of us coming and as well into '27 and '28, I think that's the opportunity for us. And we do value and really look at what the opportunity for a return on it is. So first of all, always using that capital for new locations and not simply for upgrades. So that would be new box office potential for us, but also in high-performing markets and with partners that we know that we can expand and have a greater penetration as well. And so -- and we know that they'll lean in. And all of those things working together, we've been able to value out what that arrangement will look like. And each arrangement does look different as well. But of course, all within the respect of making sure that we hit our return hurdles, and also just for the opportunity to continue to quickly expand the network, therefore, grow the box office. And as you know, that will continue to not only grow the box office, but then grow the network, and it works in a nice cycle from that perspective. Eric Handler: And then I wonder, as you look further into markets like Australia, Japan, EMEA, are these more JV type deals? Or are you looking -- are they doing more -- are they more interested in like [ straight ] sales? Natasha Fernandes: Actually, it's a mix, Eric. It can be -- it's dependent on the partner. It's dependent on the way the negotiation goes as well. But I think part of it is, we also like to have a good mix within our revenues and the way that we build out the network. So sometimes it's been JVs and others, it's been sales. Japan, for instance, hybrids are a really good opportunity there where not only do you cover the cost of the system, but then you get to participate in the box office performance. And that actually is a fantastic model for a lot of markets like Europe as well and Australia and France, in particular, in Europe has been very good for that, too. So I think that's a really good way to be able to capture the box office potential and the incrementality that can flow through our model. Operator: And our next question is going to come from Chad Beynon with Macquarie Capital. Chad Beynon: Rich, glad to hear you're progressing well and looking forward to talking to you soon. Natasha, with respect to China, the comment that you gave earlier just in terms of the weighting or I guess, what we saw last year, this year being more balanced. Consumer feels to be improving. Your indexing is strong. Can you roughly talk about the slate for the rest of the year, whether it's local language versus Hollywood? And really just what gives you the confidence that China will come through in '26? Natasha Fernandes: For China, I think the best of it is that we're managing it on an annual global portfolio, and it gives us the ability to stack our slate for the best results. I mean you can have unexpected outsized performance, look at Ne Zha 2 last year, right, from a local language title or from other titles. I think the biggest thing to remember, Chad, is that as a company, we're not so much focused on the geographies as much as we're focused on the overall slate for our company. And what's great about this year is there's a lot of Hollywood titles that have strong potential in China, like the Odyssey and Dune, but also the local language slate is stacking up as well, and we do expect there to be several titles released into the summer. And the May holiday is coming upon us this weekend as well, and there's a couple of titles there, including World War, which is supposed to do -- which is tracking very well in China as well as obviously, The Devil Wears Prada and some Hollywood titles going there. So I think what's been good about China is that we're going to be able to create a good mix between both Hollywood and local language and in order to capture the wins this year. And then there's other IP that will perform well there as well, like Post Toy Story. And then, of course, we're going to look towards the rest of the world and other areas. What's really good, Chad, is that the rest of world regions, if you think about the fact that we've grown over 8% in the rest of world outside of China and domestically, we've grown over 4%, that's where you can also start to see that you capture box office from many regions, not simply focusing on China, but looking at how do we make sure we have a good mix globally and continue to capture those market shares. And it's enabled us to have a trailing 12-month market share of 3.8%. And with that, we've grown our rest of world market share as well in the quarter. So that's been great. Chad Beynon: And then maybe takeaways from CinemaCon? It seems pretty positive from investor standpoint. But how are you guys feeling just in terms of the content beyond '26, whether it's the quality or just the number of titles that you took away from CinemaCon or CEO Forum? Natasha Fernandes: CinemaCon, it was great this year. I mean -- we saw you there. And the -- I think the buzz around CinemaCon was so uplifting this year compared to last year. I think the industry is excited. It's going to be a great year for 2026. I think the best of the slate is definitely ahead of us for IMAX with lots of films for IMAX coming, including the Odyssey in June. But I think the other part is if you look out to the future years, I mean, what's very positive is that we have a strong demand and our slate and content visibility continues to strengthen, and we continue to make moves on that every day to strengthen and solidify that. I mean 2027 is already approaching 10 FFI titles. And there's some really large ones in there, too. In 2028, we actually have 5 announced FFI titles, plus we just confirmed today with Disney Pixar that Incredible 3 will be released as a film for IMAX title, and it will feature IMAX exclusive 143 aspect ratio. So I think what you're seeing is that exhibitors clearly are seeing our growing market share and the growing demand by consumers for IMAX across film genres and content. And there's just so much excitement about not only this year's slate, but also the slate going forward in '27 and '28. Operator: And our next question is going to come from David Karnovsky with JPMorgan. David Karnovsky: Natasha, with Disney's Infinity Vision announcement, there hasn't been a lot of details on this, I'm interested in your view. Is it your understanding they're trying to kind of unify PLF formats under a brand or is this just kind of specific to Avengers? And is there any kind of read-through that we should have to kind of your relationship with the studio? Natasha Fernandes: David, from our view, we feel it's a pure marketing play to try and offset the fact that they don't have an IMAX platform or brand for Avengers Doomsday. It doesn't offer the consumer anything that they couldn't get yesterday. And so Marvel fans, we believe that they're among the savviest, most discerning moviegoers out there. And there's a reason why we're the undisputed leader in premium cinema worldwide. No one can match our relationship with filmmakers, our image capture with our proprietary film and digital cameras, our post-production and exclusive expanded aspect ratio. Essentially, we have the most immersive proprietary architecture in our auditoriums and consistent delivery of that across all of our 1,800 locations as we monitor that in real time and 24/7 for control and quality. And so I think the biggest part about it is the fact that we are a consistent platform and delivery for consumers. And that's sort of how we feel about the announcement with Infinity Vision. David Karnovsky: And then I just want to ask one on gross margins for content. Obviously, the year-over-year is impacted by the box office, but there have been some quarters where you put up a higher margin on a similar level. So I just wanted to understand if there are any kind of unique puts and takes to think about it for Q1? Natasha Fernandes: Sure. I think margin will fluctuate normally quarter-by-quarter, and it's similar to box office cadence. When you see the margin percent kind of moving with the box office, and of course, I know what you said about box office and our ability to still deliver on margins in other quarters. And I think part of that is we actually are focused this year on marketing. You've seen that the Dune tickets and the Odyssey tickets have all been moving and particularly in June, we put those out for sale already, which means we've been marketing. And so we are marketing titles well in advance right now for this year. And so in Q1, of course, we took some marketing charges ahead of time, but we think that those returns are in front of us. And as you heard, I did reiterate our guidance for adjusted EBITDA as well. Operator: And the next question is going to come from Omar Mejias with Wells Fargo. Omar Mejias Santiago: I want to give Rich my best wishes and in wishing him a speedy recovery. Natasha, maybe first on signings. I think 1Q this year had 23 signings versus last year, 95. Just curious, can you frame this, how much of this is timing related and if this has any impact on install cadence throughout the year? Natasha Fernandes: Yes. I think we're seeing good pacing and ramping of installations and signings. I mean, year-to-date, actually, our signings are sitting at 42. And what's great is it's across 10 countries. And -- so that's fantastic. And I think there -- it's not indicative versus what we had last year. Last year was one large deal for AMC, and we did note that as well. And so for us, that's timing. I mean we are focused for installations, on getting installs in, and we had 19, which is a great number. It was across 8 countries in the first quarter. One thing that you can't see through our financials is how focused we are on getting installations in high-performing sites, but secondly, on getting installations in for film systems in advance of the Odyssey. And so we do expect to have 41 film system locations in for the Odyssey versus 30 that we had for Oppenheimer. It's about 40% more. And what's key about it is that you're not seeing that counted as installations because we're going into sites that already have a laser or digital system. But once the film is distributed, the productivity of these -- the locations will increase significantly. And so we've added a lot of key locations already for the film systems, and we're highly focused on that. And on the signings front, I mean, we have the 10-system deal with HOYTS, but then also, we've had over 10 signings in China, 7 in Japan, 7 in EMEA, including Spain, France, Germany, Netherlands, Egypt. I think what's great is that more than half of our signings actually represent new IMAX locations. So a meaningful driver for our network economics and includes some that will install this year as well. Omar Mejias Santiago: That is very helpful. And maybe one more for me. There were some media reports talking about the $50 movie ticket as a ride for certain films in premium theaters. And just want to get your thoughts on how widespread is this? And how much more room for growth from a theaters perspective you think there is in this fund, especially for some of the biggest titles across some of the PLS locations? Natasha Fernandes: Sure, Omar. I mean we've talked about this before, of course, too. We don't set ticket prices. Of course, we believe there's opportunity in the ticket prices, but it's not something that we do set. I mean we saw the Dune tickets go on sale and then all of a sudden, you saw them go on aftermarket sales as well, right? So I do think there's opportunity, but I think the -- it's a whole experience. And so exhibitors need to think through what's the opportunity for different films, for different days of the week, for different showtimes and a lot goes into that. It also goes into whether they're capable to do that with their systems that they operate as well. And so I think that's kind of the potential that you see before everyone as to how do you continue to grow box office as well. Operator: And the next question will come from Eric Wold with Texas Capital Securities. Eric Wold: Two questions. I guess, one, Natasha, as you look at the backlog, I know you've worked on in prior years cleaning up the backlog with agreements that maybe stay in there. Any remaining opportunities in the backlog to kind of work with exhibitors to accelerate installations, move locations around to other zones that may be earlier in kind of the queue or shrink zones going to drive new deals? Natasha Fernandes: Yes. I think we -- obviously, we have good visibility into our backlog. We're at about 430 systems. We do come through that backlog. We actually did an exercise a couple of years ago, which I know we've talked about that we kind of walked through our backlog and made sure everything is -- that we're able to roll it out, and we've updated our plans, and we continue to do that. And so we feel good about our backlog. There is always opportunity. There are -- some of our exhibitors are global exhibitors. So they operate in different countries. And so there are opportunities when they sign deals that sometimes we'll shift it from one country to another, and we've done that very recently as well. And so I think that we're -- our team is very active and skilled in that. They are in constant communication with the exhibitors and are tracking a list. It's all list managed as well, and they have a lot of experience in that area. Eric Wold: Got it. And then just last question, I'm not sure we discussed this in the past, I apologize if I missed it. But looking at the historical model that you put on the website, it looks like 30 or so systems in China were reclassified from hybrid JVs to STLs. Anything that -- I guess, what was the rationale behind that? Is that -- will that have any impact on your revenue share going forward from those agreements? Natasha Fernandes: I think you saw that right in the documents. And from time to time, we always go through an assessment of locations and they might come up for upgrade or renewal and we decide whether or not we're -- both parties together decide whether or not we are ready for an upgrade or renewal or whether we want to wait a little longer for that. And at some point in time, we'll transfer the title. And so it will shift from a JV over to a sales type, but nothing that kind of changes the box office dynamic for us on that. And so I think from that perspective, nothing material that we would need to note from it. Operator: And the next question is going to come from Steven Frankel with Rosenblatt Securities. Steven Frankel: Natasha, India has been a market that's had a lot of potential, and you had some good progress with some local language content. But historically, there have been, let's call them, backlog conversion problems. It's taken longer than you thought to get some of these theaters open. Where are we in that process today? Natasha Fernandes: Yes. I think we still have a lot of opportunity. I think we're only about 28% to 30% penetrated in India. So a lot of growth to be had. And you're not wrong, it does take long to install and get permits and complete an installation. But what you haven't maybe seen is that we have grown that network over the past few years. And we have been signing with different partners in India as well. And so that's been a good opportunity for us. One thing that, as you mentioned, is the local language. For us to be doing the Ramayana Part 1, there will be -- that's -- this year, there will be a Part 2 and then Varanasi, all film for IMAX titles in India. That's a really big deal because over 90% of their box office is local language. And so the big opportunity for us is to continue to show how well local language can perform in IMAX in India, and therefore, it will stir up that conversation for future growth there as well. Steven Frankel: And then one quick follow-up on that. What are the ticket prices like on a film for IMAX title in India relative to traditional Indian ticket prices? Natasha Fernandes: On that one, Steve, I may have to get back to you because we've never done a film for IMAX title yet in India. So we're going to see what they go for later on this year, but we will keep you updated on it. Operator: And our last question will be coming from David Joyce with Seaport Research Partners. David Joyce: A little bit more on the local language side. How do you expect the next couple of quarters to comp year-over-year with China box office and total local language box office versus the prior year? And overall, for this year, do you expect local language to be able to grow versus 2025? Or are the couple of really big titles last year a little bit too much of that hurdle? Natasha Fernandes: David, I think the -- our local language underpinnings are strong. I mean the rest of world, our local language has continued to increase over the last few years. Of course, last year was very strong with the Ne Zha 2 effect. But if you actually take out China, you can see that our local language is growing. And even this year, we expect it to continue to grow. And there's a lot of diverse content. Within the past year, we've done 9 new countries, like -- local language coming from 9 new countries. Actually, this quarter, we had our first Taiwanese title as well. And so I think that there's a lot of opportunity. But I think what's even more important is that with the Hollywood slate, it is making sure you have the right mix to make sure that we penetrate into the right markets with the right type of film. And so if Hollywood is going to do better for a particular period, we will lean in, in that. And if it's not, then we'll lean in on the local language. And that's what's great about all of the different pieces of content that we have and all of our content partners worldwide. With having over 60 content partners worldwide, we have the ability to lean into alternative content. We've been doing music films as well. We did Epic this past quarter for Elvis, and we've done some other pieces of content. We have the F1 races coming this weekend and other opportunities of other local language that we've been doing. We've been doing a Japanese anime rollout as well and in South Korea been doing some content. So I think our whole goal is to make sure we're doing a whole portfolio between our Hollywood local language and alternative content to make sure we're maximizing box office and leaning in. And even on that, like this past week, we did a fan-first event and brought back Steve Racer for our fans and -- on a night or a couple of nights that we wouldn't have really had much box office brought in over $1 million. And so I think our whole goal is to look at utilization and maximizing box office, and we're highly focused on that. David Joyce: Great. And if I could just tack on a short one. On the CapEx side, you invested $4 million in JV equipment this quarter. I think that was on maybe 11 installs. Is that a decent kind of ratio for future JVs? Or how else would you think that investment might trend this year? Natasha Fernandes: A little bit of timing plays in there, too, David. Like sometimes we're investing this quarter, and it will come through on a cash outflow, but we might have installed the system already in April, for instance, right? And so I think you just look at the average prices that we've kind of worked through before. And I think that's the better -- best way to do it. But you're right, like looking at it from the installs is the first starting point and then kind of adding in a little bit for knowing that upcoming installations will happen too. But our whole goal this year, I mean, we've talked about even our CapEx for the year is somewhere between $30 million to $35 million and could be up by $10 million to $15 million just based on us investing in helping our exhibitors roll out faster as well. And we do have a very strong balance sheet to be able to achieve that. And in doing that, we'll be able to capture more box office as well. Operator: Thank you. And I would like now to turn the call back over to Natasha for closing remarks. Natasha Fernandes: Thank you again for joining us today. As you heard, we are hitting our stride at the right time and very bullish as we head into the summer blockbuster season. We've had strong year-over-year growth, and we've already seen that in April with over $105 million achieved in April and over 15% growth year-on-year. The fact that we've seen a slew of recent hits outperform at the box office and that we're continuing to drive strong market share with a variety of audiences and genres. These are all great signs as we unveil one of our strongest slates in history and build on that to grow our network worldwide. We look forward to keeping you updated, and we'll talk to you soon. Thank you. Operator: This concludes today's conference call. Thank you for your participation.
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