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Operator: Good day, and welcome to the TTM Technologies Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead. Unknown Executive: Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM. With me on the call are Edwin Roks, our President and Chief Executive Officer; and Dan Boehle, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to 1 or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. A -- such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's in release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on the website and earnings presentation that we will refer to during our call. Here is Edwin. Edwin Roks: Thank you, Sean. Good afternoon, everyone and thank you for joining us for our first quarter 2026 conference call. At TTM Technologies, we are focused on designing and manufacturing complex products and solutions in 2 strategic directions. The first is advanced interconnect, which includes highly complex printed circuit boards, substrates and advanced packaging. The second strategic direction built on our advanced interconnect technology to design and manufacture sophisticated modules, subsystems and systems. Examples of this include our RF modules, thermal and power management systems etch and AI processing products as well as complex subsystems and fully integrated mission systems. We believe the future of electronics lies in speed to market, high reliability and efficient technology interim. The markets in redo business continue to demand highly complex technology solutions in an increasingly compact size and footprint. Our strategy is to stay at the cutting edge of advanced interconnect technologies through innovation and continue to move up the value chain into complex modules and subsystems that combine sensors, actuators RF and Photonics. We engaged early with our customers to ensure alignment on product development and speed to market while also enabling optimal management of their complex supply chains. From a demand standpoint, we are experiencing healthy multiyear tailwinds due to our participation in 2 key megatrends currently driving economic growth, artificial intelligence and defense. We previously stated that approximately 80% of our net sales are related to these 2 megatrends, and that this puts us in a unique position to benefit our investors. Our ability to seize these organic growth opportunities requires our continuous focus on technological innovation as well as expanding our capacity across our strategic footprint. We are further investing capital and resources to take full advantage of these opportunities today and in the future through our global footprint, which offers our customers manufacturing options across 24 sites located in China, Malaysia, Canada and the United States. We stand well positioned to support this growth across our end markets, and we are tracking well ahead of our previously communicated plan to grow revenues 15% to 20% per year for the next 3 years and to double our earnings from 2025 to 2027, which were closed that were reiterated on our February 4 earnings call. In our commercial segment, we are highly focused on supporting the demand wave of artificial intelligence in the data center and networking end markets where customer demand has materially accelerated. We are also focused on evolving opportunities in the use of automation and AI in our medical, industrial and instrumentation end markets, while we remain strategically positioned in automotive where our highly valuable solution designs are positioned to benefit from competitor consolidation and have additional transfer application into other markets. In our airspace and defense end markets, we continue to excel with our leading position in advanced interconnect products and we work to expand our product offerings in indicated and electronics, including modules, subsystems and full mission systems. Recently, we were proud to be a participant in the success of Artemis-I mission with our microelectronics, PCBs and assemblies for both the space large vehicle and the Orion crew capsule. As for this, current state of the defense budget as well as the geopolitical environment considering the conflict in Iran, our solutions are ever present in the categories of advanced radar systems, advanced gaming systems, missiles and decoys, electronic surveillance systems and satellite and ground-based communication systems. In the commercial aerospace market, we recently won an award from an innovative electric autonomous aerospace company for light passenger travel to provide the sense and the void radar system for their autonomous aircraft. I'll now begin with an overview of our business highlights from the quarter. Then we'll follow up with a summary on our Q1 fiscal 2026 financial performance and our Q2 and fiscal 2026 guidance. We will then open the call to your questions. We delivered an excellent first quarter of 2026, and I would like to thank our employees for delivering these results. We achieved sales of $846 million and non-GAAP EPS of $0.75 per diluted share, both above our guidance issued in early February and both all-time quarterly highs. Sales grew 30% year-on-year, reflecting continued demand trend in our data center and networking end markets driven by the requirements of AI while our medical, industrial and instrumentation and aerospace and defense end markets also experienced strong growth. The company adjusted EBITDA margin was 15.7% in the first quarter of 2026 compared to 15.3% in the prior year, largely reflecting positive mix impacts. Non-GAAP EPS of $0.75 per diluted share was a 50% improvement year-on-year. The aerospace and defense end market represented 40% of first quarter 2026 sales. Sales in the Aerospace and Defense market grew 11% year-on-year for the first quarter. The sales growth in defense market continues to be a result of positive tailwinds in defense budgets, our strong strategic program alignment and key bookings for ongoing programs. During the first quarter of 2026, we saw significant A&D bookings related to the Alteams Air Defense Radar, APS 153 maritime surveillance radar and a transportable radar safaris system for ballistic missile detection and tracking. In addition, we continue to see an increase in bookings for respective programs and we also have first booking that was confirmed to support Golden Done. A&D book-to-bill was [indiscernible] for the quarter, which led to a program backlog of $1.6 billion, similar to a level a year ago. We expect second quarter 2026 from this end market to represent [indiscernible] 36% of our total sales, while still delivering both year-on-year and sequential growth. Sales in the data center and networking end market represented 36% of our first quarter 2026 sales. This end market experienced 61% year-on-year growth in the first quarter above our growth expectation and reflecting continued demand strength from our data center and networking customers, building out the AI data centers. For the second quarter of 2026, we expect this end market to represent 42% of net sales. The medical industrial instrumentation end market represented 16% of the first quarter 2026 sales. This end market saw a year-on-year growth of 61% during the first quarter aided by healthy demand of AI-enabled robotics in medical, automated test equipment for AI applications in instrumentation. A notable example when in the quarter was for a major continuous glucose monitoring customer products with our involvement on both the current and next generation, which will feature a materially smaller footprint and more powerful performance. For the second quarter of 2026, we expect medical, industrial and instrumentation end markets to represent 14% of total sales, growing both sequentially and year-on-year. Automotive sales represented 8% of the first quarter of 2026 sales. We continue to be very selective in this market to focus on higher value-add products that carry margin profiles consistent with our financial goals as we also believe long-term business cycles should migrate back towards advanced capabilities. We are also supporting our Tier 1 automotive customers as they transition some of their more advanced capabilities towards products, in ancillary end markets. We expect the automotive end market to represent about 8% of our total sales in the second quarter of 2026. The overall book-to-bill ratio was 1.41% for the first quarter of with the commercial reporting segment at 1.65% and the A&D reporting segment at 1.10%. At the end of the first quarter of 2026, the 90 days backlog, which is subject to cancellations, was $787 million compared to $517 million a year ago. Now then Bailey will summarize our financial performance for the first quarter. Dan? Daniel Boehle: Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the first quarter of 2026 that were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the first quarter, our net sales were $846 million compared to $649 million in the first quarter of 2025. The 30% year-over-year increase was due to continued strong growth in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets, partially offset by a more modest than anticipated decline in our automotive end market. GAAP operating income for the first quarter of 2026 was $72.4 million compared to comp operating income for the first quarter of 2025 of $50.3 million. On a GAAP basis, net income in the first quarter of 2026 was $50 million or $0.47 per diluted share. This compares to GAAP net income for the first quarter of 2025 of $32.2 million or $0.31 per diluted share. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain noncash expense items such as amortization of intangibles, impairment of goodwill stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or infrequent items. We present non-op financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations in prior periods. Gross margin in the first quarter of 2026 was 22.3%, an increase of 150 basis points from 20.8% in the first quarter of 2025. The year-on-year increase was due primarily to higher sales volume and favorable product mix, particularly in the data center networking and aerospace and defense end markets. Selling and marketing expense was [indiscernible] million in the first quarter or 2.8% of net sales versus $20.3 million or 3.1% of net sales a year ago. First quarter general and administrative expense was $49.3 million or 5.8% of net sales compared to $38.9 million or 6% of net sales in the same quarter a year ago. Our operating margin for the first quarter of 2026 was 12.8%, a 230 basis point improvement from 10.5% in the same quarter last year. The increase in the period was due both to the improved gross margin as well as operating leverage resulting from selling, general and administrative expense discipline. Interest expense was $10 million in the first quarter of 2026 compared to $10.9 million in the same quarter last year. Interest income was $2.5 million in the first quarter of 2026 compared to $3 million in the same quarter last year. Realized foreign exchange and other nonoperating income and expenses in the first quarter of 2026 totaled a net expense of $6.8 million as compared to net income of $1.5 million in the same quarter last year. The increased expense was driven by the weakening of the U.S. dollar, which resulted in a $7 million foreign exchange loss in the first quarter of 2026 as compared to a $0.9 million gain in the same quarter last year. Our effective tax rate was 14.5% in the first quarter of 2026, resulting in a tax expense of $13.6 million. This compares to an effective tax rate of 15% or a tax expense of $9.3 million in the same quarter last year. First quarter 2026 non-GAAP net income was $80.1 million or $0.75 per diluted share. This compares to first quarter 2025 non-GAAP net income of $52.4 million or $0.50 diluted share. Adjusted EBITDA for the first quarter of 2026 was $132.9 million or 15.7% of net sales compared with first quarter 2025 adjusted EBITDA of $99.5 million or 15.3% of net sales. Cash flow provided by operating activities was $21.7 million in the first quarter of 2026, despite the increased net working capital supporting our continued revenue growth. This compares to cash used in operating activities of $10.7 million in the same quarter last year. Free cash flow in the first quarter of 2026 was a net usage of $85 million as compared to a net usage of $74 million in the first quarter of last year both periods reflecting increased capital expenditures in support of organic growth opportunities. Now I'll return to our guidance for the second quarter of 2026 and a directional outlook for fiscal 2026. We project net sales for the second quarter of 2026 to be in the range of $930 million to $970 million and non-GAAP earnings to be in the range of $0.82 to $0.88 per diluted share. In addition, considering the current demand dynamics reflected in our first quarter results and second quarter guidance, we believe that the net sales growth trajectory in the first half of the year should continue in the second half. The second quarter 2026 non-GAAP diluted EPS forecast is based on a diluted share count of approximately 107.5 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 7.4% of net sales in the second quarter and R&D expenditures to be about 1% of net sales. We expect interest expense of approximately $10.6 million, interest income of approximately $2.5 million. and realized foreign exchange and other nonoperating expenses of approximately $6.9 million. We estimate our effective tax rate will be between 13% and 17%. Further, we expect to record depreciation of approximately $32.1 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $11.5 million and noncash interest expense of approximately $0.5 million. Finally, I'd like to announce that we will be participating in the Barclays Leverage Finance Conference in Austin, Texas on May 19 and the B. Riley 2026 Investor Conference in Los Angeles, California on May 20. In addition, we will host an Investor Day on May 27 at the NASDAQ Exchange in New York City, as announced in our press release last week. That concludes our prepared remarks. Sherry, will turn it over to you for questions. Operator: [Operator Instructions] Our first question will come from the line of Steven Fox with Fox Advisors. Steven Fox: Great. I had 2 questions, if I could. First of all, I was wondering if you could maybe discuss the current interest you're seeing from your customers in bringing business into the UK facility as you ramp it? What kind of customers are looking at the facility and maybe how have the discussions progressed versus a year ago? And then I had a follow-up. Daniel Boehle: Yes, happy to answer your question. If you think about Once, I think we're making really, really good progress there. we are identifying, let's say, our anchor customers like we did in Penang. So that's going well. a core team is identified to see what we're going to do. As you remember, probably remember, it's about 750,000 square feet, and we have basically 3 modules. So we can use them for both our commercial business or our defense business, and we're very flexible with that. So we're identifying the customers right now. We have, of course, our supplier agreements in place. We have -- we are dealing with our equipment centers. So that's going well. And what I really like in that site as well is that we are going to build an R&D center, which is not only, let's say, providing capacity for our customers but also being very close with them on new R&D developers. Steven Fox: Great. That's helpful. And then as a quick follow-up, can you give us your latest thinking around the impact of higher oil prices on laminate costs and how that flows through your income statement in coming quarters? . Unknown Executive: Yes, Steve. So it's Sean Hannan here. So we did have some conversations within the company here and what we're observing within our supply chain and suppliers we are observing some pressure in the supply chain environment as is the rest of the industry and that can relate certainly to lead times and to pricing, but we don't think it's restricting our ability to reach our goals. In terms of a derivative specifically due to oil pricing, that's not something that we're currently observing through our questions. Operator: Out next question. And that will come from the line of Jim Rashidi with Needham & Co. . James Ricchiuti: Just wanted to focus on the growth you're seeing in the Davis Center networking portion of the business. Is there a way for you to give us a sense of how much of that is volume driven versus price? And when I say price, I guess there are 2 components to that, right? They are the higher ASPs for the more complex forwards and maybe just higher pricing in general. So I'm just wondering if you can maybe drill down a little bit more on that. . Unknown Executive: Yes, Jim, actually Happy to do that. And again, good to meet you again. First of all, I think if we -- before we get to the ASP and the volume aspects let's go back to the visibility first. I think our visibility is still, let's say, for normal order still within the quarter. As you know, we are doing some larger order for larger players here where we have a visibility of, let's say, a year. And we still have our strategic alliance with the stop customers. And these are, let's say, in the multiyear regime. That is, let's say, the whole point with respect to complexity. These boards are getting more and more complex. We spoke in the past about the number of layers. We can go to 80 layers. We had 100 players, even 140 layers, which is really the summer. And then, of course, we have these atomical panels as well where we distinct the power from the signals. So that's going very, very well. because of that complexity, our ASPs are going up, let's say, a factor of 4, maybe a factor VIII. But I hate to talk about ASP because it's basically the complexity. It's basically the complexity of what's going on -- then the volume aspect of it, yes, there is more volume. There are more panels. But also if you look at volume, if you want to create a more complex panel, you need more cycles in the facility to build that panel that's also a volume aspect. So if you -- let's say, bottom line, bottom line, if you look at ASP versus volume, yes, it's mostly ASP, but it still has a big effect on the facility because complex panels require more cycles in the facility. Hopefully, that answers your question. . James Ricchiuti: It does help. And maybe 1 quick follow-up. I'm wondering if you can give us an update on how the ramp is going in Penang. And Dan, maybe if you can give us some sense as to what kind of a headwind it might have represented in the quarter and how you see that unfolding in Q2 in the second half? Daniel Boehle: Yes, yes, one, absolutely. I'm very happy with the performance [indiscernible] yields, let's say, are improving a lot. If I look at these anchor customers, and I pick one of them, there we are seeing yields, let's say, in the past, we saw yields above 40% last quarter. Now we are seeing it closer to 70% and 80%. So that's going very well. In the past, I would say a year ago, we disclosed some of the breakeven numbers. I can tell you, we were getting very close to that number. So I will be very surprised, let's say, in Q4 and hopefully earlier, we are in a breakeven situation for Penang. So that's going well. We spoke about the headwinds of 160 basis points, bringing that back, so let's say, in half to 80 basis points headwind for the full year. we're still on track there. And again, we hope to do better. So again, we changed the team. I was at myself, by the way, a few weeks ago. It is going very smooth. It's a highly automated facility, so yes, I'm very positive, Jim, about that situation there. James Ricchiuti: And then just to clarify, when you say an anchor customer, is that an anchor customer in the data center networking area. Daniel Boehle: It is but in that facility, we also do a lot of medical industrial instrumentation business. But in this case, I was talking about one of the data center networking players, yes. Operator: Next question. And that will come from the line of William Stein with Truist Securities. . William Stein: Congrats on the great results and outlook. First, I want to ask something about data center networking, can you help us understand the your size in that market relative to the market overall because most of this market really has served out of Asia. I think there are many investors here in the U.S. who might not appreciate you may not be the biggest. And so it highlights the potential for significant growth, maybe almost you can take whatever you can build to. Can you maybe characterize that? And then the other question I had was about the exposure or concentration in that end market relative to the various GPU or TPU type customers and the other hyperscaler customers. Maybe talk about the dispersion of -- or the customer concentration. Daniel Boehle: Yes. Thank you, Will. These are really good questions. So first of all, your first question, if you look at the size of the market, that's always a big that's always a bit difficult to define, correct. It's -- the spend, let's say, in all these data centers, about 75% of it is still in hardware, which I really like. It's the energy component, and it's basically what we do is the interconnect. Yes, we are the nervous system, as you know, of all these interconnects putting all these chips together. The market overall is a bit difficult to define in that sense. But I can tell you, we play in the high end of that market. So everything what has to do with, let's say, more than 40 layers. And like I said in the previous question, [indiscernible] high complexity, very small pitch. That's where we play in. If I look at our competition, so thinking about Giant, thinking about boosting and micro and others, let's say, we are in that top 4. There is a lot of demand and we are in that top 4. Some of the, let's say, innovations, some of the innovations we did, let's say, I'm talking about emplozem, which is, for instance, the asymmetrical boards where power is on one side of the board and signal the other side of the Board, we basically transferred some of that IP to our competition to be able to make sure that we can supply a whole business. So the whole landscape is, let's say, 5, 6 layers where we are in the top 4. That's about the situation. Of course, we have a pretty unique situation here. We are a U.S. player that also means that we are very flexible with our location perspective what the customer wants. We can, if you want the process in China, we do that. We have 5 facilities in China. We have a facility in Malaysia, if you want, China plus 1 but if these customers want to be in the U.S., we have 16, 17 sites in the U.S. supporting this. So that's basically what's happening. Then related to your second question, regarding GPU, TPU XPU, whatever you want the PU. I can tell you we're agnostic. We're agnostic for that particular situation. Even if it goes to Quantum processing, QPUs, there is a lot of conventional processing required after quarter -- so there is always a need for these boards. These boards for whatever customers are very, very, very similar. And the complexity is fairly similar. So I'm so happy to say that we are very agnostic for that situation. Hopefully, that answers your question. Operator: Our next question. That will come from the line of Mike Crawford with B. Riley Securities. . Michael Crawford: Within your aerospace and trans vertical, how much was commercial? How much was space? And where what do you expect to see space in the future, especially as compute migrates to Leo Geodis linereven loom based space? Daniel Boehle: Yes, Mark, that's a very clear question. If you look at the aerospace and defense and by the way, you probably saw in the earnings that we did move our commercial space business from our commercial through the Aerospace and Defense group. And we did that for a reason because there is a lot of synergy between these businesses and it's much, much easier to put it in their own business. So that's what we did. If you look at, let's say, aerospace and defense, the breakdown is about 50% of the aerospace and defense business and that can be printed circuit boards can also be up to chain what we call the chain, let's say, all kinds of modules or subsystems or systems it's about 50% radar related. Then we have about, let's say, 25% communication, mostly communication related, some guidance systems, these type of things. Below the smaller fraction here below 10% is munitions. That's, by the way, that's where I expect a lot of upside in the coming periods. And then 5% only 5% -- currently, 5% of our business is space. And I agree with you, there is a lot of room to maneuver. There's a lot of potential, especially with our radiation heart designs and all the other things we do. So space is absolutely in the area of focus area, but currently, it's only 5% of our business. Michael Crawford: Okay. And then switching gears. CapEx was high at $107 million in Q1. Can you just provide any updated thoughts on where that might fall out this year and next, and that's assuming that you are not only ramping in China and Malaysia and Syracuse, but also clear. Edwin Roks: Yes, Mike, I'll take that question. So we -- you'll see in our 10-Q when it comes out, we disclosed the CapEx forecast for the year. It was originally about $250 million -- $240 million to $260 million. We're increasing that to $300 million to $320 million is the range that we're currently looking at. So we've accelerated some of the capital expenditures that we talked about for Asia as some of the lead times on equipment we're starting to get indications that those would -- would start stretching out. So we got our orders in early. We were starting to really get some of that equipment in a little bit quicker we've had to pay deposits for that. So that's why the cash expenditures have been up a little bit higher. But as you can see in our numbers, it's also generated fast revenue for us. So we've accelerated some of that $200 million to $300 million of CapEx that I said we were going to expand in Asia. Operator: Our next question and that will come from the line of Ruben Roy with Stifel. Unknown Analyst: This is Fed saying on for Ruben. Look yesterday, one of the major EMS guys reported. And then you made mention of challenges in 40-plus layer PCBs and sort of sourcing them. We've already talked about price leverage. It sounds like you have that headwind. Correct me if I'm wrong, I think I heard you say [indiscernible] on that. We're talking about volumes via the accelerated CapEx ramp, which sounds perhaps tied to the anchor customer. Maybe we look at perhaps the contract structures themselves and the length of contracts, the update into '27 we got earlier this year was healthy and great. And curious if you're seeing contract structures extend out as we're seeing with some of these other rack scale input and what that looks like in terms of securitizing supply with you being the supplier over a multiyear period, particularly as you're investing on an accelerated cadence into CapEx? Edwin Roks: Yes. That's a good question. Thank you very much for the question. Yes, if we look at contracts, it works a bit different here. I think it's it's all over these hyperscalers and data center and networking customers, it's about very tight relations. We have very, very tight relations. That basically means we have a lot of alignment on road maps or future. How do you think about, let's say, multilayers or you think about 0 stop, which is basically making sure there is no antenna function in these boards, you can imagine that everything becomes more and more complex. So you get a lot of antenna functionality in that thing which you don't want. So 0 sub is a new thing there. We spoke already about the empower the power and the signal is separated, there's a lot of, let's say, material science in our boards, which makes sure that signal integrity becomes at the highest part. I think that's the key thing for these customers. you need to be the technology leader. You cannot be a follower here. And then the other thing is, of course, you need to have the capacity and the flexibility. And that's what we provide, let's say, being in China, being in China Posninoucase, Malaysia and being in the U.S. and hopefully soon in Europe. So that's basically where we are, and that's basically tightened that relation with the customers. The other side is, let's say, the suppliers, they are the same thing. We have strategic alliances with all the critical components. And yes, of course, we have contracts in place. But if you have to rely on that contract, you're just too late. It's always a matter of, let's say, relation and making sure you're very relevant for that supplier, you're very relevant to your customers. So that will be my answer here. Daniel Boehle: By the way, just to add to Edwin's answer. So -- and also coming back to part of the question. So to clarify, within data center and networking, we don't have just an anchor customer. I think there was a reference to an anchor customer specific to a facility being Penang earlier in the conversation. But we have about [ 10 ] very major customers within that segment. Only 1 is a 10% enter right now, but we're playing with [ 10 ] substantial names. . Unknown Analyst: Okay. That's great. That was actually going to be a follow-up, particularly Daniel because of your CapEx commentary, I think last quarter, you -- as you mentioned, we're pointing to $250 million at the midpoint. And quarter, it sounds like $310 million, and you're still talking about FY '27 going up. So you're talking about an incremental [indiscernible] relative to at least what we signaled last quarter. if you can point to any sort of puts and takes on the pace at which you might recognize these ramps. I don't know if you're ready to make those types of disclosures. I understand if you're not. And if you're not the question on A&D you're pointing ammunition in the space, similar sort of question on contract structure, are these procurement-based contracts whereby margins are fixed? Or are these fixed firm price, whereby there's potential of margin accretion and I'll stop there. Edwin Roks: I guess I'll first address your capital expenditures. So I'm not going to go beyond what I just said about this year, as you mentioned, so our capital expenditures from this year is going up from -- yes, centered on $250 million to now centered on $310 million. So the range is from $300 million to $320 million. And so that's accelerated a little bit of what we had previously talked about over the next 2 years, and that's to continue to stay at pace with the demand that we are experiencing from our customers in the data center area. So I'll maybe pass it over you to answer the other question. Sorry, do you want to repeat that second 1 a comment earlier. Unknown Analyst: And as far as -- you're talking diminution in space, and it sounds like Edwin you're saying munitions might be the upside more near term space for a longer build upside. Edwin Roks: Yes, absolutely. By the way, we see strong demand in general, in our Aerospace and Defense business. And for the obvious reasons, of course. But on the munitions side, yes, if you read the newspapers, the there is the supply becomes more and more important. And we see that. We are long lead time items. So basically the primes are already coming to us, let's say, with respect to what can you do additionally on the munition side. So -- and that's -- for us, it's more of the same. We already do that. So that's a very, very good thing. So yes, that's the answer. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Edwin Roks for any closing remarks. [indiscernible] Edwin Roks: Yes. Thank you, Sheri. Now I'd like to close by summarizing 3 key items. First, we are experiencing a high healthy growth. We delivered strong sales growth in Q1 of 30% year-on-year, resulting in an all-time high for quarterly revenue, driven by increases in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets. Secondly, our adjusted EBITDA for the first quarter of 15.7% as reflected strong operating performance, leading to another all-time high record and quarterly non-GAAP EPS results of $0.75 per diluted share. And third, we continue to generate solid cash flows from operation, which enables us to invest in our projected continued growth while maintaining a healthy net leverage ratio of about 1. In closing, I would like to thank all the employees of TTM, our customers, our suppliers and our shareholders for your continued support. Thank you very much, and goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Greetings. Welcome to the Align First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin. Shirley Stacy: Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's conference call is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2026 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events, product outlook and financial expectations. These forward-looking statements are only predictions and involve risks and uncertainties that described in more detail in our more recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2026 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe? Joseph Hogan: Thanks, Shirley. Good afternoon, and thanks for joining us today. On today's call, I'll start with an overview of our first quarter 2026 results, discuss performance across our two operating segments, Clear Aligners and Systems and Services. John will then walk us through our financial results and outlook for Q2 and 2026. After that, I'll come back to highlight a few key takeaways before we open the call for questions. We're pleased to report another better-than-expected quarter in Q1. Clear Aligner volumes from both the GAAP and non-GAAP operating margins exceeded our outlook. These results reflect continued execution against our strategic priorities and the resilience across our global business. We delivered first quarter revenues of $1.04 billion, up 6.2% year-over-year driven primarily by high Clear Aligner volumes and increased ASPs. Clear Aligner shipments reached a record 686,000 cases, increasing 6.7% year-over-year, reflecting double-digit growth across our international businesses, and continued stability in North America. Growth was broad-based across customer channels with shipments to orthodontists up 7.4% and GPs up 5.6% year-over-year, along with solid momentum across adult, teen, and growing kid patient categories. Dental and orthodontic service organizations continue to be force multipliers in every region, driving global double-digit Clear Aligner volume growth during the quarter. We remain encouraged by how naturally our digital platform fits with DSO operating models and how it continues to benefit customers and patients and support both Invisalign adoption and increased iTero scanner utilization. Q1 highlights the continued strength in Invisalign demand across age groups and geographies, even amid varying macro conditions. For Q1, 449,000 adults were treated with Invisalign aligners, up 7.8% year-over-year, reflecting strong growth across both orthodontists and GP channels in all regions, led by EMEA, APAC and Latin America. Teens and growing kids continue to represent the largest orthodontic patient opportunity globally. In Q1, 237,000 teens in kids started Invisalign treatment, up 4.8% year-over-year, led by China and Latin America. Growth was supported by continued adoption of Invisalign First, the Invisalign Pal expander and mandibular advancement with occlusal blocks, reflecting broader use across growing patient indications. A clinical study by researchers at the university of in Serbia in Italy, found that Invisalign palate expander or what we call IPE, was shown to effectively widen the upper jaw by opening a natural growth seam in the palate, achieving bone and bite changes similar to traditional metal expander. IPE also delivered more controlled and predictable results in Hyrax. When further considering the greater ability to maintain hygiene and the simplicity many parents desire compared to Hyrax device, these findings supported the use of IPE as a reliable option for growing patients and highlights its role as an important step towards fully digital orthodontic care. For imaging systems and CAD/CAM services, including iTero, exocad and x-ray insights software, Q1 revenues totaled $184 million, up 1% and year-over-year and declined sequentially, reflecting expected first quarter capital equipment seasonality. Q1 Systems and Services year-over-year revenue growth reflects continued adoption of iTero Lumina Full systems, service revenues and CPO sales, along with the continued mix shift towards lower-priced scanner offerings included PC-based configurations, leasing and rental units. These offerings provide greater affordability and flexibility to doctors in certain markets and practice models. In addition, the number of scanners sold to new doctors increased double digits year-over-year. For Q1, the total installed base of active scanners exceeded 125,000 globally. In addition, during the quarter, over 12 million iTero digital scans were performed supporting Invisalign, restorative wellness and numerous other digital workflows and applications. Exocad delivered double-digit year-over-year revenue growth, reinforcing our strategy to integrate orthodontics and restorative dentistry within a customer and patient-centric digital platform. Following the success of our inaugural Invisalign Advanced restorative treatment or ART pilot in EMEA, we recently began an Invisalign ART pilot in the United States with labs and doctors beginning training in several markets. Invisalign Art integrates with exocad enabling clinicians in labs to plan tooth alignment ahead of restorative work within the exocad environment without changing the tools doctors and labs already use. We're very excited about this opportunity to enhance the goal of preserving patients' natural dentition as much as possible. ART allows us this by incorporating the prior alignment of teeth into the overall restorative treatment plan as opposed to the removal or grinding them down before minimally invasive restorative work. It allows us to further expand our reach and offer existing and new products to the large and growing restorative market through lab-based channels. Clear Aligner revenue in Q1 was $856 million, increasing 7.4% year-over-year and 2.1% sequentially. Q1 Clear Aligner volume reached a record 686,000 cases, up 6.7% year-over-year and 1.3% sequentially. On a year-over-year basis, our clear aligners revenues reflected double-digit volume growth in EMEA, APAC and Latin America, along with overall stability in North America. Importantly, growth was primarily driven by both submitter expansion and higher utilization across the orthodontists and GP channels and across adult, teen and growing kid categories. During the quarter, more than 88,000 doctors submitted Invisalign cases globally a year-over-year increase of 3% or an additional 3,000 orthodontists and GP driven primarily by increases in APAC and the Americas, led by Latin America. Doctor utilization also increased year-over-year by 3.4% led by EMEA, Latin America and APAC. These metrics illustrate the continued adoption and penetration of the Invisalign system through our strategic geographic growth efforts as well as the meaningful addition opportunities in the large untapped demand for digital orthodontics, both in gaining share in the existing 22 million annual orthodontic case starts and expanding access to care to the more than 600 million potential patients that our digital technology can serve through GP dentists globally. Our DSO channel continue to be meaningful full growth driver. In Q1, DSO Clear Aligner volumes grew double digit across all regions and represented approximately 1/4 of total global volumes. The retail channel continued to be mixed, particularly in the United States, where our doctor customers reported less patient traffic during the quarter. To drive adoption and utilization across channels, we expect to continue to expanding targeted initiatives focused on affordability, patient conversion, clinical confidence and practice efficiency. These initiatives are beginning to show traction with GP, dentists, orthodontists and DSOs, helping to drive increased engagement and directional growth and case volumes. These initiatives include the doctor subscription program, or DSP. We continue to see strong growth from our DSP program, which includes retention and touch up or relapse cases. DSP touch-up cases continue to grow double-digit year-over-year across regions. DSP was originally launched in the United States in 2023, expanded into EMEA in 2025 and is expected to launch in APAC in Q2 of this year. North America DSP is also supporting early momentum with orthodontic groups and DSOs, helping drive reengagement among competitive and historically lower utilizing doctors as pricing simplicity and bundled value resonate across accounts. Patient financing in the United States, Healthcare Financial Direct or HFD is now live in over 4,000 offices, enabling patients to prequalify for financing before their first appointment. allowing doctors to see these patients directly within our Invisalign Doctor site. We saw particularly strong adoption in Q1 among the American Academy of Clear Aligners or AACA member practices, where we expanded access to patient financing is helping improve affordability, increase patient conversion and drive meaningful directional growth in case starts. Beyond AACA, adoption continues to expand across independent practices, multisite groups and DSOs. Practices report that HFD simplifies their front office workflows and reduces complexity and payment discussions and increases staff confidence when offering financing during consultations and special patient events. -- prequalification and flexible monthly payment options are helping practices broaden access to care, in many cases, providing affordable options to patients to increase scope and types of treatment, including Invisalign clear aligners. Feedback we've received from offices highlights that the speed of approvals, clarity of options and prompt funding are shifting conversations away from price and back toward delivering treatment options that match patient needs. While also easing administrative burdens for staff and operating teams. These benefits are proving particularly impactful in multi-practice environments where consistency, simplicity and scalability are critical. Invisalign Pay, which is available in Brazil, with further expansion planned across Latin America continues to improve affordability and treatment conversion and serves as a proof point for how patient-centric embedded financing can complement our clinical and digital workflows. In Brazil, Invisalign Pay is now used in a majority of Invisalign cases, reflecting strong doctor endorsement and patient adoption. Providers report that financing helps optimize cash flow, reduce friction for patients and supports reactivation of lower utilizing providers, reinforcing financing as a meaningful lever for sustained growth across the region. Peer-to-peer mentoring, on the clinician-to-clinician mentoring programs, Connect Doctors over a structured 12-month period to build clinical confidence in drive engagement and treatment conversion. These programs are especially effective for accelerating adoption of new technologies, increasing confidence treating kids, teens and more complex cases. Peer-to-peer programs are active across all regions, and we expect to expand them over the year. These efforts complement our broader engagement strategy, particularly with GPs and competitive orthodontic accounts that benefit from hands-on clinical support and shared best practices. Treatment planning services or TPS. TPS addresses one of the largest barriers to adoption, low clinical confidence and uncertainty around treatment planning, particularly among GP dentists. TPS provides case assessment and treatment planning support through a combination of internal TPS and external TPS partners, enabling doctors to submit cases with confidence. TPS has emerged as a direct go-to-market engine with materially higher utilization among TPS users versus nonusers and strong adoption across regions in markets such as Canada, TPS adoption among participating GPs continues to increase with TPS users consistently outperforming nonusers and contributing to low double-digit year-over-year growth in case starts. From a regional standpoint, Americas Q1 Clear Aligner volumes increased year-over-year, reflecting very strong double-digit growth in Latin America, partially offset by a modest but stable year-over-year decline in North America. Latin America delivered record first quarter shipments driven by increased submitters, higher utilization across both orthodontists and GP channels, along with strength across adult teen and growing kid categories. In EMEA, Q1 Clear Aligner volumes grew double digits year-over-year, reaching record first quarter levels, led by increases in Iberia, Italy, Nordics, U.K. and also Turkey. Growth was driven primarily by utilization gains across both GP and orthodontic channels and continued strength from adult and growing kid patients. In APAC, Q1 Clear Aligner volumes also grew double digits year-over-year with record first quarter shipments for APAC led by China, India, Korea and Japan. In addition, APAC markets had record first quarters, including China, Japan, Korea, India and Taiwan. Growth was broad-based with a teen and growing kid patients growing double digits alongside continued growth among adult patients. Overall, while the operating environment remains uneven in some markets, our Q1 results illustrate the resilience of our global business and we continue to see orthodontics and oral health and digital dentistry as durable long-term growth categories. With that, I'll turn it over to John. John Morici: Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $1.041 billion, up 6.2% from the corresponding quarter a year ago. On a constant currency basis, Q1 revenues were favorably impacted by approximately $44.9 million year-over-year or approximately 4.5%, in line with our Q1 expectations. Q1 Clear Aligner revenues were $856 million, up 7.4% year-over-year, primarily due to higher volume, favorable foreign exchange price increases and lower net deferrals, partially offset by higher discounts and a mix shift to lower-priced countries and products. Favorable foreign exchange impacted Q1 Clear Aligner revenues by approximately $38.2 million or approximately 4.7% year-over-year. Q1 Clear Aligner average per case shipment price of $1,250, increased 1% or $10 per case on a year-over-year basis, primarily due to favorable foreign exchange, price increases and lower net deferrals, partially offset by higher discounts and mix shift to lower-priced countries and products mentioned previously. Clear Aligner deferred revenues on the balance sheet as of March 31, 2026, decreased $77.2 million or 6.4% year-over-year and will be recognized as revenue as additional aligners, also noted as refinements are shipped. As we continue to scale our 0 additional aligner configuration and introduce other streamlined configurations with limited or no additional aligners which do not require revenue deferral because there are no future performance obligations, we expect the overall Clear Aligner deferred revenue balance to decrease over time. This reflects earlier revenue recognition and cash conversion rather than any changes in free cash flow economics. Q1 Systems and Services revenues of $184.1 million were up 0.9% year-over-year, primarily due to favorable foreign exchange, higher scanner systems and sales and nonsystem sales, partially offset by lower scanner on sales. Foreign exchange favorably impacted Q1 Systems and Services revenues by approximately $6.7 million year-over-year or approximately 3.8%. Systems and Services deferred revenues decreased $22.4 million or 10.8% year-over-year due in part to the shorter duration of service contracts selected by customers on initial scanner system purchases. Moving on to gross margin. First quarter overall gross margin was 70.8%, up 1.4 points year-over-year primarily due to operational efficiencies and higher Clear Aligner ASP. Q1 overall gross margin was unfavorably impacted by foreign exchange of 0.4 points year-over-year. On a non-GAAP basis, which exclude stock-based compensation, amortization of intangibles related to certain acquisitions, depreciation expense on assets disposed of other than by sale, gain on assets held for sale and restructuring and other non-GAAP charges, gross margin for the first quarter was 71.8%, up 1.6 points year-over-year. Clear Aligner gross margin for the first quarter was 71.6%, up 1.1 points year-over-year primarily due to higher ASP and operational efficiencies. Q1 Clear Aligner gross margin was impacted by unfavorable foreign exchange of approximately 0.5 points year-over-year. Beyond mix and cost actions, margin expansion is increasingly driven by lower refinement rates, improved treatment predictability and higher manufacturing throughput benefits that scale with volume and data over time. Many of our lower price product configurations, such as COMP 3in3 and DSP Touch-Up include fewer or no additional aligners and require less manufacturing production which supports gross margins and improved cash conversion despite lower upfront pricing. Because of the clinical capability of the Invisalign system, we are able to offer configurations such as Zero AA products that give doctors the ability to use and scale with the Invisalign system and deliver on patient expectations and enable us to more effectively compete with traditional wires and brackets and Clear Aligner suppliers that we believe primarily compete based on price. Over a year ago, we expanded the Invisalign portfolio to include Comp Zero AA configuration primarily with U.S. DSOs that began piloting in the retail channel in Q1. It's still early, but given results from DSO partners showing Comp Zero AA drives adoption by supporting improved efficiency, utilization and overall practice economics for doctors, we see interest and momentum building around this offering and anticipate expanding it over the year. Systems and Services gross margin for the first quarter was 67.2%, up 2.5 points year-over-year, primarily due to operational efficiencies, partially offset by lower ASP. On a year-over-year basis, foreign exchange had no significant impact on Q1 Systems and Services gross margin. Q1 operating expenses were $594.6 million, up 8.3% year-over-year. Year-over-year operating expenses increased by $45.6 million, primarily due to legal settlement costs and higher employee compensation. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, amortization of acquired intangibles related to certain acquisitions and legal settlement costs, Q1 '26 non-GAAP operating expenses were $523.1 million, up 4.5% year-over-year. Our first quarter operating income of $142 million resulted in an operating margin of 13.6%, up approximately 0.3 points year-over-year. Operating margin was unfavorably impacted from foreign exchange by approximately 0.1 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other non-GAAP charges, amortization of acquired intangibles related to certain acquisitions, legal settlement costs, gain on assets held for sale and depreciation of assets disposed of other than by sale, operating margin for the first quarter was 21.5%, up 2.5 points year-over-year. The Q1 '26 6 GAAP effective tax rate was 24.3% compared to 33.6% in the first quarter of 2025. The first quarter GAAP effective tax rate was lower than the first quarter effective tax rate of the prior year primarily due to change in our jurisdictional mix of income, lower tax expense related to uncertain tax provisions, lower tax expense recognized related to stock-based compensation and a decrease in U.S. taxes on foreign earnings. Our Q1 2026 non-GAAP effective tax rate was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.57, up $0.31 compared to the prior year. Our EPS was favorably impacted by $0.01 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.58 for the first quarter, up 21% year-over-year. Moving on to the balance sheet. As of March 31, 2026, cash and cash equivalents were 1,059.8 billion, up $186.8 million year-over-year. Of the $1,059.8 million balance, $206.6 million was held in the U.S. and $853.2 million was held by our international entities. Align maintains a disciplined capital return program. In August 2025, we announced our intention to repurchase $200 million of our common stock under our previously authorized $1 billion stock repurchase program from April 2025. Between August 2025 and January 2026, we repurchased approximately 1.4 million shares at an average price per share of $143.85, completing the $200 million repurchase plan. As of March 31, 2026, $800 million remains available for repurchase of common stock under our repurchase program. Today, we announced that we expect to repurchase up to an additional $200 million of our common stock over a 6-month period beginning on or about May 1, 2026. We believe this action reflects our conviction that Align shares remain attractively valued, supported by improving underlying business fundamentals. Q1 accounts receivable balance was $1.1251 billion, our overall days sales outstanding was 97 days, flat as compared to Q1 of 2025. Cash flow from operations for the first quarter was $151 million. Capital expenditures for the first quarter were $30.8 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations minus capital expenditures amounted to $120.3 million. Our financial priorities are centered on disciplined execution and long-term value creation. Through restructuring actions and ongoing efficiency initiatives, we believe we are strengthening Align's cost structure and positioning the business for improved operating leverage as we grow returns. We remain focused on managing input cost pressures, investing for long-term returns and maintaining balance sheet flexibility to support sustainable margin expansion over time. We also continued to return capital to shareholders in Q1 through disciplined share repurchases, supported by our strong balance sheet and cash flow generation. With Q1 2026 results as a backdrop, we remain focused on executing our strategic growth initiatives and building on the recent quarterly results. At the same time, there is uncertainty and the potential for adverse impacts on patient traffic, consumer demand and shipping and freight resulting from ongoing military action in the Middle East. With respect to the Middle East, we continue to monitor developments closely while our doctor customers in EMEA have noted some impact on patient traffic and conversion. The overall effect on our EMEA results was immaterial in the first quarter. Given the ongoing uncertainty, we have taken a prudent approach in our second quarter outlook by assuming some impact on both Clear Aligner and scanner demand. Beyond the second quarter, it becomes increasingly difficult to predict how the conflict in the Middle East will affect our business, particularly in the event of further escalation, sustained constraints on oil and gas supplies or broader softening in consumer and patient sentiment. As we look to Q2 and the remainder of 2026, assuming no circumstances occur beyond our control, such as additional ramifications as a result of the aforementioned military action in the Middle East, beyond what we have already assumed, adverse foreign exchange fluctuation, changes to currently applicable duties, including tariffs or other fees that could impact our business, our outlook is as follows. We expect Q2 2026 worldwide revenues to be in the range of $1.040 billion to $1.06 billion, up approximately 3% to 5% year-over-year. We expect Q2 2026 Clear Aligner volume to be up sequentially and year-over-year, and Clear Aligner average selling price to be flat sequentially and year-over-year. We expect Systems and Services revenues to be up sequentially. We expect our 2026 GAAP operating margin to be approximately 16.4% and non-GAAP operating margin to be approximately 21.5%. For fiscal 2026, we remain confident in our outlook that we provided previously and reaffirm our full year fiscal 2026 guidance as follows. We expect 2026 worldwide revenue growth to be up 3% to 4% year-over-year. Our full year 2026 revenue guidance continues to assume a benefit from foreign exchange that is consistent with the assumptions underlying our initial full year outlook. We expect the impact of foreign exchange to moderate in remaining quarters, trending toward the full year assumption of approximately 100 basis points. We expect 2026 Clear Aligner volume growth to be up mid-single digits year-over-year. We expect 2026 GAAP operating margin to be slightly below 18% and an approximately 400 basis point improvement over 2025, and non-GAAP operating margin to be approximately 23.7%, a 100 basis point improvement year-over-year, consistent with our previous guidance. We expect our investments in capital expenditures for fiscal 2026 to be $125 million to $150 million. Capital expenditures primarily relate to technology upgrades, additional manufacturing capacity as well as maintenance. As we consider our full year 2026 guidance, we want to be clear about our approach. While we are encouraged by our first quarter performance and the outlook for the second quarter, we are maintaining a prudent stance with respect to the full year. The macroeconomic environment remains uncertain, and we believe it's appropriate to maintain the guidance framework established at the beginning of the year. We remain focused on disciplined execution in a dynamic environment, and we will provide updates as visibility improves over the course of the year. As mentioned, we expect to repurchase an additional $200 million of our common stock over a 6-month period commencing on or about May 1. With that, now I'll turn it back to Joe for final comments. Joe? Joseph Hogan: Thanks, John. Stepping back, we're pleased with our Q1 performance and consistency of execution we're seeing across the business. Growth this quarter was broad-based across regions, patient segments and channels, supported by record submitters for our first quarter and a higher utilization within our existing customer base. We also continue to see strong momentum from our doctor subscription program with Invisalign Touch up and retention products growing double digits year-over-year. We continue to observe the dental needs we address such as orthodontics, restorative, diagnostics, oral health and digital dentistry and durable consumer demand, which we expect will continue to drive our long-term growth expectations. Importantly, teens and growing kids remain a central driver of Invisalign demand and long-term opportunity. In Q1, we saw continued strength in teens, kids across key international markets, supported by adoption of Invisalign First, palate expansion and mandibular advancement. These products are helping doctors treat a broader range of growing patients with Invisalign aligners and allowing us to compete more effectively against traditional wires and braces at earlier stages of treatment. We have moved forward in 2026, our focus is on maintaining discipline as we invest strategically in innovation and growth opportunities. That includes advancing digital dentistry through the Align digital platform, scaling our iTero Lumina ecosystem, expanding internationally with localized strategies and continuing to build differentiated portfolio for teens and growing kids. While macroeconomic conditions remain dynamic, we continue to benefit from long-term investments in AI-enabled treatment planning and integrated digital workflows that improve predictability, efficiency and scalability across the business. These capabilities are designed to increase planning consistency and throughput and support more predictable outcomes for doctors helping us operate more efficiently across volume environments. A key part of strategy is expanding the role Align plays in oral health and restorative dentistry. Increasingly, doctors are using our platform not just to align teeth, but to identify oral health issues earlier and integrate orthodontics into comprehensive treatment plans by connecting iTero, exocad and Invisalign through digital workflows. We're helping doctors deliver better long-term oral health care outcomes for patients, especially as they transition from orthodontic to restorative care. Our vision is to make tooth alignment using Clear Aligner therapy the standard of care. By revolutionizing traditional treatment modalities, appliances, tools, practice workflows and businesses and go-to-market models across the dental industry. By focusing on oral health and the benefits of tooth alignment as part of orthodontic restorative treatment, we're developing products and technologies that are helping doctors deliver the best treatment experiences and clinical outcomes for their patients. To date, nearly 23 million patients worldwide have been treated with the Invisalign system, including approximately 7 million teens in kids. Every case adds to our proprietary clinical data set generated within our integrated digital platform. This data set continues to fuel our innovation and ability to scale across orthodontics, oral health and change lives for our doctors, customers and their patients. Innovation remains central to our strategy, but always with a clear purpose, helping doctors deliver better outcomes, improving efficiency and enhancing the patient experience. Looking forward, that includes continued progress in direct fabrication, which we are advancing deliberately and in phases with quality and reliability as our guiding principles. While still early, direct printing unlocks new design flexibility, strengthens our long-term cost structure and allows us to operate more cost effectively. We began initial limited market releases of direct 3D printed attachments and retain our products. In Q1 and look forward to updating you further as direct printing programs progress. Our objective is as straightforward to keep earning trust through clinical leadership, thoughtful innovation and consistent execution quarter after quarter. With that, I thank you for your time today. And now I'll turn it over to the operator. Operator? Operator: [Operator Instructions] Our first question comes from Daniel Grosslight with Citi. Daniel Grosslight: Congrats on another strong quarter here. I wanted to focus on the cadence of profitability for the remainder of the year. Obviously, a very strong beat this quarter. 2Q looks about flattish sequentially, which implies a fairly significant step-up in the second half. Can you just comment on the underlying assumptions for the cadence of profitability this year, particularly I know there's a lot of uncertainty around the Middle East, but how much impact around the conflict are you assuming in 2Q? And kind of what are the assumptions around the second half? John Morici: Yes. Dan, this is John. So we're pleased with our profitability and what we saw in the first quarter. It's really a reflection of what we've been able to do is a lot of the restructuring and other changes that we made last year both from a COGS standpoint and OpEx standpoint, really starting to take hold in the first quarter. So we're pleased with that. We expect that profitability and the productivity to continue as we go through the year. And that's typically the cadence that we have as we go quarter-over-quarter, we see that profitability and especially as volume increases as well, we see that profitability come through as well. So good start to the year, and we look forward to the rest of the year playing out as expected. Operator: Our next question comes from Daniel Grosslight with Barclays. Glen Santangelo: Just two quick ones for me. Joe, I want to touch on this Middle East situation. I know you guys don't break it out specifically, but we sort of place it in the mid- to high single-digit range with respect to revenues. Can you confirm, is that in the right ZIP code? And I'm just kind of curious if there's been any impact on the iTero manufacturing facility there. And if you have any insight on how that business trended in April because I think that would be helpful for us sort of assessing the balance of the year. And then I just have a follow-up on share repurchase. It's kind of interesting to me as you completed the $200 million in January, and you said you're going to start on the next $200 million over the next 6 months. But I'm kind of curious, given the transient nature of the conflict, like why wouldn't it make more sense to kind of lean in here more heavily through that $800 million in 1Q, for example, given you have over $1 billion in cash on the balance sheet. And so any thoughts on the timing of your share repurchases would be helpful. John Morici: Yes, Glen, I can start with answering some of these questions. This is John. On Middle East, you're right. It's in the Middle East part of our numbers to the company is in the single digits. And so there's some impact that we saw, but it was pretty minimal in March, and our reflection is in the second quarter and kind of beyond based on that. And in terms of iTero, Joe, you want to... Joseph Hogan: On the iTero side, Glen, honestly, we haven't -- we didn't have any disruption from a production or shipment standpoint. That team is very rigorous over there. We understand when the move equipment well and whatever. And so I'm not saying that's always perfect, but the team has responded well, and we didn't have any really impact on the business in the first quarter. John Morici: And then on the share repurchase, you're right. We saw the $200 million that we just completed and now an additional $200 million. Remember, it comes down to U.S. cash, and about 20% of our cash is in the U.S. versus out of the U.S. So we have that constraint as well. But it's part of our overall plan that we have. We want to grow the business as fast as we can use our cash to be able to help do that. We have a good business model that generates a lot of cash. You saw that reflection in the first quarter. And then we do the buybacks to be able to put cash back to our shareholders. So that's been the plan that we have. And it's a disciplined approach that we've taken, and we've seen that investments made back in the business that way. Operator: Our next question comes from Brandon Vazquez with William Blair. Brandon Vazquez: Congrats on a quarter here, good quarter here in uncertain macro. I want to follow up on the Middle East question, but actually, not like the specific exposure to the Middle East, but you guys have kind of called out some prudence around the guidance just for the uncertainty around the Middle East situation. I assume you guys are talking about potential like impacts to consumers, things like that. Maybe just talk us through what are the potential risks, what is the prudence that's being baked into the guidance just so we understand if we do have a prolonged situation in Middle East, what's the wiggle room within guidance and where you guys would expect across the P&L, there could be an impact, right, because it could be in revenue? And then maybe the other one I'll ask on margins related to this is like are you guys exposed to resin costs that we keep seeing headlines about rising from the Middle East? John Morici: Yes, Brandon, this is John. So there's a minimal direct impact. Like I said, the Middle East part of our business is actually relatively small in the single digits as a result -- as a comparison to the rest of the business. It's really just the higher fuel prices that you see that every country is seeing now as a result of this and what it means for their inflation and what they have to be able to purchase other products, including ours. We've done a lot to be able to help drive that conversion. So much of what we talked about was helping potential patients with financing and helping doctors to be able to provide financing and so on, and we'll continue those efforts. But it's really more around something that's prolonged with higher inflation and higher share of wallet that goes to other places that puts us from a forecast standpoint, just trying to be as prudent as possible. Operator: Our next question comes from Jon Block with Stifel. Jonathan Block: Two for me. Maybe I'll break them off. But just on the first one, Joe, Shirley Stacy: John, can you speak up. Okay, that's better. Jonathan Block: All right, sorry about that. Two questions. I'll try to break them up. So I was saying, Joe, trends are always really important, but certainly top of mind with investors with, call it, the current state of the globe and what's going on. So I'm wondering if you can give us any color just how things trended or call it closed in the first quarter, call it, more the month of March? And then any early 2Q trends to call out for the first month that you experienced in the month of April? Joseph Hogan: John, look, I mean, overall, when I look at the quarter and I look at it globally and all, it was pretty consistent across the board when we look month-to-month. Obviously, iTero is kind of back-end loaded, obviously, in the way capital equipment purchases go. But when we look at Invisalign, we felt good about Invisalign, all country and country and the consistency of what we saw. So -- and no, I would say overall pockets of weakness that was different than what we experienced in the fourth quarter. So overall, we felt good about that. And we felt good is how we entered the second quarter, too. So John, anything to add? John Morici: No. I mean there's going to be puts and takes as you go through any quarter. But on balance, we kind of take a balanced view of that from a guidance standpoint and reflect that. Jonathan Block: Okay. And John, maybe the second one, and hopefully, you can hear me okay. Just a follow-up. So you mentioned Zero refinement or no AA, and it seems like that rollout is going to broad. And you talked about seeing some good proof points with some of the accounts that had like notably the DSOs. So what's the assumption in 2026 guidance? Have you built out any, call it, like incremental contribution from Zero refinement as that rolls out more broadly for the balance of the year and the tack on to that, but certainly related is in the wording on the 2Q guidance, you mentioned prudence due to what's going on in the Middle East, for 2Q. To be clear, have you seen it yet as and in the month of April? Or are you building that in in case it's on the come. John Morici: Yes. So when we see the Zero refinement, it's really not in a big way in our forecast for the year. So we're very pleased with what's happening and how this rollout happens. Again, doctors have to get comfortable with these products. They want to see results for themselves. They want to get that clinical confidence so that they can increase adoption. So it's a rollout, but what we do see is doctors started to utilize it more and more. So we're pleased with that, but we're not expecting much just because of the time nature of the rollout for this year. And then when we look at the overall that we see, we're pleased with that. And I think from a guidance standpoint, we've been able to see the puts and takes of the first quarter and you factor that into April, and that's what's gone into our guidance. So I would say it's a balanced view of all those puts and takes. I wouldn't say it's overly cautious. It's just a reflective of what we expect and from a guidance standpoint for Q2 and then the reflection of maintaining our overall for the year. . Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Maybe a two-parter from me. One, can you go into a little bit more detail about your sort of like change in ASP view. It just seems a little bit more positive than what you're saying. So just to like parse through that in a little bit more detail in terms of like mix or FX and that kind of thing. And then two, as you think about the margin opportunities in 2026, would you see any changes in those buckets versus sort of what you were thinking about later last year? Are there any incremental opportunities? Any more details on that would also be helpful. John Morici: So Elizabeth, on the ASP, you're right. There are moving pieces certainly that we called out foreign exchange and we talk a lot about country mix and product mix. And certainly, those play through our ASPs. But on an overall basis, when we look year-over-year, it's a $10 increase, which was good. It was as expected. And even on a quarter-over-quarter basis, $10. And that's kind of how when we look forward, you're still going to have that country mix and product mix, but A lot of times things are offsetting, and we see that as a result. So ASPs stable. It is when we see some of those lower-stage products that we talked about with the NOAA or some of the moderate products, they come at a higher gross margin. And we see that coming through. And first quarter is a good example of that. As you increase your NOAA products, as you increase your moderate with NOAA, the cost of service is just less. And we end up with being able to see improvements in gross margin. So as we go through the year, we should expect to see that in terms of our product mix. Improvements in gross margin. We should continue to see productivity. We made a lot of cost actions at the end of last year. We're seeing good effects of those cost changes, whether it's getting closer to our customers, in some cases, it's just equipment that's more efficient, drives productivity. And certainly, as we have more volume, we get that leverage as we go through. So that's how we expect things to play out this year and so far in the first quarter, it was a good start. Operator: Our next question comes from Jeff Johnson with Baird. Jeffrey Johnson: So Joe, I wanted to start maybe two questions, but let me start just on kind of your North American case growth. I think you mentioned it was down a little bit year-over-year. every other market, I think up double digits, although correct me if I'm wrong on the every other market comment, part of that. But what do you think the difference is in the U.S. or North America versus rest of world? Is it just all consumer? Is it competition? What is driving such a stark contract? I know that's not really different over the last several quarters or handful of quarters. But just what's your updated thought on how we get that kind of North American number back to something that can be contributing at least to the double-digit elsewhere. Joseph Hogan: Yes. That's a good question, Jeff. First of all, I'd say the competition aspect hasn't changed. And just to take off on John's question a second ago, that NOAA allows us to play offense out there, and we're playing more offense in that sense, and we feel good about it overall. I'd say broadly, I was actually anticipating this question, Jeff, is that it's broadly a macro of the way I look at it versus here in the rest of the world. And it's almost like you put the macro in Asia being the best. Secondly, in Europe, spotty. Europe is a lot of different countries. But you can see that the countries we highlighted like Iberia, U.K. and different parts of EMEA is growing pretty well. And then when you look at the Americas, which includes Latin America, did extremely well. We've seen some improvement in Canada right now and some improvement in the U.S. So overall, I feel good overall, but that variable you're looking for, Jeff, has been U.S. macro as far as I can tell. Jeffrey Johnson: All right. Fair enough. And then maybe just a two-parter around NOAA. One, I think last quarter, you had talked about going into 2Q being pretty complete with the rollout of Zero AA across most markets. It sounds like maybe that has a little extended launch timeline now. Just wondering if anything has changed there. And then on some of the LMR, the limited market release you did of NOAA last year, any early evidence of whether these docs who are using NOAA are still doing 1 or 2 refinements in an a la carte way? Are they using DSP to pay for it? Just how to think about kind of years months through year 2 of those NOAA cases, do additional revenues come in over time or not on those -- on that product? Joseph Hogan: John, why do you see... John Morici: So on the NOAA, when we look at -- it's been available to many doctors. It's just a question of, do doctors want to utilize it and start to utilize it right away. So there's a roll up based on the doctor's preference in terms of how much they want to utilize and that ramps up. And in success, when doctors start to see the benefits of it, their clinical confidence that they can treat patients even on complicated cases with no refinements or maybe one refinement, then they continue to do more and more. And that's what we've seen in our data as we've gone. And now as it's been out for over a year in many markets, now you see doctors saying, okay, they need to purchase a refinement or they might be -- they might have something that they need to to add to the case to make sure it can finish properly and you start to see some of the refinements come later. So that was our expectation when we started this, that there would be an adoption, and those doctors then start to use it. They want to see what refinements they need, and now we're starting to see some refinement, but it really helps doctors be able to keep that initial case cost lower for them so that they can fit that into their practice and see those patients as they would want. So good adoption that we've seen across the globe, you're starting to see refinements come in, but it's pretty much as expected. We just want to keep rolling this out and getting doctors more and more options. Joseph Hogan: Jeff, I think just to add something what John said, I think one is, over the years, the doctors have gotten more and more confidence in our product lines. I talked about TPS in my script and different things that we do to train doctors. And I think it gives us much more confidence to go out there with NOAAs. Secondly, is it aligns doctors' economics, along with our economics, too. And so it helps to bring the two of us together in a much better way. Operator: Our next question comes from Michael Cherny with Leerink Partners. Michael Cherny: I know we've been talking a lot about macro. Obviously, not something you can control, but you can control some of the reaction to macro. So as we sit here, wondering what's going to happen with the Middle East. I appreciate all the color in terms of what's baked into the guidance on the top line as well as the COGS side. How are you thinking about the OpEx spend in the push and pull to make sure that the appropriate level of demand is being stimulated, and especially in a world where you do have a broader product portfolio. Is there any color you can give us in terms of the scenario analysis that could lead to ongoing margin upside? John Morici: So Michael, this is John. So we're constantly looking at understanding the macro and then our investments into that macro. And it's not one size fits all. some countries, there's maybe not as much awareness and we're at different points in the overall journey of Invisalign there. You make different investments compared to maybe the bigger markets like you see within the U.S. But we're very attuned to making changes and being able to reflect what's working and what might not be working, what macro is happening in certain markets versus not, and we'll make adjustments to that. Ultimately, wanted to get the best return on investment. And when we take that approach, we can manage that in the short term to be able to hit our -- the expectations we have. Then of course, we want to be able to drive the category and grow, and that's something that we make maybe on a more longer-term basis. But we're really looking at what's happening kind of market by market and even within the market. Whether you advertise at the high level or more at the customer level, and we're making those trade-offs and doing this active conversion that we've talked about to really help doctors. Operator: Our next question comes from Jason Bednar with Piper Sandler. Jason Bednar: Nice start to the year here. One to follow up, I think, on Jeff's question earlier on focusing on here in the U.S. Good to see a lot of the record quarters in the international side. The U.S. market seems like maybe it's had some green shoots at least in some of the data that we look at, maybe more focused on the orthodontic channel. Is that consistent with what you're seeing to. I'm just -- sorry if I missed it but you seeing any differences in your business when you look across that teen-focused U.S. ortho channel relative to more of the retail adult-oriented U.S. GP segment? Joseph Hogan: Just deciphering your question, Jason, I'd say when you look at like a DSO approach versus a retail approach, we obviously get a broader signal on a DSO because we're looking at a lot more patients and doctors. And the DSO traditionally they have really good skills to go out and recruit, finance in different areas. On the retail doctor side, when I talked about HFD and those different things, those are types of systems that we're bringing together to address things that we feel hurt our retail doctors at times and an ability to be able to finance or to make quick decisions and financing with patients in different areas, how we go about that as a business overall. So I'd say the macro is there, but I feel good about what we've been offering from a product standpoint, we do from a financing standpoint and delivering it from a -- we changed our organization to move to the call on both orthodontists and GPs going forward. That's given us more coverage out there to be able to deliver this kind of message and support to our doctors, too. Jason Bednar: All right. Got it. And just as a follow-up, shifting over to different side of the globe. China to us is a bit of a surprise, a good surprise, double-digit growth, record first quarter you referenced. Are you comfortable saying demand is returning to normal across China? And can you remind us what's embedded in your full year guide for China volumes and revenue this year? Joseph Hogan: I think anybody in the business has to be careful of using the word normal in China, okay? It's just -- I think you take that business almost on a year-to-year, sometimes quarter-to-quarter basis. We have a great team there, Jason. They execute well. Jude Ho that ran that business has been moved and he runs all of Asia right now. We have a great team there that helps to drive that. It's a very dynamic marketplace. We're well positioned with our manufacturing, well positioned with what we offer over there. But I would never say it's always business as usual in China. It's the most competitive market in the world. Operator: Our next question comes from Steven Valiquette with Mizuho Securities. Steven Valiquette: This question has been, I guess, sort of half asked so far, but just wanted to get a little more color around this 2Q guidance. It seems probably stronger than what probably most people were expecting, which is certainly positive. But as far as just kind of the geographic mix across that, should we assume generally the same trends stronger in international than maybe America is a little more -- I guess you're characterizing as stable in particular. And also, I think for just North America, in particular, last year, you talked about this ratio of patients getting scans versus patients starting treatment kind of being off a little bit. Have you been able to at least kind of close the gap on that across a lot of geographies, especially on the back of some of the patient financing programs you have in place. John Morici: Yes, Steve, when we think about Q2, I think the growth that we've seen is pretty consistent or our expectation is pretty consistent to what we've seen. We would expect international to grow faster for many of the reasons that we spoke about. We've seen that for a number of quarters now compared to North America. So that would be our expectation for Q2. And I would say just on the conversion piece of it, that dislocation we saw in the second quarter of last year. And some of that, as it played out went through the quarter, we saw that dislocation, it really has more or less returned to normal really since that second quarter. So we haven't seen some of that dislocation as we've gone through, which is good. We want to be able to drive our volume, get with more more -- sell to more and more doctors and increase the utilization, and we want that conversion to be as active as possible. We're trying to make that happen, and therefore, more as predictable as possible. And we've been able to see that and the expectation as it continues. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Another question on sort of the North America or U.S. market, but what are you seeing in terms of the Gaidg data like when it comes to the broader growth trends and then what you're seeing in terms of growth across brackets and wires versus clear aligners in the market, just more broadly? And then a follow-up on Zero AA or NOAA. I guess when could this move the needle for you? It sounds like you're not expecting much this year or maybe you're just leaving up for upside in the guide, but I guess, can you remind us the economics for you? And can you quantify also that relative margin profile for the offering? John Morici: Maybe I can start with the AA or the product Zero AA product. It continues to ramp, as we said. We started more on the DSO side. Now it's getting more and more retail doctors, and we'll play that up. Look, as that adoption happens and it drives incremental cases, that would be upside compared to what we've expected for the year because, again, it's a slow gradual adoption. And if doctors adopt faster and that's what they want to use then great. And then in terms of the revenue recognition, we don't have to defer revenue on that. So it's basically revenue neutral kind of in that current period. Of course, there's additional refinements that come later that we'll get that revenue as that comes later. But when we think of those lower or NOAA product, the gross margin is excellent for us. It's accretive for us as a business. We're starting to see that in more and more of our results. If you look back the last couple of quarters, including this first quarter, you start to see some of the benefits in there, and it's very efficient for us because it's one set of treatment planning, one manufacturing, one shipment and you're kind of done with it unless there's a refinement that's needed. So -- and then the most important part of it is it fits with how a doctor might want to practice where they don't want to pay as much upfront. They kind of -- they want to look at it maybe paying as you go and and an NOAA product gets to that. Joseph Hogan: And back to your question, it's Joe, on the U.S. marketplace, particularly wires and brackets and ratios with clear aligners. I tell you, you got to be careful with the data that you gather out there today and where it's coming from. We find there's a pretty big delta in that data overall. What I'd say is I feel good about our team play overall because -- advancement with the plus blocks, Invisalign First that I referenced in my script and also IPE, we're doing better and better on that preteen area because what we're offering is so much better than what the traditional kind of appliances were to be able to do that, and we see good progress in that area. But overall, I don't -- I wouldn't say a whole lot of change over the quarters in the U.S. orthodontic market wires and brackets versus aligners, except for what we're seeing in the preteen side has been pretty substantial. Shirley Stacy: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I have two, if I can. First one is with all the questions around resin and oil, can you just remind us what percentage of your COGS are resin? And what would be the impact on direct fab in terms of reducing those costs, like the potential opportunity there? Just trying to think about this as an overhang. And then the second question is more, I just want to make sure I understand the commentary broadly about your guidance. In essence, what you're doing is you're taking the trends that you've seen in 1Q and into April. You're sort of running those through for the full year, but then adding on some kind of undisclosed amount of prudence with regards to the macro and the war and everything else. Is that a fair way to describe it? John Morici: That's a fair way to describe it, Kevin, in terms of the guidance. It's like you got puts and takes as you go through the quarter. We net those together, put that into Q2 and total year. So that's an accurate way to view that. And then in terms of oil prices, there's really two effects that can affect our business from that standpoint on a direct basis. One is the actual material costs, say about 25% of our COGS is kind of the resin plastics. There's a lot of contracts that we have where we have fixed amounts that there's not a lot of room for negotiation in terms of inflationary effects that we take. So we feel we're pretty protected on that. The other piece might be on freight and logistics. And again, we're pretty controlled on that as well. So not to say that there's not some impact that we've seen from higher costs related to some inputs, but it's been manageable and we managed it in the first quarter and expect to be able to manage it going forward. . Joseph Hogan: Kevin, Joe, on the direct fab side, I mean you called out, I mean, there's an obvious aspect when you direct print, you don't have a 95% kind of scrap base that you used on our current vacuum forming piece. So that's always there. And our feed stream is more of a natural feed stream. There's not really a feed stream from a petrochemical standpoint, so it helps isolate you overall. But remember, I mean -- that play is a great thing about that on direct fab is it will help us significantly in a sense of efficiency in that way, but how you can make an aligner and the flexibility to make it in variable wall thickness and being able to be able to design aligners to each individual cases to an extreme. We could never do before, still a primary driver, but you do have these ancillary areas that really help in the sense of how the resin is obtained and how it's used. Operator: Our final question comes from Michael Ryskin with Bank of America. Michael Ryskin: I'll try to be quick. One is just following up on, I think, Elizabeth's question on ASPs. In the past, I think you talked about a 1% to 2% decline in ASPs for the year. Your 1,250 in 1Q, I think you pointed to around 1,250 in 2Q implies still a little bit of a step down in 3Q, 4Q. Is that still in the guide? I think it is, but I just want to confirm you didn't call out the full year ASP dynamic. John Morici: Yes, Michael, 1% to 2% decrease on a year-over-year basis is is our expectation. You're going to have that mix that we talk about, whether it's product or country mix that plays out each quarter and throughout the year. Michael Ryskin: Okay. And then a quick follow-up, if I may. Another question earlier asked sort of about U.S. versus OUS and some of the U.S. not quite at the same level as the other as you talk about the macro. I'm going to ask it in a different way. The DSO versus retail channel, is that some of the same dynamics? I know retail has obviously been weaker DSO has been a strong point for a while. So it's nothing new. But just is that sort of the same answer of macro and just harder to push that through? Or is there anything new that it back in that channel? John Morici: Yes, no change to what we've seen, Michael. We're very pleased with the DSO growth, and it continues to be, in many places, double-digit growth. And that's a reflection of of really those groups taking a lot of the tools that we offer and bring together, whether it's the scale, the technology and the brand, and they do a great job of bringing all together and really being much more active to try to drive that conversion with their potential patients. So that plays out, and that's the force multiplier that we talk about. You just don't see that as much, at least on a consistent basis on the retail side. we're working to try to get those retail doctors to operate more like some of the DSOs. But broadly, it plays out as we've seen. And it's up to us to try to get after those retail doctors with our sales force, with the technology, with the marketing and so on to try to get them more active. Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks. Shirley Stacy: Great. Thank you, everyone, for joining us today. We look forward to meeting you at upcoming conferences and industry meetings, including the AAO meeting in Orlando this Friday. If you have any follow-up questions, please contact Investor Relations. Have a great day. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Red Rock Resorts First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead. Stephen Cootey: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts First Quarter 2026 Earnings Conference Call. Joining me on the call today are Frank Lorenzo Fertitta, Scott Kreeger and our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note this call is being recorded. Let's start by noting that the first quarter represented another strong quarter for the company across all key measures. Our Las Vegas operations delivered the highest first quarter net revenue and the second highest first quarter adjusted EBITDA in our history while maintaining near record adjusted EBITDA margin. This performance was achieved despite several headwinds later in the quarter including higher gas prices, air travel-related disruption and temporary construction impacts at and around several of our properties, underscoring the strength and resilience of our business model. In addition to delivering strong first quarter results, we remain very pleased with Durango's performance and the successful revenue backfill at our core properties. Durango continues to expand in the Las Vegas locals market and drive incremental play from our existing customers reinforcing its position as a meaningful growth driver in our portfolio. Since completing our December expansion, adding more than 25,000 square feet of casino space, the premier high limit slot area, and nearly 2,000 additional covered parking spaces. We've continued to see strong financial performance alongside positive guest feedback. With more than 4 months of operating history for the new high limit slot area, results continue to validate our strategy of investing in premium slot and table offerings across our portfolio. Building on Durango's momentum, we continue to advance the next phase of the property's master plan, the Durango North expansion. With more than 6,000 new households expected with a 3-mile radius over the next few years, this expansion is designed to broaden Durango's customer appeal and strengthen its competitive position. The project will add more than 275,000 square feet on the north side of the property, including nearly 400 additional slot machines and other gaming along with new amenities to drive repeat visitation, highlighted by a 36 lane bowling facility, luxury movie theaters and new dining and entertainment venues, including our partnership with Moonshine Flats, which brings its signature Country Western Bar and live music concept to Las Vegas for the first time. The project is scheduled to open in the summer of 2027 with a total cost estimated at approximately $385 million. Now let's take a look at our first quarter. With respect to our Las Vegas operations, our first quarter net revenue was $499.5 million, up 0.9% from the prior year's first quarter. Our adjusted EBITDA was $232.4 million down 1.5% from the prior year's first quarter. Our adjusted EBITDA margin was 46.5%, a decrease of 113 basis points from the prior year. On a consolidated basis, our first quarter net revenue which includes $4.7 million from our North Fork project, was $507.3 million, up 1.9% from the prior year's first quarter. Our adjusted EBITDA, which includes $2.9 million from our North Fork project, was $212.6 million, down 1.2% from the prior year's first quarter. Our adjusted EBITDA margin was 41.9% for the quarter, a decrease of 129 basis points from the prior year. In the quarter, we converted 50.3% of our adjusted EBITDA into operating free cash flow, generating $107 million or $1.03 per share. The significant level of free cash flow was strategically deployed to support our long-term growth initiatives, including our most recent projects at Durango, Sunset Station and Green Valley Ranch and returning capital to our stakeholders through dividends and share repurchases. As we begin 2026, we remain focused on our core local guests, which continue to grow our regional and national customer segments across our portfolio. Compared to first quarter last year, we saw continued strength in Carter slot play across the majority of our database, robust spend per visit and net theoretical win across our local, regional and national customer segments, helped drive the highest first quarter gaming revenue and profitability in the company's history. Turning to our non-gaming operations. Both the hotel and food and beverage divisions delivered a strong quarter, achieving near record revenue and profitability. The hotel operations performed well, generating near record results, driving higher ADR across the portfolio despite the loss of room nights at Green Valley Ranch due to the renovation of our hotel product. Not to be outdone, the Food & Beverage division delivered its second best first quarter revenue in our history and its third best first quarter profit in our history, supported by higher cover counts and higher average guest checks across our outlets. In group sales and catering, our teams delivered their third highest first quarter revenue in our history. And if we exclude the lost room nights from our Green Valley Ranch room renovation, we continue to see positive momentum into the first half of 2026. As we look ahead into the second quarter, we are seeing stable trends in our core slot and table business across the Las Vegas locals market and within our gardens database, consistent with a return to more typical seasonal patterns, but we continue to where we expect continued near-term disruption from our ongoing construction at and around Durango Sunset Station and Green Valley Ranch, and we're actively managing these impacts to minimize operational disruption. We remain highly confident in both the strength for our business and the investments we are making at these properties, which we believe support our long-term growth trajectory. Now let's cover a few balance sheet and capital items. Company's cash and cash equivalents at the end of the first quarter was $134 million, and the total principal amount of debt outstanding was $3.6 billion, resulting in net debt of $3.4 billion. As of the end of the quarter, the company's net debt-to-EBITDA ratio was 4.07x. During the quarter, we made total distributions of approximately $139.9 million to the LLC unitholders of Station Holdco, including a distribution of approximately $82.1 million to Red Rock Resorts. The company used its portion of the distribution to fund its previously declared special dividend of $1 per Class A common share, its previously declared quarterly dividend of $0.26 per Class A common share and to fund a portion of the repurchase of approximately 635,000 Class A common shares at an average price of $6.32 per share under its previously announced $900 million share repurchase program, reducing total shares outstanding to approximately 104.4 million. When combining the dividends and the share repurchases made in the quarter, we returned approximately $170.5 million to shareholders. demonstrating our ongoing commitment to disciplined capital allocation and delivering sustainable long-term value to our shareholders. Capital spend in the quarter was $117.2 million which includes approximately $87.2 million in investment capital as well as $30 million in maintenance capital. For the full year 2026, we expect to spend between $375 million and $425 million, which includes $275 million to $300 million in investment capital as well as $100 million to $125 million in maintenance capital. In addition to our continued investment at our Durango property, we're making significant investments at our Sunset Station and Green Valley Ranch properties. At Sunset Station, we continue to make strong progress on the podium refresh. The $53 million renovation is well underway and includes an all-new country Western bar night club, a new Mexican restaurant, a new center bar and a fully renovated casino floor. Customer feedback and performance from the completed portion of this project have been encouraging, reinforcing our confidence in the direction of the renovation and the underlying demand in the property. The project remains on budget with the remaining amenities expected to come online throughout 2026, including the iconic gouty bar, which is expected to reopen in the coming weeks. Building on this momentum, we are advancing the next phase of Sunset Station designed to further strengthen the property's competitive position and broaden its customer appeal, positioning it to capitalize on the continued growth in Henderson market, particularly from the master planned communities of a Skye and Cadence. This phase will continue with the comprehensive casino refresh, including the expansion and enhancement of the movie theaters as well as the relocation of the temporary bingo area to a new permanent location. Upon completion of Bingo relocation, the former buffet space will be converted into a new Highland steakhouse and the high limit table games room leveraging a proven strategy that has consistently generated strong returns across our portfolio. Work in this space is expected to begin this quarter with the remainder of the project commencing in the back half of 2026 and extending into 2027. The total cost of this phase remains approximately $87 million. At Green Valley Ranch, we continue to make strong progress on the comprehensive refresh of our guestrooms, suites and convention spaces, align the hotel experience with the recently renovated and well-received high limit table and slot rooms at the property. Renovations to the West Tower and convention spaces are now complete with both the tower and convention areas have reopened to strong customer views and encouraging financial performance despite ongoing property disruption. Renovations to the East Tower are well underway and are expected to extend into late summer 2026. Continuing with Green Valley Ranch long-term development -- redevelopment strategy, we're advancing the next phase of enhancements of this resort. This phase is designed to further strengthen the property's competitive position as one of the premier resort destinations in Las Vegas and broaden its customer appeal through a fully refreshed casino floor, along with upgraded food and beverage and entertainment offerings. These enhancements build on the performance we are seeing from the high limit product and the renovated room and convention inventory and our intent to drive increased visitation and deeper customer engagement. Work in the space is underway and is expected to extend into 2027 with the total cost of this space estimated at approximately $56 million. Turning to North Fork. Construction continues to progress. The facility now is permanent power, and we're working toward turnover of the first phase of the casino floor in late June, keeping us on pace for an early fourth quarter 2026 open. Total all-in project cost remains approximately $750 million and the project is fully financed. As of the end of this quarter, Red Rock's outstanding note balance due from the Tribe was approximately $80.6 million. We remain excited about this best-in-class development and are pleased with the continued progress of construction and look forward to providing further updates on future earnings calls. The company's Board of Directors has also declared its regular cash dividend of $0.26 per Class A common share, payable on June 30 to Class A shareholders of record as of June 15. With the first quarter behind us, we remain highly confident in the strength and resilience of our business model, as well as in the recent capital investments we have made across the portfolio. Durango continues to validate our long-term growth strategy and underscores the value of our owned development pipeline and real estate bank which includes more than 450 acres of the developed land in the highly desirable locations across the Las Vegas Valley. Combined with our portfolio of best-in-class assets in premier locations, this pipeline positions us for significant long-term growth and enables us to capitalize on the favorable demographic trends and high barriers to entry that define the Las Vegas locals market. Looking ahead, we remain focused on executing our development pipeline, maintaining operational discipline and delivering enhanced shareholder returns through a balanced, consistent and disciplined capital allocation strategy. Before we wrap up, we'd like to sincerely thank all of our team members for their continued hard work and dedication. They are the heart of the company and the driving force behind the exceptional guest experiences to keep our customers coming back time and again. In recognition for their efforts, we are proud to share that Station Casinos has been recognized by Forbes and Statista as one of America's best large employers in 2026. We are also proud to have been recognized for the sixth consecutive year as Top Workplace in Nevada. In addition, we've earned national recognition as USA TODAY Top Workplace for the third consecutive year and for the first time as a top workplace in the hospitality industry. Lastly, as we approach our 50th anniversary, we extend our heartfelt gratitude to our loyal guests for their unwavering support. We are deeply thankful for the trust they place in us and look forward to continuing to serve our communities for many years to come. With that, operator, we'd be happy to open the line for questions. Operator: [Operator Instructions] And our first question for today will come from Trey Bowers with Wells Fargo. Zachary Silverberg: This is Zach Silverberg here filling in for Trey. In your prepared remarks, you mentioned a couple of headwinds. I'd like to touch on the first 2, the higher gas prices in their travel. Could you quantify those 2 buckets what the impact was in 1Q and kind of what you're seeing in 2Q thus far? Stephen Cootey: No. I mean I can qualify -- I mean clearly, we're experiencing higher gas prices in Nevada. I think we're in early days. as judged by our Q1 performance and what we're seeing in April, we've seen no impact from higher gas prices. And what was the second one, Zach? Zachary Silverberg: The air travel? Stephen Cootey: The air travel, given the fact, while 87% of our hotel guests are generally out of town, the majority of these folks are driving from the regional states. So the TSA impact has been de minimis. Zachary Silverberg: Okay. And just -- I appreciate the color. And just for the follow-up, just on seasonality for 1Q to 2Q. Could you remind us of the typical cadence? And are there any one-timers to call out either last year or this year that could affect performance? Stephen Cootey: Yes, sure. I mean I think generally, seasonality, Q1 is definitely our peak quarter moving from Q1 to Q2, generally were down 8% to 9%. And from a onetime -- there's no real one timers other than the $9 million disruption number that we've previously quoted in our last call, which still stands. And given some of the construction delays we're seeing at Green Valley. We're expecting another $9 million of disruption to occur in Q2. And then as we start bringing cranes, cement trucks and start erecting steel at our Durango site, we're anticipating another $2 million to $3 million of disruption starting next quarter. Operator: Your next question will come from Barry Jonas with Truist Securities. . Barry Jonas: Steve, just wanted to follow up on Durango. Obviously, you got a new slide in the deck somewhat detailing and there's a great video there, too. I was just curious, I think the projects in the vicinity goes through July of '27. How should we be thinking about disruption between now and then beyond the -- what you outlined for next quarter? Stephen Cootey: Sure. I mean, I think as you saw from the video and from the map, we did experience significant traffic disruption in the first quarter. I think the team on the ground did an exceptional job managing through that disruption that this is early days in a $385 million construction project. So now we start beginning the heavy lift and the cement has effectively poured. We're starting to mobilize cranes early this quarter. and we're going to start erecting steel. So this is why we're expecting a bit more significant disruption as we go through the main poor part of the build. So the $2 million to $3 million estimate for disruption sticks pretty much through the summer to the completion of the project. Barry Jonas: Understood. And just for a follow-up, tax refunds are sort of kicking in now. Curious if that's showing in your business at all, especially with the no tax on tips and some of the other positives in the one big beautiful bill? Stephen Cootey: I mean, Barry, I think the build is job. I think you saw where return processing was pretty constant. The amount of refunds this year versus last year was almost $43 billion to the United States economy up 17%. And the average refund was up almost $333 or 11%. So the build did have its intended consequence of providing more discretionary income into the economy from our perspective where there's a lot of moving parts in the quarter, as you know. But I think we clearly demonstrated we had a great quarter in Q1, our second best Q1 on record. And then what we're seeing in April, we like what we're seeing in April. Operator: Your next question will come from Joe Stauff with Susquehanna. Joseph Stauff: Steve, on your comments about, say, the new phases at Suncoast and GVR. I was just wondering what the update is on the greenfield project and how you think about maybe when those might layer in at this point? Lorenzo Fertitta: I want to comment on Suncoast. Stephen Cootey: Well, the sunset and the Green Valley projects, Joe, I think as I articulated in the marks, we are progressing on said we are progressing well. We're going to open the Gaudi Bar in the weeks and then we expect the rest of the menus in our phase to open up throughout 2026. In terms of Green Valley, the West Tower and the convention center have been open, and we have seen very promising financial results, even though they're early days. the East Tower, we're limping along a little bit, and so we're expecting kind of the suite product and the final rooms to be delivered in mid-September. Lorenzo Fertitta: Yes. This is Lorenzo. Look, we're continuing to work through the pipeline that we have. We're currently working on what is a potential to add rooms at Durango, rooms, spa, handsome additional meeting space -- in addition to that, we're actively working on 2 additional new greenfield projects going through the process of working on the plans, the scale of the project, working on pricing -- and as that process goes, it's really not something that you can necessarily rush. There's times when we go through it and we sit back down and start over again because it's not perfect. So we are making progress, and we don't have anything to announce now or necessarily in the very near future. But as we kind of turn the corner into next year, I think we'll have more visibility into what the development plan is going to look like. I mean we do have 6 development properties here in Las Vegas, plus 1 up in Reno for a total of 7, which is, we believe, the most robust pipeline anybody has in the gaming industry. So we're very bullish on it. We just want to make sure we get things right. It takes time to develop these projects. Operator: Next question will come from Dan Politzer with JPMorgan. Daniel Politzer: It's been a few months since you opened the new part of Durango. Can you talk about what you've seen there and how you're thinking about the returns? I know it's still relatively early, but at this point, you should have, I think, probably a good idea of how that's progressing. . Scott Kreeger: Dan, this is Scott. Yes, we're really happy with the early results of the Durango expansion. If you recall, we not only increased the casino floor with slot machines, but also added the new slot limit room. And just about every quarter Steve have been reporting on what we call the Durango zone. And that area saw notably increased net deal for the quarter over last year. And it really is confirming the thesis that continued capital investment in Durango is a good thing. And that's with the team fighting through some of this disruption that you probably see on the investor deck with the traffic situation. So we're really encouraged with what's going on there. Daniel Politzer: Got it. And just for my follow-up, just to clarify, the disruption for the second quarter, you said $9 million for GVR and then an incremental $2 million to $3 million related to Durango. So just 11% to 12%, correct? Just clarifying that. Stephen Cootey: That is correct, Dan. . Operator: The next question will come from John DeCree with CBRE. John DeCree: I would love a little bit more detail on the EBITDA margin declines year-over-year, trying to unpack what might be attributable to disruption in the quarter and transitory versus perhaps a little bit more persistent OpEx inflation? Stephen Cootey: Not a problem. But one thing I did want to point out that from an EBITDA perspective, we feel very comfortable with our margins given some of the structural changes we've made over the last several years in terms of -- and proud to say that Q1 represented the 21st quarter of the last 23 since Cove where Las Vegas operations was about 45%. But then to get to your question, I think we've done a great job managing payroll. Payroll is probably up a little under 3%, which is in line with the Valley COGS, which is another large cost flat to down, really, the majority of the EBITDA margin degradation can be contributed to the really-the Green Valley hotel disruption. -- which is probably almost half of that margin degradation and then a few uncontrollable such as we had elevated utilities costs this quarter as well as loss and some loss of damages. John DeCree: Great. And just as a quick follow-up, -- any insight into hotel demand at the renovated Green Valley Ranch rooms or the business more broadly as we think about differentiating that hotel customer from the strips hotel customer that's facing some weakness right now? Scott Kreeger: This is Scott. Let me take the broad-based performance. We were really happy with the performance in the hotel for the overall brand. Now you have to caveat that we had about 27,000 room nights offline or about 10% of our inventory at Green Valley Ranch. Given that we still were positive year-over-year in hotel revenue. So the rest of the portfolio did a nice job of addressing some of the headwinds that Steve talked about with TSA issues, fuel prices and then, of course, those units being done. As far as the West Tower that is available and the new banquet space, customer feedback, both from a transient customer and from a sales customer standpoint, it's been phenomenal. And it's our view that those rooms are probably the nicest rooms in town right now. from a competitive standpoint and a quality standpoint. We're seeing increased ADR growth as we expected out of refreshing those rooms. And really, the story for Green Valley is to get through the rest of the room remodel and call it, late September to kick in to maximizing the full capital investment where we've got all the rooms up and running and we've got the banquet space. And so we look forward to that happen soon. As far as general health going forward, we like where we are in April relative to hotel -- it's early in the summer booking window. But if you kind of look at competitive set, let's call it, on the 60-day booking window, we are seeing green shoots in core and 5-star hotel ADRs. And we do like the fact that the strip is addressing some of the tourism concerns around value. There's a lot of inclusive packages available in the market for that customer that's seeking value. So we're optimistic about the summer, but it's really early in the booking window to come. Operator: Your next question will come from Grant Montour with Barclays. Unknown Analyst: It's Christie off for Brad. I just wanted to clarify on the seasonality from 1Q to 2Q. I just want to make sure I heard that right that you said it was typically down 8% to 9%. And then in terms of -- I appreciate the color on the 2Q disruption costs of $9 million at GVR and $2 million to $3 million at Durango I just wanted to clarify, what was that in 1Q? I think last quarter, you mentioned it was $9 million for GVR. Stephen Cootey: Yes. So the clarification point, you did hear the seasonality, right, typically going back that we are down 8% to 10% between -- excuse me, 8% to 9% between the first quarter and the second quarter. On terms of -- or, I'm sorry, I lost your second question again, my apologies. . Unknown Analyst: The -- I appreciate the color on the 2Q disruption costs, but how did that compare to 1Q for GVR and Durango? Stephen Cootey: 1Q GBR was -- we previously announced $9 million that you came in pretty much spot on $9 million and Durango, despite seeing a lot of traffic disruption the teams kind of managed through it to have just a marginal impact. . Unknown Analyst: And then switching over to North Ford. Can you guys provide any color how you expect that property to ramp? I think in the past, you have seen a potential to be similar to Gun Lake? Scott Kreeger: Yes. I think -- look, I think just optically looking at ramps, we're pretty good at understanding these traditionally -- each market has its own competitive pressure. Certainly, there are 3 competitive properties in the area. We expected in the early days that they might be promotionary in how they approach our opening -- but we expect in the typical projects, it may take a couple of years to ramp up and to really get the database acclimated and to grow that database. But given our location, given the quality of the product and our knowledge of that kind of, call it, mid-California market and the team that we have there, we expect to do quite well. Lorenzo Fertitta: Yes, we would expect the property to be profitable from day 1. So it's just a matter of fine-tuning it and growing the revenue base and managing the expenses on a go-forward basis. So probably a little bit of a shorter ramp than, say, Las Vegas typical . Scott Kreeger: Two years maybe . Lorenzo Fertitta: Typical Las Vegas as I think so. . Stephen Cootey: Yes. And then -- and I think we've articulated maybe several quarters ago that stabilization this is about a $40 million to $50 million revenue product for us. Operator: Your next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: Maybe a follow-up just on GVR and the room renovations. What does the total spend of somebody who's staying on property there kind of compared to the average. I mean when you're quantifying that disruption, is that purely the hotel revenue that's come out? Or are you able to kind of decipher what other netting, you can see if you get that customer coming back somewhere else or getting other spend? Stephen Cootey: Yes. You can actually -- it's pretty much by the room. So you can pretty much nail this. From a disruption standpoint, this is absolutely not an exact... Frank Fertitta: Room revenue and gaming revenue. Stephen Cootey: It's come a -- that's what I was going to say. And so -- well, an exact size when it comes to rooms, there's more science to it. And so where Frank was getting to it's a combination. The majority is going to be room revenue majeure. And then the second point is going to be convention revenue and catering, right? You'd expect that given the rooms that are out and the catering spaces are out. but then it's all -- then there is a significant portion of food and beverage and gaming that are associated with those rooms. Stephen Grambling: Right. And so I guess you're including that in that disruption as part of that estimate because I guess what I'm trying to think through is as we bring those rooms back, I imagine that's a higher spending customer, perhaps the benefit that you get is when it comes back, should be theoretically much bigger than the disruption that you're describing. Yes. Frank Fertitta: Once we get it dialed in. Yes, absolutely. That's right. Operator: Your next question will come from Jordan Bender with Citizens. Jordan Bender: Steve, I want to go back to the higher gas price comments. You kind of made it sound like April were back to normal, and the consumer is acting normal. Were those comments in March, you were seeing higher gas prices impact foot traffic into the casino? Or how should we think about that? Stephen Cootey: I mean, I think as we kind of go through the progression of the quarter, right, January was strong, February was strong. March was impacted by everything you read in the news, which included some higher gas prices. And then -- but we were very happy with the way April right now is tracking to be 1 of the best Aprils on record. So far, gas, but we haven't seen too much of an impact from higher gas prices. . Lorenzo Fertitta: Yes, March was a -- it wasn't a bad month. It was fine, but we think it was affected by that, by gas, by the war, the uncertainty as well as just the TSA situation was a bit untenable. The goodness it's over and behind us, at least it seems. But for that 2- or 3-week period, I think people just were hesitant to get on a commercial airline because they didn't want to wait in the airport for 2 to 3 hours to get on their flight. So it definitely affected things. But in no way was it a bad performance money. Jordan Bender: Got it. And then the other part, the construction disruption that you're seeing around town -- are you able to capture those players at other properties via your database? Or are you just losing those visits from those players to specific properties? Scott Kreeger: This is Scott. Yes, I think you hit it on the head. We have quite a broad distribution of properties in very convenient drive times of each other, and we kind of call it crossover play. And what we'll see is if we can't mitigate that disruption with the customer, they'll typically land in an adjacent property of ours. And we watch that very closely from a database perspective as well. So if we see decline in any known customer. We certainly have programs to address that. . Operator: Your next question will come from Chad Beynon with Macquarie. Chad Beynon: You mentioned that you're starting to do some of the early work on additional greenfield projects. So with the outline CapEx that you have going on over the next 18 months, in the current leverage, what's the maximum leverage that you'd be comfortable levering up against in this market? Stephen Cootey: We kind of articulate right now, we're about 4.07x. The balance sheet is we feel it's very strong. Interest expense has come down for the past 4 quarters in a row right now. There's no short-term maturities and the credit agreement is incredibly flexible. And as we said in the past, Chad, that while we'd love to keep maintaining leverage on and around 4 for the right opportunities that we would spike leverage up. I think once you start topping -- that's really where you start kind of -- kind of you start getting a little concerned Doria project . Frank Fertitta: Look, we have North Fork coming on. We have a note receivable from North Fort around $80 million we expect that thing to be profitable from the day that we opened it up. And we're going to continue to have some of these new investments come online where we're upgrading the properties we have at Sunset, Green Valley, et cetera. So... Lorenzo Fertitta: Durango [indiscernible] the summer. So like Frank said, our expectation is that we'll be getting a return on the capital is currently in the ground. So our expectation is that EBITDA will grow. And then we're going to make a decision on what property or what project is next and how we're going to layer these things in. But I think we're very comfortable with... Frank Fertitta: While you're on reproduction. Stephen Cootey: And knowing that as you're investing in new assets, you're going to generate new EBITDA, which is going to once they open, obviously, get you back in line to where you want to be long term. Chad Beynon: Okay. Yes. That makes sense. And then you kind of touched on this a little bit with the database and what's going on the strip with some of the all-inclusive deals. But are you starting to see strip operators start to market locals in a way that we haven't seen for several years, whether it's slot credits or hotel rooms or anything else that could increase the promotional or competition landscape? -- in the near term. Scott Kreeger: Yes. We don't see anything that would cause us to change what we're hearing or expect that it was anything different than what's happened in the past. Lorenzo Fertitta: Yes, ship operators historically have always taken a shot at local some maybe with more success than others, but nothing has necessarily changed that I've seen. You haven't seen anything, Scott, right? Scott Kreeger: No. Operator: Your next question will come from David Katz with Jefferies. David Katz: Heard some earlier this week commentary from a hospitality company on a little bit of change in the shape recovery and seeing some strength in the lower end, which has shown up in some of the hospitality numbers. Are you seeing anything like that? Because it's as though we've talked about the bottom of your database being a little pressured for quite a while. Scott Kreeger: I think the place to look for any kind of change there is in the absolute discretionary. So if you look at eating out I'll reference food and beverage and entertainment -- we had a great quarter. We were up year-over-year. We increased cover count. We increased average check. Overall revenue and profit in Food and Beverage is up. And to me, that's probably 1 of the more absolute discretionary items in our business, and it's kind of a bellwether for us as to the health of that customer. And like Steve said, we had a record gaming quarter. So they're also here plan slots and other gaming casino games. And so right now, it looks healthy. Frank Fertitta: It's not that our low end has been under pressure for a while. It's Post-COVID, we changed our business level. And we've really reinvested in high limit slot rooms, high limit table games. We're not in the promotion business anymore we're relying on our best-in-class locations, best-in-class buildings, having the best employees to take care of the guests. And it's just -- it's been a pivot from what used to be a very promotional market. And it's just where our focus is. It's not that it's under pressure. Scott Kreeger: Yes, I think that saying that customers basically doesn't have the discretionary income is probably not the way we look at it. We do have customers that seek value. So it's kind of a bit of a magic recipe as to how to provide what a customer perceives as value based on their demographic tier. And so we think we do a really good job offering a value to just about every demographic in the spectrum. Lorenzo Fertitta: Yes. The art is having a hang in steakhouse under the same roof that you're serving $1.99 margaritas and balancing that. Frank Fertitta: So you appeal to all the segments and the market demographically. So the one thing that we've done is try to provide a lot of value propositions for the repeat local customers and give them real value. And I think we do a better job at that than anyone else in the market. . David Katz: Understood. And if I can just follow up quickly, do you -- are you seeing anything? Or can you talk to destination volumes that impact the business? Probably not the core, but on the margin, is there any notable impact or trends you can cite? Scott Kreeger: Well, look, I think the most finite place and measurable place to look is in our database out of town. And our database out of town, I don't know how many quarters it's been steep, but we are incredibly consistently growing that national and regional segment of our database, inclusive of the first quarter. So it continues to be an area of opportunity and growth for us. Stephen Cootey: At least 10 -- these 10 quarters Scott. . Operator: The next question will come from Steve Pizzella with Deutsche Bank. Steven Pizzella: First, maybe we can get an update on what you're seeing in the promotional environment? Scott Kreeger: Stable. I think just as we've said in previous earnings calls, you do have the single proprietary one-off casinos that their kind of core DNA is to be a bit promotional. But nothing has changed there. And the market continues to be very stable, and we don't intend on changing any of our current strategies as a result of anything we're seeing. Steven Pizzella: Okay. Great. And then just as a follow-up, curious if the World Cup has had a material impact in the past more visitation perspective for you guys at your properties? Scott Kreeger: Yes, the World Cup is unique this year, and we really got ahead of it. The fact that of where it's located, the time slots for viewing and the number of games creates a great opportunity. We have the best race and sports book experiences in town. Customers know to come to our books for that kind of communal viewing experience. And so the operating teams have a very comprehensive plan to put our best foot forward during the World Cup. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Stephen Cootey for any closing remarks. Please go ahead. Stephen Cootey: Well, thank you, everyone, for joining us. Take care. Operator: The conference has now concluded. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. My name is Hillary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Third Quarter 2026 Earnings Call. Today's conference is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead. Vibhuti Nayar: Thank you, Hillary. Good afternoon, everyone, and welcome to Viavi Solutions Fiscal Third Quarter 2026 Earnings Call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. And with me on today's call is Oleg Khaykin, our President and CEO; and Ilan Daskal, our CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call, and our expectations regarding the end market and acquired business are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on today's call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will make the recording available on our website by 4:30 p.m. Pacific Time this evening. With that, I would like to now turn the call over to Ilan. Ilan? Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the third quarter of fiscal year 2026. Net revenue for the quarter was $406.8 million, which is above the high end of our guidance range of $386 million and $400 million. Revenue was up 10.2% sequentially and on a year-over-year basis was up 42.8%. Operating margin for the third fiscal quarter was 21%, above the high end of our guidance range of 19.2% and 20.2%. Operating margin increased 170 basis points from the prior quarter and on a year-over-year basis was up 430 basis points. EPS at $0.27 was also above the high end of our guidance range of $0.22 to $0.24 and was up $0.05 sequentially. On a year-over-year basis, EPS was up $0.12. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $321.5 million, which is above the high end of our guidance range of $304 million and $316 million. Revenue from Spirent product lines was $54.2 million, which was in line with our expectations and included a few opportunities that were pushed out from the prior quarter. On a year-over-year basis, NSE revenue was up 54.4% primarily driven by the acquisition of Spirent product lines. We also saw strong demand for our level production and field products driven by the data center ecosystem as well as for our aerospace and defense products. NSC gross margin for the quarter was 65.3%, which is 220 basis points higher on a year-over-year basis and was primarily driven by higher volume and favorable product mix. NSE's operating margin for the quarter was 17.2%, an increase of 680 basis points on a year-over-year basis. NSE's operating margin was also above the high end of our guidance range of 15% to 16% as a result of a higher fall-through. OSP revenue for the third fiscal quarter came in at $85.3 million, also above our guidance range of $82 million to $84 million. On a year-over-year basis, OSP revenue was up 11.4%, primarily driven by strong demand for 3D sensing and anticounterfeiting and other products. OSP gross margin was 50.3%, down 130 basis points on a year-over-year basis, and it was mainly due to unfavorable product mix. OSP's operating margin was 35.3%, an increase of 140 basis points on a year-over-year basis. OSP's operating margin was in line with our guidance range of 34.8% to 35.8%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 were $508 million compared to $772.1 million in the second quarter of fiscal 2026. Cash flow from operating activities for the quarter was a use of $26.3 million versus $7.8 million that we generated in the same period last year. The cash flow was mainly impacted by the earn-out payments to Inertial Labs, timing of working capital and employee variable costs. CapEx for the quarter was $5.9 million versus $6.8 million in the same period last year. During the quarter, we successfully paid $49 million in cash for the remaining principal of the convertible notes due in March 2026, and we issued about 1.8 million shares for the conversion premium above par. We also prepaid during the quarter, $150 million of the Term Loan B. We currently have $450 million remaining for that loan. The prepayment is in line with our capital allocation priorities. During the quarter, we did not purchase any shares of our stock as we prioritize our capital allocation towards debt management. The fully diluted share count for the quarter was 249.5 million shares, up from 226.9 million shares in the prior year and versus 245 million shares in our guidance for the third fiscal quarter. Moving on to our guidance for the fourth quarter of fiscal 2026. We expect the fourth fiscal quarter revenue for Viavi to be up sequentially, driven by continued strength in many of our end markets across NSC and OSP. For NSC, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for our 11 production and field products driven by the data center ecosystem as well as for our aerospace and defense products. For OSP, we expect quarter-over-quarter revenue to be higher, driven by strength across all of the product lines. For the fourth fiscal quarter of 2026, we expect Viavi revenue in the range of $427 million and $437 million. We expect NSE revenue between $340 million and $348 million. OSP revenue is expected to be in the range of $87 million and $89 million. Operating margin for Viavi is expected to be 22.7%, plus or minus 50 basis points. NSE operating margin is expected to be 18.7%, plus or minus 50 basis points. OSP operating margin is expected to be 38.4% plus or minus 40 basis points. And EPS is expected to be between $0.29 and $0.31. Our tax expenses for the fourth quarter is expected to be about $10 million, plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12 million, and the share count is expected to be around 256 million shares. With that, I will turn the call over to Oleg. Oleg? Oleg Khaykin: Thank you, Ilan. The results of the third quarter of fiscal '26 exceeded our expectations and came in above the high end of our guidance. The strong year-on-year and quarter-on-quarter performance was driven by strong growth in many of our end markets. NSE revenue in Q3 grew approximately 54% year-over-year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, NAMs, and the hyperscalers drove strong demand for 11 production and field instruments in support of AI data center build-out. We are seeing strong demand across all data center segments. Scale up, scale out and scale across. Acceleration of industry investment in ever greater communication speeds and chip-to-chip interconnect technologies are the principal drivers of strong demand for our optical transport silicon photonics and communication protocol and high-speed Ethernet test equipment. The Q3 growth was also helped by a recently acquired Spirent high-speed Ethernet product lines, which gave us access to a large installed base of enterprise customers. HSE performance came in line with our expectations. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our Aerospace and Defense business also showed another strong quarter-on-quarter growth, driven by continued growth demand for our positioning, navigation and timing products. We expect this trend to continue through the calendar year. The service provider business, which includes field instruments, wireless and service enablement was in line with seasonality. As you may recall, the service provider business is seasonally weaker during the March and September quarters and seasonally stronger during the June and December quarters. Some notable on the service provider dynamics during the March quarter included early orders from cable operators relating to the new DAA architecture and continued weak but stable demand for wireless test products. We do not expect to recovering growth in the near term for wireless business. Now turning to OSP. OSP saw strong year-on-year growth, driven by strong demand for 3D sensing and anticounterfeiting products. Looking ahead to Q4, we expect NSE revenue to be up quarter-on-quarter, driven by continued strong and growing demand from the data center and aerospace and defense customers and seasonally stronger service provider spend. We expect OSP to be up also quarter-on-quarter, driven by strength across all product lines. In conclusion, we expect our data center and aerospace and defense end markets to be strong drivers for the foreseeable future. I would like to thank the Viavi team for its continued strong innovation and execution and thank our customers and shareholders for their continued support. With that, I will now turn it back over to the operator for Q&A. Operator: [Operator Instructions]. Your first question comes from the line of Ruben Roy from Stifel. Your line is now open. Ruben Roy: Great. Thank you. Hi, Oleg and Ilan. Congrats on the momentum here in the business. I guess to start, Oleg, maybe we could just drill into the data center momentum. And if you think about sort of the first half of the year and what you're seeing here with the beat here in the March quarter and the guidance for June. Can you detail out sort of a little more detail around the drivers by production field, and maybe just kind of what you're seeing in terms of visibility from your customers? Obviously, a lot going on with AI infrastructure networks and that type of thing. But just trying to get to a little more detail around lab production at field and how you see that sort of trending from here as you look ahead. Oleg Khaykin: Sure. Well, I mean, the -- on the lab side, it's your classical optical transport and PCIe express test products. So as you develop all these new AI chips for inference or the training, it requires, as you can imagine, very high speeds for all the ports and the overall traffic. So I mean, everybody who is working on any kind of product out there that's going to go into these next-generation systems, be it for AI training or inference is buying our optical transport and our protocol test solutions. So that's primarily lab, but also exactly same equipment is being bought by NAMs or building optical switches and all the other gear that goes into the systems. And that's kind of on the lab side. On the production, we are seeing a lot of momentum on this whole co-packaged uptick area, and that plays extremely well to the traditional Viavi strength with the old JDS Uniphase products that go into the production line where you're measuring spectral performance, the optical performance of all the various optics, but it's also -- we are selling now a lot of that equipment to the semiconductor vendors as they develop their integrated packaged optic solutions. So I mean, it's pretty much everything we do in that area relating to the advanced silicon for both training and inference applications and all the optical gear that goes into these data centers is playing perfectly aligned to our portfolio. Now on the field instrumentation side, as all these data centers come up, they are putting a lot of investment into ensuring peak performance. And I tell you, I mean, I've never seen so much demand for our fiber monitoring solutions. I mean, I'd say these data centers buying more equipment than regular service providers for the whole big network. So that is obviously driving the whole field instrument side of the business. I mean, it's now approaching cost to, let's say, 40%, 45% -- pretty soon probably maybe 50% of the field instruments is actually driven by the data center. So in that respect, it's a very good alignment between what the market needs and what we actually have. Ruben Roy: That's great detail. I guess for a follow-up on that. You had started to see some hyperscaler activity around 800 gig, I would assume last year, some of these things that you're talking about in answer to the question and on the call today, things like 1.60 co-packaged optics. They're actually just starting, it seems like. Is that the right way to think about it? And I guess the question... Oleg Khaykin: Go ahead. Ruben Roy: I was just going to ask the question, it would be sort of in terms of your mix here, is it -- I would assume it's still more weighted towards some of the older generation technology? Or is that the wrong way to think about it? And kind of how do you think 1.60 and some of these new products layer in, I guess, is the question. Oleg Khaykin: Yes, it's all. I mean the 800 is still very much a high volume driver. But a lot of the new development is using our 1.6. By the way, we released 1.6, 1.5 years ago. So you just see -- actually, ironically, it was initially the NAMs, the optical equipment vendors who deployed it first in development. And now it's spreading to the semis and the whole co-packaged optics. So yes, I mean, 1.6 is ramping in a lab. And we're also having some of the early production products to the module vendors. But there's no like one way or the other, it's actually both of these are -- one is ramping into volume, the other one continues to be strong in the volume. Operator: Your next question comes from the line of Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. Oleg, congrats on execution. I want to get a bigger picture and looking more longer term I see your midpoint of your June quarter guide implying annualized earnings of $1.20 which is much higher than the prior peak from FY '22. And with that context, how should we think about company's earning power over the next 1 or 2 years. And I'm not asking for a guide, I just want to get a better picture of how these -- the new vector the demand factors that are materializing are going to enable you longer-term earning power. And I have a follow-up. Oleg Khaykin: No, it's a great question. So I think clearly, I would say our NSE business is now getting very close to 20% operating profit. It's all volume driven. So for every incremental dollar in NSE, I mean, you're getting about what to $0.45 dropping to bottom line. Ilan can give you a lot more detail on that. So clearly, that's driving up the operating margin. Our OSP has always had pretty high operating margin, but also with the higher revenue, and that it's now going from like was in a mid-60s to 70s. Now it's moving to high 80s to maybe low 90, while that gets you a couple of percentage points higher gross margin, which then obviously drops right down to the a couple of percentage points higher operating margin. So already at the blended average, we are, like, what, 23%, 24%. And as NC keeps getting stronger that will keep moving into the mid-20s and maybe higher. So in that respect, there is a tremendous operating leverage that comes with volume. And also, we've been able to weather pretty well any kind of the price increases due to components and component shortages, and as we probably will try to pass some of that increases to our customers, that will be an additional mitigation of the cost, which will probably give us a little bit more expansion on the gross margin. So clearly, a combination of keeping up with the price increases and passing around, maintaining healthy gross margins volume growing, driving significant operating leverage. And fundamentally, it scales very nicely from here this point on. I mean as our fixed costs fully covered, every incremental dollar is what, about 40%, 45%. Ilan Daskal: So for modeling, Mehdi. So on the NSE side, it's around today, the 40% level. And obviously, the top line, we assume will continue to drive as it continues to grow. So when you think about the operating leverage and the operating income, for NSE and the company? I mean... Oleg Khaykin: And I'll say last but not the least, we've talked a lot about our NOLs. Well, guess what? Now that we are generating a lot of profit and a lot of it falls in the U.S. jurisdiction because of where our IP and R&D is, I mean, all that incremental profit comes in at virtually 0 tax in the North America. Ilan Daskal: This quarter, for example, the effective tax rate is about 12%. So definitely another benefit there. Oleg Khaykin: I mean the only level -- you have is with the converts you get a little bit dilution as your price stock price goes up. So you've got to factor a bit higher share count in your calculations. Mehdi Hosseini: Okay. And my second question or follow-up. I want to come back to a scaling right now against midpoint of the June quarter implies about a 25% growth from the prior peak from mid-'22. And back then, 5G wireless was a big factor. I'm on your assumption that wireline, especially as we roll out 1.6 that subsequent to that 3.2% offers the bigger TAM. And given that setup, yes, you have been able to scale revenue through acquisition, organic growth. But where do we go from here? Is there any way you can help me understand the growth the growth from here, especially cannibalized by 1.6 and 3.2. Oleg Khaykin: Well, so I think the intensity of our equipment increases as you go into higher speeds for both not only the networking speed or bandwidth, but also with a chip-to-chip interconnect. And then on top of it, you throw in things like co-package optics or near package optics and all that. So actually, you're not only growing with the market, you are also having a broadening of areas where our equipment is being bought. I mean, for example, when you start making manufacturing multi-mode and hollow core fiber, you now -- before we never really sold into the manufacturing lines. Now the level of complexity in this product requires our instruments so we are now seeing opportunities emerging where we will be selling into the production environment on things like fiber manufacturing, right? Things like people making co-packaged optics or integrated optics while now you are selling optical equipment into the lab that before you only used for maybe fiber optic modules. Now they need to characterize and design these optical components and then all these optical components need to be tested in like multiple insertions because the yield is so critical when you build this whole module I mean if you have one device is bad, you throw away the entire once it's completely sealed, you can't rework it. So you have to test every component that goes into the module, then you test it again once you mount it. And only at the end, you put an ASIC on to the module. So in that respect, it drives a tremendous amount of test requirements in the manufacturing process. Mehdi Hosseini: I completely understand. I think your booth at OFC in March was illustrated at this increased test insertion points. But I guess back to my question, could this opportunities help you with the $500 million of the quarterly revenue? I'm not asking for a specific timing, but is the $500 million of quarter revenue a realistic target? Oleg Khaykin: I think it's entirely realistic. I mean, look, I think this quarter, we are at midpoint is well around 232. I mean, so it's moving in that direction. Remember, it's not only -- it's, I'd say, it's early on. We're seeing a lot of early demand in this truly as a lot of the next-generation optical equipment and components come into being. I mean you look at some of these new high-power Ethernet, which is a day embedding like optical photonic integrated circuits into substrates and OLED. So it's -- the scope of the market is expanding tremendously. And let's not forget our Aerospace and Defense business. It's also growing very nicely. So we don't talk much about it, but that business is like also driving the wave. And last but not the least, wireless will not be down forever. Eventually, we do need to consume all the data and all the through our wireless devices. So I think eventually, either the service providers or some other money will come in to take the wireless infrastructure and make it AI rent which will rebound the spend in that market. And today, our wireless business is down about 45%, depending on the quarter. And that alone could drive $20 million to $30 million additional quarterly revenue. Ilan Daskal: And maybe, I assume just to make sure that we are levering kind of the expectations here. I assume first you referred on the $500 million to the NSCP [indiscernible] Viavi but it's also not... Oleg Khaykin: I think he;s talking about [indiscernible] of Viavi. Ilan Daskal: So that's what I wasn't sure. But in any case, this is not necessarily kind of immediate next fiscal year. This is over kind of the next kind of upcycle. Operator: Your next question comes from the line of Ryan Koontz from Needham. Ryan Koontz: Terrific results, guys, just excellent. Maybe just a quick clarification on the data center customer mix there. It sounds pretty broad and diversified. But as you think about the different types, the semis, the optical, the NEMs, the operators, can you give us maybe an order of kind of which one of those customer segments is driving the are the biggest within the data center mix today? Oleg Khaykin: It's fairly well -- it varies quarter-by-quarter. I mean I mean, let's first way, the actual data centers are buying quite a bit. I mean, so it's -- if you only just take the one single segment, I would say the hyperscalers would be biggest bucket because they not only buy equipment for data centers, but they also run their own R&D, developing their own processors and modules and the ops right. And within the hyperscalers, I'd say there is the ones who are much more into doing their own staff are actually much bigger and some that are not so big. But it's percolating across, right? And the next big bucket would be the modules -- module makers and the system makers, right? People making optical modules and optical systems. And I would say the next bucket is the silicon vendors. And I mean I mean, I haven't really looked at it, but it's a fairly even balanced distribution. Ryan Koontz: That's great color. And maybe switching gears to Spirent. Obviously, they're a big part of your success here in data center as you build that momentum. Can you maybe talk about the synergies you're seeing with that business as it relates to both the product side of the house as well as the sales side? Oleg Khaykin: I would say the -- I mean, clearly, they come with a pretty big established customer base. I would say we are really upgrading the performance -- hardware performance of their products, which makes them much more competitive. But they have a very good established reputation and the, I would call it, application hardened software for all kinds of Ethernet traffic. So, in a way, it's a good combination, accelerating our hardware development to the ever higher speeds and bringing their software and combining it together. I'd say the first truly integrated product that we're going to have between them and [indiscernible] 3.2 terabits. But we are doing very well already leveraging our 800-gig position with their 800-gig Ethernet test and obviously expanding it to our customers who they did not have, but also getting access into their customers, which drives broader discussion and more strategic discussion around not only high-speed Ethernet, but all the other products that we bring into the mix. Ryan Koontz: That's great. Sounds like the cross-selling is already beginning there. And maybe just some of the emerging -- if I get one last one in here around emerging product areas, obviously, defense is one. How would you characterize where you are in winning share for this P&T with the growth in all the drones? And would you touch on maybe what you're doing in wireless in the satellite arena you see that as an emerging opportunity for LEOs. Oleg Khaykin: So the positioning, navigation, timing, actually, a lot of the revenue that we're seeing today and driving today, most of it was actually designs that were won before we acquired them. But we're now starting to see even things coming ramping up ever since we acquired it. But if I look at the funnel of wins in the last, let's say, 12 months, as these things kick in, that momentum will continue to drive that business. So it's all goodness and it's clearly drones is a big one, but pretty much anything autonomous, I mean, whether it's air, land, sea or undersea vehicles, is -- creates a great pool. And we are now winning some of the U.S. Tier 1s. I mean, traditionally, they were very strong with Tier 2s and a lot of international. And I would say in the past, year, we have really -- as we brought in a lot of the kind of discipline around the implementing ITAR and various secure access systems we are now being considered by U.S. Tier 1 players, and we are starting to play in much bigger leagues in that respect. So that was the aerospace defense. Your satellite question on wireless. Well, as I tell my wireless team, when the market is awful, focused on the next generation, and it's 6G, it's NTN and all these kind of applications. And we are very heavily involved with kind of the 5G plus 6G. And a lot of it is really focusing on the two types of communication, the AI RAN, which is basically running AI traffic through the advanced a wireless network and the ground to satellite communication. So this is what a lot of our advanced wireless applications are focused on today. Operator: Your next question comes from the line of Andrew Spinola with UPS. Andrew Spinola: I wanted to ask on the component shortages and some of the supply constraints. I'm just wondering if during the quarter, you were able to meet all of the supply or all of the demand rather or the supply constraints limited to you? And as a part -- sort of like an addendum to that question, we're starting to see a lot of long-term supply agreements in other areas in this industry to meet the hyperscaler demand and sort of increases in visibility a couple of years out. So I'm wondering what your visibility is like have you started to enter into any long-term supply agreements with some of your bigger customers? What's evolving on that side? Oleg Khaykin: Thank you, Andrew. Well, I mean, I don't think -- we don't have the volumes to enter into a long-term supply agreement. And remember, test and measurement, usually, it's you're leading a lot of the value market. So you have to buy the latest and greatest. So what's more important for you is not necessarily supply agreement, but the early access. It means you're accessing alpha silicon or beta silicon well before it's released. So you can develop the products there are available even before the qualified silicon is released to the market. So that is where we focus on. In terms of the availability, in Test and Measurement, you generally pay the highest ASP of their price distribution. So it's never a problem to get it. You just got to make sure you give them -- you get enough notice. So when you -- I would say, if we say supply shortage would not be because we would not give the material. We just didn't get -- we get an upside order with too little lead time to get it in. But generally, you pay more money, you always get the product. So -- and the nice part about being a bleeding edge of the test and measurement, people need the product that works and pricing is secondary in that respect. Now as you get into more mature products like field instruments, handhelds, yes, their cost is very important. And there, we generally maintain inventory. I mean we got a lot of headache from my CFO and our Audit Committee a few quarters back because we went in and put some product on the shelf because we anticipated the shortage coming in. And today, we look pretty smart as a result of it and nobody is complaining. So in the end, I mean, you got to manage your supply chain. And last thing you want to do is be pennywise and found foolish. And I mean if you don't pay, then don't complain, nobody is going to give you any availability. So far, we have -- I mean clearly, there is supply shortage, especially memories. I mean, listen, I think memory is going to be a deficit for the -- till 2030 according to some of the studies I've seen. But given our volume requirements, it's not such a big deal. I think having a product available ahead of everybody else and having early access is probably what's more important. Ilan Daskal: And I can add to that also, if you look at our balance sheet for March, you will see on the inventory level, it's up single-digit million. The majority of it was to secure some additional components for the [indiscernible]. Oleg Khaykin: And I mean -- and we look 2, 3, 4 quarters out, and we'll make some bets because it's not the issue if we don't get the product. It's really the lead time. and making sure we give adequate notice to the vendors. Andrew Spinola: Appreciate that color. One follow-up I wanted to ask. You talked about incremental margins earlier on the call of 40% to 45%. I think that makes a lot of sense. It looks like that's what's in your numbers. And for Q4 in your guide, and I'm trying to think about how to think about fiscal '27. And so my assumption is that you've got the 40% to 45% incremental on the core business as you scale. But what I'm really asking about is you announced last quarter, I think it was about $30 million of restructuring. I think you acknowledge some of that will probably get reinvested. But I'm wondering, at this point, if you could give us any color on maybe how much of that is going to drop to the bottom line? How much of that is going to be reinvested. And frankly, my assumption would be a good chunk of that is going to hit the bottom line. So maybe incrementals in fiscal '27 are closer to 50%. So I wonder if you could comment on that? Oleg Khaykin: Well, maybe I'll start and Ilan will give you details. So we're going to implement most of it by the end of our fiscal year, so the June quarter. And there's some remainder that probably will go through the end of the calendar year. And I think, Ilan, what is it roughly 1/3 of it gets reinvested. Ilan Daskal: Yes. And Andrew, the 40% fall-through that we see right now, we probably -- and there is a good reason to assume that it can go higher Specifically, if you think about the second half of the fiscal year next year, meaning 27, there is still the seasonality that Oleg mentioned in the prepared remarks. So if you think about the September quarter, usually it's a down quarter for us, et cetera. And we need all the restructuring to materialize, and that will take also until the end of the calendar year, this calendar year. So the increase in the fall-through from the 40% level it's fair to assume that with the top line kind of growth will be more visible in the second half of the fiscal year of next fiscal year, meaning it's the first half of the calendar year of '27. Oleg Khaykin: So one thing I just want to clarify. When he launches September quarter is a seasonally down quarter for us for service provider segment, that's what it is. So if you think about it, in the old days before we had this whole data center and aerospace and defense. If you look at the old Viavi, it's like March and September quarter would be the down quarters because that's the type of spending that of service providers. By the way, that pattern is still there, except now it's on a much smaller scale. But because of the Aerospace and Defense and our data center business is growing so strongly. It's more than offset but you still have that underneath it, you have that up and down. So you would see like a much bigger jump between March and June quarter because you have a tailwind from service providers. Conversely, you'll have a smaller increase in the September quarter because you have a headwind from the service providers. Then in December, you'll have a tailwind again. So I mean, this thing is still there. It's just becoming more and more muted from impact on the overall Viavi. Ilan Daskal: And on a quarter-on-quarter kind of trajectory overall, December is stronger versus September and September is still more muted relative to the June number. Oleg Khaykin: That's right. Operator: Your next question comes from the line of Michael Genovese from Rosenblatt Securities. Michael Genovese: Thanks. Exciting times, guys. Congratulations for being right in the middle of it.Oleg, I keep hearing now as we go to silicon, more silicon photonics and more co-packaged optics that the bottlenecks to the whole thing are moving to the packaging from the foundry players and to the test and measurement for the electronics, the optics, the engines and the ASICs. It seems like there's so much testing to be done with co-packaged optics. So my first question is, do you agree that testing is a bottleneck? And if so, how will you address that over time to take advantage of that? Oleg Khaykin: I'll say, Amen, Brother, you're absolutely right. So I mean, the whole test packaging used to be kind of a back-end afterthought. It is now the system. It's now a strategic asset. So you look at companies like, well, I don't want to name names, but all the leading semiconductor companies, the packaging expertise package is now the system. And you're looking at integrating glass substrates. You're looking putting photonic integrated circuits next to the electronic integrating circuits embedded into this whole coat chip on wafer on substrate, right? You're building this really complex thing. And then if you look at -- you're putting now all these copackaged optics on a periphery of the chip, this thing is starting to look more like a brick and some of them weigh -- I mean we're talking about the chemos of weight, right? So to me, that's like music to my ears because as you probably know, I started in the [indiscernible] I ran Encore. So it's like all the [indiscernible] field, you get no respect. Well, now the respect is like hugely and I mean, we are seeing now our technologies and our capabilities are being dragged into the straight into this whole value chain of testing from the individual optical components to wafer level packaging to the heterogeneous integration packaging all the way down to being integrated into major test platforms. And that's like a whole new business that we did not even have. And then last but not the least, this whole rack-mounted systems that are being built as custom test by leading players. We're supplying a lot of the guts and a lot of hardware that goes into those systems. So, as I was saying, I think is like from the old JDS Uniphase date, we still have all these products, and now there's a whole new life being injected into those products. And that's something we didn't even think about, I would say, 3 quarters ago. Michael Genovese: Great. And then just as a follow-up, just with newer things like OCS, where I think you're probably going to have very high market share for testing. And then for co-package optics, I mean are these in the numbers at all yet? Or is this is all in the future, I assume. And I guess maybe my question would be how do you define the foreseeable future when you're saying that you feel great about the foreseeable future. Like how far out is that? Oleg Khaykin: I would say it's -- in the current numbers, it's kind of the early sales. But I'd say foreseeable future, you probably you're talking 2 to 3 quarters when it starts ramping up. The future is not that far off. [indiscernible] selling right now is the early inning. Michael Genovese: Right. Just to clarify the foreseeable future question. I mean, in the press release, you said something like we feel great about growth into the foreseeable future. So is that multiple years that we're talking about? Oleg Khaykin: No, no, no. I mean generally, we, as a practice, don't want to go beyond end of the calendar year. So when I say foreseeable future like the next 3 quarters. Operator: Your next question comes from the line of Tim Savageaux from Northland Capital Markets. Timothy Savageaux: Congrats on some pretty spectacular results. It's pretty simple question to start with. Well actually a confirmation and a question and maybe I'll get a little more complex on there. So Spirent was 54.2% in the quarter. Is that right? Ilan Daskal: That's correct. Timothy Savageaux: Okay. So I guess the simple question is, what do you expect for next quarter for Spirent? Ilan Daskal: So Spirent benefited from a few orders that we mentioned already in the last quarter that got pushed out to this quarter. So this quarter, that's the reason that it's a little bit stronger than seasonality, we still expect on an annual basis, calendar annual basis, a similar run rate of around about the $200 million that we said with a split of around 45%, 55%. And -- so that takes you to normalize everything still back to just shy of the $50 million, maybe $48 million for the June quarter. Timothy Savageaux: Okay. Well, that's a good answer because that speaks to higher levels of organic growth in your NSE business? Would I see approaching 40% here in Q4. The way I'm dicing things up here and over 30% for the year. So I guess I'll try to tie the last question to this one and say when we see this type of environment for the foreseeable future, do you think you can see those type of organic growth rates, 30%, 40% for, call it, organic NSE continue over the next couple, 3 quarters. Oleg Khaykin: Well, I mean one thing about percentages, it's very hard to maintain same percentage. I mean because 30% on one number is much smaller than 30% on a much bigger number. But I think if you look at that growth in the absolute dollars, I mean that's what we're try to maintain. Ilan Daskal: And Oleg just mentioned earlier, the service providers, which is part of the core NSE. And so if you think again, the seasonality of September, traditionally does not enjoy the same growth rate if you bundle everything together. So I'm not sure that our assumption is exactly, I mean, right? I mean it's... Oleg Khaykin: I think he's talking about year-on-year. Year-on-year, when you have -- when you needed quarter -- same quarter, same dynamics, Yes, I wouldn't say -- I don't think you could say like a 40%, but I think still a high number should be realistic because 40% on $400 million is one number. 40% on $200 million is a very different number, right? Timothy Savageaux: No, I got it. Although I'd say consensus probably has you at high single digits right now given what you reported. So I could probably do a little bit better than that. [indiscernible] more for the full year of '27. I'm just making serious comments. I'm not asking you to guide anything. You've been very helpful in giving the breakdown at least some I'll ask for either 1 of 2 ways, which is kind of the data center, defense and service provider breakdown, if we can get an update there and/or growth rates in those categories estimated for what you saw here in fiscal Q3? Oleg Khaykin: Well, I'd tell you, if everybody spends what they claim they're going to spend, I mean, we still got a lot of growth to go on, right? So I mean, if you take those assumptions, I think we're -- I mean, the momentum, I'd say, we're still in the fairly early segment of the ramp. Timothy Savageaux: Message received there. Would you say data center, and again, this kind of with and without Spirent confuses thing. I assume with data centers saw solidly more than 50% of NSE revenue -- but what I was looking for is, however you want to break it down, I think you'd said 45, 15. 40 before. Oleg Khaykin: Yes. I think right now, the data center is -- I mean, the exit velocity this year is inching to the high 40s. The service providers are inching towards mid-30s and Aerospace and Defense is a little over 15%. So I wouldn't be surprised if data center in a not distant future, gets up to about 50% of our NSE revenue. Operator: Your next and final question comes from the line of Andrew Spinola with a follow-up from UPS. Andrew, your line is now open. Timothy Savageaux: I just wanted to ask a higher-level question about your drone business, your module business from inertial how is that business performing? Obviously, there's a lot of demand and new programs in that space. And I'm just wondering what you're seeing in terms of opportunities. How is that business positioned? Do you have all of the approvals and the ability to sell into all of the customers? How should we think about that opportunity over the medium term? Oleg Khaykin: It's a good question, Andrew. I mean so you can judge from it, the mere fact, Ilan said that we just paid out. If you look at our balance sheet, we paid out a pretty big earnout, means these guys have exceeded every forecast that they've given us. And as I tell you, in my career, I've made about close to 40 acquisitions. There's been only two of them have exceeded their first year forecast. Okay. This is the only one at Viavi. I mean that business is doing extremely well. And they make products anything from the basic sensors that go into the inertial navigation system, to fully blown inertial navigation system that does a sensor fusion of GNSS the location, the ground speed, the LiDAR and all these other things. So -- and we are engaged with pretty much every drone munitions subsystem vendor of interest out there, both in U.S. as well as in the rest of the world. Now clearly, there's a clear guidelines what constitutes control versus not controlled. When you [indiscernible] sensor, and it's within a certain level of accuracy that for that you need a export approval. If you are making a product that's more commercial, let's say, you're doing a surveillance drone or agricultural drone or something for mining industry. Those things are deemed to be commercial. So we have a very clear boundaries and how we define the products, how we grade them and obviously, how we price them. So all these things are some products so you can only export through the U.S. government export license others, you can just sell as a commercial product. Andrew Spinola: And just one follow-up on that. It sounds like there's particularly strong growth and demand for lower-cost drones. And I'm just wondering without knowing that market all that well. Would the inertial modules or some of those gyroscopes or sensors that inertial sells, would they be applicable for the lower-end drones for that opportunity? Oleg Khaykin: When you [indiscernible] drones, if you're talking something like $3,000 then no, if you're talking something like $30,000, then yes. Operator: There are no further questions at this time. I will now turn the call back to Vibhuti Nayar for closing remarks. Vibhuti Nayar: Thank you, Hilary. This concludes our earnings call for today. Thank you for joining everyone, and have a good afternoon. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Chipotle Mexican Grill First Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead. Cynthia Olsen: Hello, everyone, and welcome to our first quarter earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. Additionally, supplemental investor information is available on our site as a reference for today's call. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer; and Adam Rymer, Chief Financial Officer. After which, we will take your questions. Our entire executive leadership team is available during the Q&A assessment. And with that, I will turn the call over to Scott. Scott Boatwright: Thank you, Cindy, and good afternoon, everyone. Before we share our first quarter results, I want to begin by recognizing the extraordinary people who bring our purpose to life every day in our restaurants. Last month, we held our all Managers' Conference, bringing together nearly 5,000 restaurant and support center leaders. The energy was incredible as we celebrated their achievements, reinforced our commitment to developing world-class people leaders and sharpened our focus on delivering exceptional food and hospitality. I have seen that same energy in my recent visits with restaurants that are clean, well staffed and run by revenue crew members and executed at a high level with culinary that is outstanding. This is the standard our guests expect and it is exactly what we intend to deliver everyday across Chipotle. More importantly, it gives me confidence that the work we are doing is taking hold where it matters most, which is in our restaurants. Now turning to our results. Our first quarter performance exceeded expectations, and we are encouraged by the early momentum we are seeing in our Recipe for Growth strategy that is gaining traction and positioning Chipotle to win in any environment. For the first quarter, we delivered revenue growth of 7.4% to $3.1 billion, including positive comparable sales and return to positive transaction growth. In addition to improvements to in-restaurant execution, this performance was supported by the high protein line, the return of Chicken Al Pastor store and the launch of Cilantro-Lime Sauce, all of which helped drive incremental transactions. We also continue to invest in value for our gas pipe pricing low inflation because we believe reinforcing our value proposition is the right thing to do in this environment. Adam will take you through the financial details, but overall, we are encouraged by the momentum we are seeing, which has continued into April. Our recipe for growth strategy is built around what differentiates Chipotle and where we see the clearest path to stronger restaurant performance and long-term growth. As a reminder, the five pillars of our strategy include: connecting and strengthening the core by driving operational and culinary excellence to deliver exceptional value for our guests, modernizing our business model with industry-leading technology, including leveraging AI and relaunching our rewards program to elevate the experience for our guests and our teams, evolving the brand messaging and accelerating menu innovation and new occasions that drive demand in our restaurants, cultivating the best talent in the industry, energized and focused on speed and agility and expanding our global reach by scaling with intention to improve company-owned and partner operating markets as well as strategic new regions. Starting with protecting and strengthening the core. We continue to roll out our high-efficiency equipment package, including the [indiscernible], 3-pant [ rice cooker ] and high-capacity fryer. For crews who are often in as early as 6:00 a.m. to prepare fresh food every day, these tools are a game changer. They help teams complete prep on time and be fully deployed for peak, while also improving the consistency and quality of our culinary and creating more capacity to meet higher levels of demand. The equipment is now in over 600 restaurants, an increase of 250 versus the prior quarter, and we are on track to reach 2,000 by year-end. For now, we are reinvesting the time savings in the equipment back into our restaurants to strengthen throughput and hospitality. And in markets where it has been rolled out we continue to see benefits translate into hundreds of basis points of improvement in comp sales. Hospitality was a central theme at this year's all-manager conference because we know today's guests are more discerning than ever, and we need to be just as focused on how we make people feel as we are [ on ] the food that we serve. At Chipotle, this means extraordinary food, a clean restaurant, fast and accurate service and fairly teams that make every guest feel local. As part of this initiative, we are testing a new mystery shopper program to provide an independent view of our operations and validate our efforts. At our all Managers' Conference, we brought our focus on hospitality to life through on-stage competition that recreated the in-restaurant experience using real make lines, real food and guests moving down the line. Each region competed on throughput, accuracy and hospitality, and throughout the competition, we highlight in best practices our leaders could take back in their restaurants. This powerful visual of what rate looks like supports GM Learning in the most meaningful way. I want to congratulate our Mid-Atlantic region, which won the challenge. More importantly, the energy in the arena of electric and reinforced that our teams came out of AMC energized, ready to execute and committed to providing great hospitality. Turning to our second pillar. We are moving with speed to leverage technology and innovation to improve the experience for both teams and guests. Here are a few examples. First is our new digital makeline display we call Chipotle Kitchen. -- built by Chipotle for Chipotle, it is designed to enhance accuracy, speed and consistency. Unlike our prior text-based display, it uses clear visual cues for ingredients and makes it easier to introduce and integrate new menu items. This improved interface simplifies execution for our teams and reduces the potential for error during peak demand. It is now live in over 100 restaurants, and we anticipate completing the rollout across all locations by the end of the year. While still early, we are already seeing meaningful improvements in on-time performance, digital order accuracy and customer satisfaction. Second is leveraging AI and our restaurants to further support our teams. Avocado, our AI assistant continues to deliver real benefits by streamlining hiring and freeing up more time for our managers. Now we are expanding [ AVA's ] capabilities to assist our general managers with operational insights, scheduling treat planning and [indiscernible] guidance. We are also enhancing our facilities capabilities to triage equipment issues more quickly, reducing [ down ] on and improving restaurant performance. These enhanced capabilities received a standing ovation in our all managers conference and we anticipate having them in stage gate at the end of the year. Finally, our zip line pilot for drone delivery is showing encouraging early results, and we plan to expand the pilot for several more restaurants in second quarter. Taken together, these efforts reflect the speed and breadth of innovation happening across the company, all in service of helping our teams perform at their best and give our guests more reasons to choose Chipotle. Moving to our rewards refresh. We have an all-new look and feel, designed to widen the funnel, deepen our connection with guests and accelerate engagement. In 2025, loyalty ops meaningfully outpaced non-loyalty, reinforcing the power of the platform and the opportunity ahead. This next evolution builds on that momentum through expanded choice increased gamification and enhanced value. One of the [ best ] opportunities to widen the funnel in our in-restaurant business, where only about 20% of transactions are currently linked to rewards compared to nearly 90% of app transactions. This month, we launched an in-restaurant campaign featuring menu panels and QR code signers to make enrollment more seamless and support our goal of driving further engagement. We also incentivized our team to promote the enhanced program to guests in restaurant. So far, we are seeing strong results with nearly 25% increase in daily [ in ] release. And we are in the process of creating a single scan feature within our mobile app, allowing guests to both earn points and pay in one step further reducing friction. Now shifting to marketing and menu innovation. Our value proposition remains industry-leading and differentiating. Delicious food made with high-quality ingredients, prepared fresh [ using ] classic culinary techniques and served with generous portions of a [ speed ] and price, you can't give anywhere else. This year, we've increased the cadence of menu innovation, beginning with the high-protein line campaign, which broadened awareness across the full menu and the value we offer. Add-on protein reached nearly 1/4 of all transactions and has remained unleaded, reinforcing Chipotle is the go-to destination for high-quality clean protein. We also recently wrapped up the return of Chicken Al Pastor, the first limited time offerings we plan to launch this year. Our guests were excited to have it back and we saw strong momentum following the launch as it drove incremental transactions. Last month, we rolled out cilantro-lime sauce which is prepared fresh daily of our stops using chopped jalapenos that are roasted on the [ poncho ] and then blended with cilantro-lime [ sound ] treatment spices to create a creamy, bright soft with citrus and a little bit of a car. It was our first limited time sauce on the make line and the first launched with multiple size options, delivering higher incidents than both Red Chimichurri and a Adobo Ranch. Yesterday, we brought back Chipotle Honey Chicken, fan favorite that delivers a balance of smoky heat from Chipotle Peppers and a touch of sweetness from Pure Honey and is one of the best sellers with the highest order rate. As we look to the back half of the year, we will have two more LTOs and additional innovation planned around sides and beverages that we feel confident will keep Chipotle top of mind with our guests all year long. Shifting to group occasions. Following encouraging results in our initial Chicago catering pilot, including the launch of a third-party delivery platform, we have expanded the program into Boston. Assuming we continue to see similar guest response and strong execution in the restaurants, we expect to begin a broad rollout toward the end of the year. Build your own Chipotle, our family or group occasion for four to six people continues to resonate with our guests. Because the occasion has proven highly incremental, we are now testing a sharper pricing architecture and leaning into key marketing moments to build awareness. Today, catering and build-ing-ll Chipotle together represent over 2% of combined sales, yet we continue to believe they could become double-digit percentage of sales over time and a meaningful growth layer for the brand Now to our fourth pillar, our people. We remain focused on strengthening our position as a people-first company by developing world-class leaders and creating opportunities for growth. At the end of the day, our growth story is ultimately a people story. And we continue to see Chipotle change lives in meaningful ways. At our All Managers Conference, we celebrated a number of inspirational journeys, including one leader who joined Chipotle 17 years ago, looking for a steady job to support her family. He started as a crew member and has developed into a certified training manager. Along the way, she raised her children, built financial stability, including purchasing a home with proceeds for employee stock grants and discover a passion for coaching others. When she talks about why she loves Chipotle, she points to the pride in serving real food she believes in and enjoy in seeing people she train, move into leadership roles. Stories like hers are what makes Chipotle special. They show that our purpose to cultivate a better world comes to life in a powerful way through serving real food, creating real opportunity and helping grow the next generation of leaders. And because developing strong restaurant leaders is so critical to our success, we remain deeply focused on the general manager role and the pipeline behind it as we improve the role of our GMs and refine our apprentice program. The good news is that general manager turnover remains at historically low levels and stability is at a multiyear high. Against that backdrop, one of our priorities is ensuring that lunch and dinner each have manager coverage so that our restaurants are positioned to execute at the highest level during the busiest parts of their day. At the same time, we are aligning the apprentice role around a designated focus on hospitality. Our early read shows that this combination is improving execution while also strengthening the bench for the next phase of growth. I want to provide an update on how we are restructuring leadership to support our Recipe for Growth strategy. We are thrilled to welcome Fernando Machado as our new Chief Brand Officer. Fernando is an award-winning globally recognized brand leader. His experience includes 18 years at Unilever and more than 7 years leading marketing across Burger King, Popeyes and Tim Hortons at Restaurant Brands International, where he helped drive double-digit system sales growth and significant brand value expansion. His proven track record of building iconic brands, driving category-defining innovation and leading customer-centric marketing strategies is exactly what we need as we continue to elevate our brand, deepen guest loyalty, highlight the value of our real food and accelerate our long-term growth. We are also excited to welcome Arlie Sisson to Chipotle in the newly created role of Chief Digital Officer. Arlie has a strong track record of leading digital, data and loyalty at scale, most recently at Hyatt, where she led a global organization of more than 400 team members and advanced their digital and rewards ecosystem to drive stronger guest engagement and revenue growth. We believe she will play an important role in accelerating our digital platform and strengthening the connection between our guests and our restaurants. Together, this investment in talent will strengthen our leadership team and fuel our strategy. Finally, to our fifth pillar, expanding global access. Starting with our partner-operated restaurants in the Middle East, the well-being of our partners and their teams remain our top priority, and we are grateful that everyone is safe. Given ongoing geopolitical conditions, we expect some delays related specifically to restaurant openings in the Middle East this year. This may result in fewer partner-operated openings than anticipated. However, our long-term outlook for the region remains unchanged, and we continue to see the potential for hundreds of restaurants in the region over time. Outside of the Middle East, we continue to anticipate partner-operated openings in our new markets in Mexico and South Korea this year, while Singapore will likely open in 2027. In the U.S. and Canada, we opened 49 new restaurants in the first quarter and remain on track to open around 350 for the full year, with approximately 80% including a Chipotlane. New restaurant economics remain consistent and strong, and we are confident in our ability to reach 7,000 restaurants over time. In Europe, we recently opened a new restaurant at Westfield Stratford, one of U.K.'s busiest shopping destinations, and it delivered our strongest opening day sales in the region's history. We now have 29 restaurants across Europe and anticipate at least one additional opening in Frankfurt this year. Momentum in our European business continued into the first quarter with positive comps across all countries. This performance reflects our ongoing alignment with North American standards across culinary, training, systems and operations. We are further strengthening our foundation for future growth and continue to believe Europe represents a meaningful long-term opportunity for our company. To close, I want to reinforce the leadership culture that defines Chipotle. Our teams are energized, aligned and ready to execute, and this is showing up in the positive momentum we are seeing in the business. We know what it takes to win, be brilliant at the basics, stay close to our restaurants and guests and deliver exceptional food and hospitality with consistency every day. This is how we strengthen our value proposition and bring our strategy to life one guest, one team member and one restaurant at a time. I've never been more confident that we have the right team, the right strategy and a very long runway ahead as we continue building Chipotle into a global iconic brand. I will now turn it over to Adam. Adam Rymer: Thanks, Scott, and good afternoon, everyone. Our first quarter performance is an early indication that our Recipe for Growth strategy has started to translate into real results. We are seeing progress across the initiatives Scott outlined while continuing to manage the business with discipline. Our approach remains clear: reinforce guest value, support transaction-led growth and preserve the long-term strength and flexibility of our economic model. Turning to the quarter. Sales grew 7.4% to reach $3.1 billion, driven by a comparable restaurant sales increase of 0.5%. Digital sales of $1.2 billion represented 38.6% of total sales. Restaurant-level margin adjusted 40 basis points for legal settlement was 23.7%, down 250 basis points year-over-year. Adjusted diluted earnings per share were $0.24, representing a 17% decline versus last year. And we opened 49 new restaurants, including 42 Chipotlane. As Scott mentioned, our first quarter performance was ahead of our expectations. We saw strength following the high-protein menu launch, the return of Chicken Al Pastor and the launch cilantro-lime. For the whole year, our comp guidance remains about flat. Although we are trending higher than our guidance as our initiatives continue to gain traction, our guidance reflects a conservative outlook given the dynamic consumer environment. As it relates to pricing, we ran just under 1% in Q1 and anticipate pricing will be about 1.5% Q2. For the full year, we continue to expect it to be in the range of 1% to 2%. Before I walk through the P&L, I want to highlight a few encouraging trends we are continuing to see in menu innovation and rewards. Starting with the menu innovation. Our protein limited time offers typically generate a few hundred basis points of transaction it over the life of the promotion. The biggest benefit occurs during the first few weeks as we see increased frequency as well as more new guests. Also, we sustain part of this comp lift longer term as many of our new guys continue to dine at Chipotle after the limited time offer [ at ]. Sauces are showing a similar path. Beyond the mix benefit, they are effective in attracting new guests and increasing frequency. Taken together, these results reinforce that menu innovation is not simply a short-term sales driver, but a meaningful contributor to building our agent volumes over time and a core pillar of our recipe for growth strategy. And for rewards, we continue to see clear evidence that deeper engagement builds loyalty and drives comps. Loyalty-driven comps have now outpaced non-loyalty comps for several consecutive quarters, and the gap is widening. In the first quarter, loyalty as a percent of sales reached 32%, up 300 basis points versus the first quarter of 2025. That reflects both growth in active members and higher frequency among existing members, driven by programs like Summer of Extras and the expansion of Free. With the launch of our new rewards features, we are enhancing the benefits our guests already love while working to bring more in-restaurant guests into the program. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.6%, an increase of about 40 basis points from last year. The benefits of lower dairy and avocado prices and menu price increases were more than offset by inflation, primarily in beef and freight as well as higher produce usage. Relative to our guidance, avocados remained favorable due to better-than-expected crop in Mexico. For Q2, we anticipate cost of sales to step up sequentially to about 30% of sales as the protein mix benefit and modest pricing leverage will be more than offset by higher costs across several items, most notably avocados, dairy and beef. Overall, we anticipate cost of sales inflation to be in the mid-single-digit range in the second quarter and will step down in the low to mid-single-digit range in the second half of the year as we lap elevated beef costs. This results in full year cost of sales inflation of around 4%. Adjusting for 40 basis points related to non-GAAP legal contingencies, labor costs for the quarter were 25.7%, an increase of about 70 basis points from last year. The increase was driven by wage inflation, lower average restaurant sales volumes and higher benefits expense, including performance-based bonuses, partially offset by the benefit of menu price. For Q2, we expect our labor costs to be in the low 25% range with wage inflation in the low synergy range. Other operating costs for the quarter were 15.6%, an increase of about 120 basis points from last year, primarily driven by higher marketing, utility and delivery costs. Marketing costs were 3.4% of sales in Q1, an increase of about 40 basis points from last year as we increased our marketing spend in the quarter to support menu innovation and to remain top of mind with our guests. We expect marketing costs to be below 3% sales in Q2 and for the full year. For Q2, we anticipate other operating costs to be in the high 14% range. G&A for the quarter was $204 million on a GAAP basis or $198 million on a non-GAAP basis. Excluding $3 million related to net restructuring costs associated with our Recipe for Growth strategy and certain legal contingencies and $3 million related to retention and equity awards granted to key executives in August of 2024. G&A also includes $142 million in underlying G&A, $24 million related to noncash stock compensation, $5 million related to payroll taxes on equity vesting and exercises and $27 million related to our All Managers' Conference, which was held in March. We expect G&A in the second quarter to be around $181 million on a non-GAAP basis, which will include $151 million in underlying G&A as we invest in technology and people to support our ongoing growth. And around $30 million in noncash stock compensation, although this amount could move up or down based on our actual performance. Depreciation for the quarter was $97 million or 3.1% of sales. For 2026, we expect it to remain around 3% of sales. Our effective tax rate for Q1 was 25.4% on a GAAP basis and 25.3% on a non-GAAP basis. For fiscal 2026, we continue to expect our underlying effective tax rate to be in the 24% to 26% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1 billion in cash, restricted cash and investments and no debt. During the first quarter, we purchased $701 million of our stock at an average price of $36.14 and at the end of the quarter, we had $1 billion remaining under our share repurchase authorization. To close, I want to reiterate what makes Chipotle a special brand. We are able to invest in the highest-quality ingredients, offer accessible price points and still deliver industry-leading economics, a combination that is very difficult to replicate. Our recipe for growth initiatives further strengthen these advantages by sharpening execution, deepening guest engagement and continuing to build long-term demand for the brand. With a strong balance sheet, clear priorities and the team energized to win, we believe Chipotle is well positioned to build on that momentum to continue creating long-term value for our guests, our teams and our shareholders. And with that, I feel good up for questions. Operator: [Operator Instructions] The first question today comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: I'd like to start with a quick clarification and then the question. It seems that you have suggested some encouraging trends also in April. So I was wondering if you can help us quantify what you're seeing quarter-to-date in the early weeks. And the real question, maybe, Scott, for you is very exciting that you're hiring Fernando Machado. And I'm wondering what specific elements of his past broad-based QSR experience you're expecting him to bring into Chipotle. Adam Rymer: Yes, I'll start, and then I'll pass it over to Scott. So Danilo, so yes, it's specific to April, we saw a nice step-up in April. Part of it was the Easter shift. Easter was about 2 weeks earlier than it was the prior year, but a bigger part of it was the launch of Santer Lime sauce. It's really done an amazing job. It's actually outperforming red chimichurri, which was our most popular sauce up until that point and the incidence is about 2x. And then, of course, the rewards relaunch. So we believe all of those things contributed to a nice step-up in April. Scott Boatwright: Danilo, thanks for the question. As you can imagine, we went on a very comprehensive search for the exact right individual, and we found that in Fernando. And I'll tell you, beyond his deep global brand-building experience, his numerous awards and accolades, what he has accomplished in his career is really unprecedented. And I'll tell you, what I admired most was in my conversations with Fernando, even the earlier conversations we met several times before we made the decision to partner is his thinking of Chipotle, his love for the brand, his affinity for the organization, his love of high-quality fresh food and great culinary. And he's always been a fan, although be it from a distance of our great brand. And hearing him talk about what he has seen from our advertising historically and where he would take it to the next chapter, if you will, was groundbreaking for me. And so it was an easy decision. Again, he is an incredible marketer, and he will do well here at Chipotle Mexican Grill. Operator: The next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: I guess if I could just start with -- I know there was a lot of noise during the quarter, I'm going to follow up on the comp side. Any color that you can give in terms of stative trends as you move through the quarter? And really encouraging to hear about the momentum in April. Any color on what your guidance beds for comp in 2Q? Adam Rymer: Yes. So I'll kind of walk through and then Scott, please add in. And so starting in January, I mean, we caught up on January in the last call. But just to reiterate, I mean, we saw strength in our protein menu and campaign. And it not only drove transactions, but we also saw a double-digit percentage increase in double protein and single tacos. And amazing part about this is it wasn't just during the campaign in January. That increase in double protein and single Tacos has really sustained even through April. And then we saw the weather impact. The weather impact in January was at one point, about half of our restaurants were closed. So that was about 100 basis points to the quarter. But then as we roll around to February once the weather impact subsided, we really saw our trends improve even further, and that was really around the launch of Chicken Al Pastor. This is the third time that we've had in our restaurants, but the incidence level is actually the highest compared to the first two. So that was really great to see. And then in March, there was a little bit of softening in our trends right around the time where the Iran conflict began, but then we saw the nice step-up in April that I talked about earlier on Danilo's question. And so when this kind of rolls into April and how we're looking at Q2, we're really anticipating comps probably somewhere in that plus 1% range. And that's kind of what our expense line guidance is based on in my prepared comments. And this comp estimate, I would say, includes a modest increase from Chipotle Honey Chicken, which launched yesterday. But we are excited about the momentum that we're getting so far from our Recipe for Growth initiatives so far this year, but we really just want to remain cautious on our outlook given the dynamic consumer environment. Scott, anything to add? Scott Boatwright: I think what we should highlight here is what we demonstrated in Q1 was really our ability to engage with our customer base in new ways and drive incremental sales and activate against a broad range of consumer segmentations, whether that's income or age group. Lauren Silberman: Great. And just a follow-up on loyalty. You talked about loyalty comps outpacing non-loyalty, I believe, in 2025. What kind of growth have you been seeing in membership in recent quarters? And I guess is the revamp of the new loyalty program really focused on bringing in new customers, bringing less customers or trying to drive engagement with the existing membership base. Scott Boatwright: Yes, I'll jump in here. So the relaunch -- since the relaunch, we've seen about a 25% uplift in new members coming into the funnel. So not only did we widen our main goal was really to enrich our engagement and deepen our engagement with the existing loyalty members. But what we found is we were able to widen the funnel, bring more users into the funnel, reactivate lapsed consumers in a really meaningful way with some of the journeys that we've talked about historically. And we've made great progress of really redesigning a program, removing the friction points that our customers told us existed in 2025. And the new benefits are obviously the chips & guac welcome offer, 3 monthly Chipotle drops. We heard loud and clear that's what our customers wanted. They want to be able to choose their own rewards. We call it rewards on repeat, and they could choose whatever reward and how they want to use their points. in the loyalty program as well as well as cleaning up some of the UX features that had friction points in them as well. We're able to simplify the in-app experience, so exchange, wallet, extra badges and history are just easier to find and easier to use. Operator: The next question comes from [ David Balmer ] with Evercore ISI. Unknown Analyst: I'm just -- I'm wondering how you're thinking about how this year might play out. And one of the things you seem to be saying here is that by doing more frequent LTOs or your protein windows that not only do you get a boost, but that boost sticks around. So the 2-year trend gets a lift each time. And that would certainly imply that with the comparisons we see ahead of you that comp trends would accelerate from here. Is that your base case? I know you want to be cautious about the underlying environment, but is your base case that seeing what you're seeing in terms of the performance of these LTOs that you will see comps climb through the year if the environment doesn't deteriorate? And I have a quick follow-up. Scott Boatwright: That's exactly right, David. And so what we learned through our demand map refresh last quarter, I guess, Q4 now is that consumers were looking for menu innovation, and they were screaming for greater innovation at a greater frequency. And we have doubled our cadence of LTO innovation and stage gate processing in our culinary center to solve that challenge, evidenced by what you will see here in 2026. They're also looking for deeper digital engagement, which I think we saw for in the app refresh and relaunch. And then they were looking for culturally relevant marketing, which we've done some of that in Q1 with a lot of success and expect to do more of that with Fernando joining here in the next couple of weeks. So I think we're targeting the right ways to activate against the core consumer and bring new consumers into our brand. Unknown Analyst: The other thing I wonder about is how you think about bringing an LTO that was around before, obviously, Chicken Al Pastor and honey chicken, you're bringing them more frequently, but they're familiar. They were successful, but they were stuff that you've done before. I wonder -- to what degree do you feel like doing new, new is going to be more important going forward? Is that something on the horizon? And I'll pass it on. Scott Boatwright: It absolutely is, David. We have a couple of things that are in process or in test as we speak that are new LTO center-of-the-plate protein items. We have a few more we'll test in the back end of the year that will inform the 2027 strategy. But that's exactly it. We need to come back to tried and true favorites occasionally, not every time and then pepper in new menu items that will drive interest, drive occasion that are on brand and uniquely Chipotle. But that's exactly the strategy. Operator: The next question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Adam, can you just talk about the traffic and mix components of same-store sales and kind of what your outlook, at least on the mix side might be? Adam Rymer: Yes, sure. So with the comp of up 0.5%, transactions were up about 60 basis points and check was a slight decline, call it, about 10 basis points. Price was around 90 basis points and then mix was a drag of about 100 basis points to net to that check. And so when you're looking at mix, it's still driven by lower group size. This is kind of that continual normalization from that really high group size that we saw around COVID. And then there's also some other elements in there, for example, rewards when people come in and redeem a free entree, that's going to lower your group size as well as other more recent things that we've done around BYOC. For example, there's a little bit of cannibalization, not a lot, but that would be somebody coming in and getting 4 or 5 or 6 entrees previously is now only getting one item. So that's providing part of that drag as well as some of the other menu items like protein cups or single tacos. It's a smaller extent, but we are seeing people come in during like snack occasions to get those items. So that's also putting some pressure on group size. But on the flip side, we are seeing some nice offsets. So the extra meat, for example, from the protein campaign is providing a nice mix lift as well as sides. I mean, first, it was red chimmychurri kind of earlier in the quarter and then cilantro-lime sauce later in the quarter. And so when you kind of look at these going forward, I would expect mix to be closer to flat in Q2, and that's really thanks to the check benefit from cilantro-lime sauce. And then in the second half, it's really going to depend on a few factors. Really around LTOs, kind of the protein LTOs and the pricing around that as well as sauces. So we'll keep kind of you guys informed on a quarterly basis as we continue to really flush out our LTO strategy for the rest of the year. Brian Harbour: Okay. Got it. Scott, I know you've sort of been talking about hospitality for a while and just renewed focus on that. What -- I guess, what is it that's specifically changing? Or like at your conference, what did you kind of zero in on? And is this just -- is deployment something that kind of addresses it best? Or like are there other things that we might see change in the stores? And how would that show up? Scott Boatwright: Yes. It's kind of a broad answer, so I'll try to be brief. I'll tell you, the customer -- we learned last year that the customer was much more discerning on how they spend their cash and hospitality was a component that they were looking for probably in a more meaningful way than they have since COVID. And so we leaned into it pretty aggressively. [ Jason Kid ] and his team really rallied around this idea at AMC to deliver not only speed down the line and great culinary, which we do a pretty good job, I'd say a pretty darn good job. down the line, but also this idea to give the guest or treat the guests like a guest in your home. And so we really pushed on it at AMC. The team really bought in, and we saw the benefits of that coming out of AMC manifest in things like better KPIs on staffing, best at model levels we've seen in years, GM turnover at historical lows, taste of food and GSAT scores that are moving up and to the right. Now it's not to say we don't still have opportunities in pockets around the country. But on balance, I am really proud of our teams and how they've executed in Q1 and how they're leaning into Q2 in a really meaningful way and really driving this idea of great hospitality at Chipotle. Operator: The next question comes from Gregory Francfort with Guggenheim. Gregory Francfort: Scott, I think you guys have pretty good price points on your food. And I think the -- maybe you've had a little bit of a pricing perception issue over the last year or 2. I guess as Fernando has come on board, how much do you want to integrate value and price points into the marketing message? And how much are you testing with doing that? And just what could that look like? And how important is that to what he's tasked with? Scott Boatwright: Yes. It's a great question. Here's what I would tell you is we are open to testing many different ideas, and we won't handicap Fernando with historical thinking or entrenched thinking. But we won't do anything to detract from the overall brand health and brand growth. And I think I've said this many times, I believe we charge a very fair price point for what we offer the consumer, high-quality ingredients, the best ingredients in the world, prepared fresh with classic culinary techniques at a speed and abundance you can't get anywhere else and what I believe to be a great price point. And so we continue to grow our pricing power by underpricing the industry now for the second consecutive year, which we believe is right for the consumer as we try to protect or drive demand for our organization. We think it's the right thing to do. We're still a 20% to 30% discount to our fast casual peers, and we continue to grow that gap year-over-year. So that gives us pricing flexibility and pricing power that we could pull that lever at some point when the timing is right, whether that's a better entry-level price point like we did with the high-protein menu at $3.50 for a taco or test other innovative ideas. We're going to have a test here in a couple of weeks in one of our markets where we're testing a happier hour from $2 to $5 with tacos at $2.50. And so we're going to test ideas like that to understand where do we have pricing power elasticity, where may we have a challenged market from a pricing perspective and what levers can we pull to get consumers in our restaurants and feel like they're not getting good value, they're getting extraordinary value. Operator: The next question comes from Sara Senatore with Bank of America. Sara Senatore: I guess, data question and then a real question. Have you -- I know in the past, you were talking about perhaps softening younger cohorts also maybe not just lower but also middle income cohorts. I guess your comment about engaging customers across income and age groups, are you seeing the gaps converge there in terms of the transaction growth with those cohorts that had previously been under pressure between those and the rest of your customer base? Scott Boatwright: Sara, thank you for the question. Here's what I would tell you is in Q1, I think through targeted messaging and really driving culturally relevant moments, we're able to get the younger consumer more engaged with our brand in Q1 than we have historically or over the last year, I should say. And we're seeing an uplift and an uptick across all ages and all income cohorts for Q1. So I think we know at this point, what levers do we pull to ensure we're being thoughtful about engaging all of those individual cohorts the right way to keep moving the needle up into the right. And so I have a lot of confidence that is built into our Recipe for Growth strategy that does just that, and we'll continue to do that for many months and years to come. Sara Senatore: And then I guess the real or non-data question is actually about Europe. You mentioned seeing some of the highest volumes in terms of opening -- recent opening in that region. Can you update us on where kind of unit economics stand there or whether it's the AUVs or the middle of the P&L, I think those have been kind of the middle -- those have been kind of sticking points or hurdles to clear before you accelerate unit growth. So any update on that and whether that means perhaps you're at an inflection point where you can start to pick up the pace? Scott Boatwright: We absolutely are, Sara. So we're now in the double-digit range on margin, and we're seeing 40% restaurant -- new restaurant growth year-over-year -- I'm sorry, 40% return on investment in year 2, forgive me, on the new restaurants we're opening, which gives us a lot of confidence. Not only are we on track, but we need to begin to look for real estate in a more meaningful way in Central London and in Germany. I think we are released to go as quickly as we can go. Operator: The next question comes from John Ivankoe with JPMorgan. John Ivankoe: The question is on competition, but I want to go a couple of ways with this, if I can. On the chain basis, which is, I guess, can be tracked. It does seem like a lot of the competition is coming in chicken, Mexican, and I'll just say very broadly but kind of bulls on a top 500 chain basis. But on a local basis, certainly, one could make the argument or at least have the observation that it's very much the same, the same type of concept growth. So the question is, is there any opportunity to not just think about marketing on a national basis or kind of through the app, but even thinking about competition or marketing different locally to where different markets would have specifically different opportunities and different needs based on where competition is growing is the first part of the question. And secondly, and I don't know if it's fully related, it did look like to us, at least on our calculation that new unit volumes may have been a touch light in the first quarter. So I was wondering if there is some timing or other types of factors that could have influenced that? Or how the unit volumes were relative to your own expectations as we would have calculated on an implied basis in the first quarter? Scott Boatwright: Yes, I'll jump in here, and I'll Adam follow up on the second part of your question. We did a deep dive analysis on competition, specifically in New York and Florida, where our main competitors, albeit they're small today, are growing the fastest. And while we see some level of cannibalization when one of those restaurants opens up near a Chipotle in the first 6 months or so, it recovers pretty quickly in month 6, 7 and 8 and then climbs back to industry trends or Chipotle standard trends from there. So what we're seeing is when one of those competitors open up, they bring more consumers to the retail trade area, which is helping buoy our restaurant performance long term. And so obviously, we think about competition, we are concerned and keeping an eye on competition. But as it stands today, it's low levels of impact. As it relates to marketing spend, we know that our marketing dollars on return on ad spend work the hardest on the national level and to bifurcate that spend to attack something locally would be costly, and I don't know if it's the most efficient use of our dollars. Adam Rymer: Yes. And then to follow up on the store productivity, John. So we're seeing about 80%, which is where we've been in the last couple of years. So we're really proud of our Q1 openings and really where we've been trending over the last year. What you're probably looking at is you don't have the details on the cadence, so they may have been pushed a little bit later in the quarter versus kind of even spread throughout. But no, we're still kind of in that 80% of our comp restaurants in terms of where they're opening at. Operator: The next question comes from Jon Tower with Citi. Jon Tower: Maybe starting, I'm just curious, following up to Greg's question around value perception in the marketplace, I would argue maybe your delivery channel is one area where you get perhaps lower value scores than the in-store experience. So I'm just curious what you're thinking about there with respect to the premium that is currently charged for delivery, if that's an area you're exploring for an opportunity to improve the value scores. Scott Boatwright: John, yes. So we did some testing on different premiums in delivery across DoorDash and Uber and people use those platforms in different ways. They primarily use Uber as a discount platform and DoorDash as a premium faster order time, faster delivery time platform. So you have to market on those platforms very differently. But I will tell you, our prices even at an elevated NPI on marketplace are still below our peers in the channel. And so we did see another tick up in delivery this -- still in the teens, but another tick up in our delivery performance last quarter. What I'm most excited about is we surpassed 20% of order ahead in the quarter, which tells us our consumers being more discerning on how they spend those dollars and coming to the restaurant to pick up their orders versus having it delivered. And so that's encouraging for us as we think about the future of delivery long term. We will have Arlie Sisson starting next week, we will take a hard look at our third-party aggregators to see where we are performing well, where might we have opportunity. and really take the learnings from the testing we did last year to inform our go-to-market strategy in the back half of this year. Jon Tower: Great. And then just maybe on the labor side of the equation, it sounds like you're rolling out quite a few tools at the store level to help obviously GMs in the store -- the hourly employees become more efficient. I think some of the pushback that I consistently hear from investors is stores need better staffing over time. And I'm just curious to get your take on, we think the labor levels at the stores need to settle out if you're kind of fully staffed today? Or is there more opportunity to invest there? Scott Boatwright: I think there's more opportunity to invest, if I'm being honest. And here's how we're doing that. The heat program throws off an incremental couple of hours of productivity, which we're reinvesting back in the business. Other initiatives like the Chipotle Kitchen, things like the GM Assistant, avocado on the hiring side, all those hours are freeing up the manager and freeing up the team to be more efficient and deliver a better team member experience, which always ladders to a better guest experience. And we are reinvesting that time back into the business and not taking it out to further bolster the consumer experience, which will always lead to value creation. And we're also taking a hard look at our management complement to ensure that we have the right managers covering peak dayparts all 14 peaks. So think lunch and dinner every day of the week. I think we're challenged there today. Jason and his team have put a plan in place that they're executing against today to ensure that we have the right manager covering lunch and dinner every single day and not give up on Saturday and Sunday to ensure we have the best management coverage, which will lead to a better team member, a better consumer experience. So there are investments that we are making along the way to free up the manager to be more effective, train better, deploy better and leads to a better customer experience. Operator: The next question comes from Drew North with Baird. Andrew North: My question is on the margin trajectory, and I appreciate the color on Q2. But as we look further ahead, Wondering if you have any updated perspective on the shape of the margins as we get to the second half I know the expectation has been for pricing versus inflation and the gap there to narrow as the year progresses. So maybe just any thoughts on how you're thinking about the shape of the restaurant margin or what comp or traffic figure might be needed to see expansion as we exit the year? Adam Rymer: Yes. Drew, so you're right in the sense that kind of the first half of the year is when margins are going to be under the most pressure on a year-over-year basis. I mean the price that we're running, for example, in Q1 of 0.9% compared to inflation is kind of in that mid-3% range. So that's providing the majority of that dislocation. As we get to the second half of the year, inflation is going to drop down a bit, mostly because we'll start to lap kind of the elevated beef prices from the year before, and we'll continue to see pricing tick up with a slow and measured approach that we're going forward with. So I would expect towards the end of the year for that dislocation to be minimal based off the trajectory we're on right now. And going forward, at that point and going forward, really the flow-through on being able to get margins higher is going to come through our usual strategy of just utilizing price to offset the impact of inflation and getting margins higher through incremental transactions. Andrew North: That's helpful. And hoping you could elaborate a bit more on what you're seeing from the high-efficiency equipment package in early days. Scott, I know you mentioned the hundreds of basis points of comps outperformance again. But wondering if that gap has widened versus control for some of the early restaurants with the equipment? And maybe just how to think about the pace of rollout through the year to get to 2,000 at year-end? Scott Boatwright: Yes. So -- and what we're seeing right now is outperformance on throughput, taste of food, [ OSAT ] and then again, hundreds of basis points of comp lift in those restaurants, and that ranges from [ 200 ] to [ 400 ], depending on the restaurant, I will tell you. We are at 600 restaurants today. We'll be at 2,000 by year-end. This quarter, I think we're at 35 -- 30 installs per week. We're going to move to 45 installs per week here in the next month or so. We are going as absolutely quickly as we possibly can, but doing it in a responsible way where we don't have to close restaurants to get the new equipment in. We're doing it overnight on these installs to ensure we don't affect the business and then make sure we do it the right way where [ the ] teams are trained correctly to use the equipment. Although the equipment is plug-and-play, it does require some level of training. And it takes the team about a month, if you will, to really get up to speed on how to use the equipment most efficiently. So we're being responsible. I think we can get the full portfolio done at some point late 27, early '28. Operator: The next question comes from Chris O'Cull with Stifel. Christopher O'Cull: Scott, just a follow-up to that last question regarding the heat package. How long does it take to see the same-store sales improvement that you're experiencing in these test stores once you deploy the package? Scott Boatwright: About 2 months, Chris. So it happens pretty quick. It takes about a month to really get proficient and then a month to kind of hit your stride. So after about 2 months, we're starting to see some pretty material uplift in the business. Christopher O'Cull: Okay. And then the marketing spend grew I think 22% in the first quarter and following a very heavy push in the fourth quarter. While you're seeing positive inflection in comps, the marginal lift relative to that level of investment appears obviously a little modest. So how is the team measuring the incremental return on the spend and are you seeing a strong enough conversion trend to justify maintaining this level of marketing? Adam Rymer: Yes. I mean I'll start and then Scott definitely add in. So yes, what you're seeing right now with the level that we're spending, especially around supporting four LTOs is we're getting some really good returns on that incremental spend as well as some of the additional things that we're doing around some of the more Chipotle's as we call them around the [ tattoo Bogo ] and some of the other things. And so we measure them individually and really ensure that we're getting the best return on each of them. I think what you're seeing, too, though, with that incremental spend, is there still some noise especially when it comes to consumers and kind of what we're up against. And so we're expecting this to continue to improve. But the team does a phenomenal job of really looking at each individual investment, assessing and determining where we go from there. Scott Boatwright: Yes, I think it's important to note that some of that has a tail, right? So as you think about marketing spend, your goal is sales overnight and brand over time. So there's a component of it that is really driving sales and transactions there's another component that is brand building, which will serve you well for many years to come. And so as long as we look at the return on ad spend as being responsible and margin accretive, which I think is the right way to view it, we'll continue to incrementally spend there. Operator: The last question today comes from Andrew Charles with TD Cowen. Andrew Charles: Great. Adam, I wanted to ask you the guidance for 2Q same-store sales up 1% relative to 1Q, 50 basis points increase is commensurate with the [ 5 ]0 basis point step-up in price quarter-over-quarter -- you also caught up you expect mix to be flat in 2Q versus down 1% in 1Q. So I'm curious like 2Q's embedding a 50 basis points traffic decline that versus what you saw with 1Q 60 basis points gain unless you categorize 2Q guidance is similarly conservative to the full year '26 guide? Adam Rymer: Yes. So I mean I think what you're picking up there is right. Really, what it comes down to is we're being modest, like I said earlier, on the increase that we expect to get, not only from [ Chipotlane ] chicken with a yesterday, but some of the other initiatives that we have planned, just given the consumer environment, especially with the conflict in Iran and gas prices. And so we're going to remain cautious on that outlook, but we believe that there's upside from there. Andrew Charles: That's helpful. Just kind of want to follow up the sustainability report published this week it indicated a large pickup in hourly turnover in 2025, following 3 years declines. What drove this? And can you talk a little bit more about the plans in place to improve throughput in 26 outside of heat, leading to a faster experience. Scott Boatwright: Yes. So the first part of the question, 2025, I believe, was just an anomaly as sales decelerated, which I hate to talk about, as you can imagine, there were fewer hours, which drove some attrition. And then this new focus on hospitality caused us to give a hard look at the employees we have in our restaurants and which ones were naturally friendly and have a natural inclination to smile and take care of our guests. And so we had to make some hard decisions there. I'm happy to report Q1, we're back to our historical low levels of turnover. So I know we're on the right track, and we're back where we need to be as it relates to turnover. And what was the second part of your question? Andrew North: No, you hit it. That was it. I was just wondering what drove and what you're doing to fix it. That's it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Boatwright for any closing remarks. Scott Boatwright: Well, thank you, everyone. We're pleased with the results in the quarter, as you can imagine, showing progress in reinforcing that our Recipe for Growth strategy is working and driving traffic across all income cohorts. I want to leave you with the idea is that we're building on a strong team with the addition of a new Chief Brand Officer and Chief Digital Officer. And we expect our initiatives to continue building throughout the year and have transactions improve as innovation on ideas like heat, group occasions, rewards and restaurant execution scale over time. And we'll continue to lean into what makes Chipotle great hospitality, generous portions, great culinary and great throughput. And with that, I just want to say thank you to our teams out in the field that really do the hard work for us and the heavy lifting in this brand for all that they do to make our brand great. and I wish everyone a good day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to Glaukos Corporation's First Quarter 2026 Financial Results Conference Call. Copies of the company's press release are and quarterly summary document, both issued after the market close today, are available at www.glaukos.com. [Operator Instructions] This call is being recorded, and an archived replay will be available online in the Investor Relations section at www.glaukos.com. I will now turn the call over to Chris Lewis, Vice President of Investor Relations and Corporate Affairs. Christopher Lewis: Thank you, and good afternoon. Joining me today are Glaukos' Chairman and CEO, Tom Burns; President and CEO, Joe Gilliam; and CFO, Alex Thurman. Similar to prior quarters, the company has posted a document on its Investor Relations website under the Financials & Filings, Quarterly Results section tied with Quarterly Summary. This document is designed to be read by investors before the regularly scheduled quarter conference call. [Operator Instructions] Please note that all statements other than statements of historical facts made on this call that address activities, events or developments we expect, believe or anticipate will or may occur in the future are forward-looking statements. These include statements about our plans, objectives, strategies and prospects regarding, among other things, for sales, product, pipeline technologies and clinical trials U.S. and international commercialization, market development efforts, product approvals, the efficacy of our current and future products, competitive market position, regulatory strategies and reimbursement for our products, financial condition and results of operations as well as the expected impact of general macroeconomic conditions, including foreign currency fluctuations on our business and operations. These statements are based on current expectations about future events affecting us and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, they may cause our actual results to differ materially from those expressed or implied by forward-looking statements. Please to review today's press release and our recent SEC filings for more information about these risk factors. You'll find these documents in the Investor Relations section of our website at www.glaukos.com. Finally, please note that during today's call, we will also discuss certain non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Glaukos' ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the tables in our earnings press release available on the Investor Relations section of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I will turn the call over to Glaukos' Chairman and CEO, Tom Burns. Thomas Burns: Okay. Thank you, Chris. Good afternoon, and thank you all for joining us. Today, Glaukos reported record first quarter consolidated net sales of $150.6 million, up 41% on a reported basis and 39% on a constant currency basis versus the year ago quarter. As a result of our first quarter outperformance, we are raising our full year 2026 net sales guidance to $620 million to $635 million compared to $600 million to $620 million previously. Our first quarter results reflect strong execution across our global commercial and development priorities, highlighting the commitment of our teams, strength of our differentiated technology platforms and our continued progression as an increasingly diversified leader in ophthalmology. Looking ahead, we believe we are well positioned to sustain this momentum driven by 2 transformational growth drivers, including the continued advancement of the interventional glaucoma treatment paradigm with iDose TR and launch of Epioxa, establishing a new standard in interventional cardoconis and rare diseases. Together, these compelling and durable market opportunities reinforce our confidence in delivering a best-in-class growth profile well into the next decade as we continue to invest in and advance a robust industry-leading pipeline while remaining disciplined in capital allocation focusing on ROI-driven investments to support our near-term objectives of continued operating leverage and cash flow breakeven. Now let's discuss our first quarter results in more detail. Within our U.S. glaucoma franchise, we delivered record first quarter net sales of $93.5 million on strong year-over-year growth of 58%, driven by growing contributions from iDose TR, which generated sales of approximately $54 million in the first quarter. IDose TR continues to deliver strong clinical outcomes that meaningfully improve patients' lives, driving strong physician interest and adoption. From an execution standpoint, we remain focused on our key initiatives, including expanding our base of trained surgeons and active accounts, increasing utilization, broadening market access, scaling targeted commercial investments and expanding body of clinical evidence. On the last point, iDose TR is supported by a robust and growing body of clinical evidence demonstrating strong efficacy, safety and durability of effect. This now includes 22 peer-reviewed publications, complemented by a broad portfolio of active Phase IV studies across diverse real-world clinical settings, further reinforcing its consistent performance in real-world practice. Importantly, iDose TR is serving as the foundation for a broader shift towards earlier intervention of glaucoma care. Our efforts to educate surgeons and key opinion leaders globally are gaining traction and helping to drive a steady evolution in the standard of care. This momentum was evident at recent major industry meetings, including AGS and ASCRS, where engagement and enthusiasm around interventional glaucoma and our novel therapies were notably strong and growing. To support these efforts, we continue to invest in our commercial organization and infrastructure to expand disease awareness and education, while enabling our customers to effectively adopt and operationalize interventional care into their clinical practice. Moving on, our international glaucoma franchise delivered record net sales of $35.8 million and year-over-year growth of 23% on a reported basis and 16% on a constant currency basis. The strong growth was once again broad-based as we continue to scale our international infrastructure and execute our plans to drive mix forward as a standard of care in each region and market -- major markets in the world. As previously discussed, we continue to expect new competitive product trialing headwinds in some of our major international markets as we progress through 2026, partially offset by growing contributions from iStent Infinite following its EU MDR certification and associated European commercial launch late last year. We also expect the currency tailwinds to abate going forward based on the current rate environment. And finally, our Corneal Health franchise delivered net sales of $21.3 million on year-over-year growth of 15%, including Fetrexan and very early Epioxa sales of $17.7 million. At the end of the first quarter, we are delighted to announce commercial availability of Epioxa, our novel groundbreaking advancement in corneal cross-linking for the treatment of cons a rare cytidine disease that is currently far too often underdiagnosed, undiagnosed and untreated. We believe Epioxa represents a transformative innovation in care comes care offering an incision-free alternative to traditional corneal cross-linking procedures, and it does not require the removal of the corneal epithelium, the outer most layer or the front of the eye. This novel oxygen-enriched topical therapeutic bioactivated by UV light is designed to reduce the pain associated with removal of the epithelium, streamline the procedure and minimize recovery, all while delivering clinically meaningful outcomes and exceptional value to patients, providers in the health care system. Response we received from surgeons in the broader ophthalmic community since FDA approval and the more recent initial commercial launch activities has been very encouraging. As we've discussed, with the launch of Epioxa, we have redefined our go-to-market approach to better address the site threat disease and truly expand patient care and access. Importantly, with this launch, we are substantially increasing our investments in patient awareness, education and access, while addressing the long-standing challenges of underdiagnosis and under treatment that have affected this rare disease community. As with all pharmaceutical launches, initial patient access will be gated by typical payer adoption headwinds in hurdles, but we've been encouraged by the progress we've made in the short order through the early days of our launch. First, I'm proud to report that we have successfully established and continue to selectively expand a broad-reaching site of care network. Our acquired O2N systems are already actively deployed across locations serving roughly 65% of the U.S. population with the pipeline progressing through various approval processes that we expect will expand our treatment center reach to approximately 95%. Looking ahead, we will continue evolving this network to bring treatment access closer to patients as reimbursement and drug acquisition pathways become further established and streamlined. Next, we continue to make considerable progress with payers to secure access pathways or policy coverage for Epioxa with several plants having already updated or are in the process of updating their policies to include this novel therapy. These efforts are translating into expanded access with pathways now established or more than 100 million covered commercial lives in the United States, including with 4 of the 5 largest payers reflecting encouraging initial receptivity of Epioxa's clinical value. While we expect the pace of policy adoption to build over time, we remain focused on driving broader commercial -- or sorry, broader coverage across both commercial payers and Medicaid programs to support more streamlined access pathways over time. Earlier this month, we achieved another important market access milestone as CMS has signed a product-specific J-code for Epioxa, consistent with our expectations and in response to our application. The new code J2789 is scheduled to take effect on July 1, 2026, and we believe it will help streamline the reporting and reimbursement process for Epioxa among U.S. payers over time. Until then, we anticipate Epioxa will be commercially available under a new technology miscellaneous J-code and anticipate measured adoption over this initial period until the permanent J-code is in place and solidified operationally by providers in our specialty pharmacy. Beyond market access, we're proud to lead the way once again on forging a new path for interventional care to come by advancing a targeted marketing and DTC initiatives to drive awareness, education and earlier detection, supported by greater optometric engagement and strengthened advocacy partnerships. Finally, we launched a co-pay assistance program for eligible patients and are operationalizing a specialty pharmacy partner network in support of Epioxa patients. As you can see, we are very excited by the significant potential Epioxa offers to patients living with keratoconus. While Epioxa remains in the early stages of its launch, our teams are energized and executing with focus, and we're encouraged by the solid progress we're making against our core launch priorities. Beyond Epioxa, we continue to advance a broad and differentiated clinical pipeline across our 5 novel therapeutic platforms encompassing 13 publicly disclosed programs and additional undisclosed assets supported by a robust portfolio of active clinical and Phase IV studies. This includes ongoing pivotal trials for iDose TREX, iStent infinite and mild to moderate patients and the PreserFlo MicroShunt, an active Phase II trial for iLution Demodex blepharitis, ongoing development for our Link platform, including a planned market introduction of our KC screening device late this year and our promising earlier-stage rental assets. Overall, we remain on track with our clinical time lines and encouraged by the progress across our complete portfolio. In conclusion, at Glaukos, we're in the business of pioneering new marketplaces within ophthalmology for the benefits of patients. Our record first quarter performance highlights the strength of our strategy and execution as we continue evolving into an increasingly diversified atomic leader with multiple transformational growth drivers in iDose TR and Epioxa and advance our mission to transform vision therapies for the benefits of patients worldwide. So with that, I'll open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Tom Stephan with Stifel. Thomas Stephan: Great. Thanks for the question. Nice quarter. First one on Epioxa, Tom or Joe, maybe if you can talk about early findings, one, on sort of how initial experiences in sort of the claims and prior of processes are going? And two, what demand in the market looks like sort of from an early utilization standpoint, maybe based on what you're seeing in the Epioxa patient portal? And then I'll have a quick follow-up. Joseph Gilliam: Sure. Thanks, Tom. It's Joe. I'll start off there. I think Tom gave you some of the higher-level stats, the progress we're making with the Epioxa launch, both in terms of the 2 fundamental, I think, foundational items, both our side of care network as well as the broader payer pathways. Underlying that, which I think you're asking a good question is the process of making your way through that. And clearly, it's hard to judge too much on that until we get into the post J-code period because at this point, you're dealing with the miscellaneous code. So all systems around that, you will are, by definition, slower than normal as you adjudicate on a claim-by-claim basis. But I will say that we've been very encouraged by those sites of care who come online, as Tom referenced. And the patient flow that's coming from that and into our portal in the hub, as you say, as a leading indicator of what it can mean for the clinical demand associated with an Epi-On therapy like Epioxa. So as we make our way through that, and we see those claims get adjudicated, which we've seen positive claims get through the process and also those procedures get done now. We're encouraged by, I'll call the is the leading indicator in terms of that funnel as it develops. Thomas Stephan: Got it. That's great. And then Follow-up just on iDose, really solid in the quarter. Joe, maybe to stick with you, can you just talk about drivers of the strength? And it'd be great if you could maybe also discuss kind of Noridian and Novitas versus the remaining MAX and what you're seeing in kind of each of those 2 pools, if you will? Joseph Gilliam: Yes, absolutely. I think the most encouraging thing about the results of the first quarter was it was very broad-based in terms of what drove that performance. It was continued expansion within the more established, I'll call it, MAX. And you referenced Noridian, Novitas subset by First Coast in that as well. I'll come back to that. But now you start to see NGS, in particular, turning on, the early signs of Palmetto turning on as well as we've more recently achieved a professional fee formally in that region. And I think also is encouraging was a real increase certainly the funnel into our hub associated with commercial and Medicare Advantage patient flow. So I think it was broad and consistent with what you would hope to expect in the context of our core initiatives. To put a finer point, I think on your question around Noridian, Novitas, typically, I talked about that in the context of Noridian plus Novitas First Coast is some of the earlier adopting MAX. And in the first quarter, that was down to about 7% of the overall region volumes, if you will, from 78% in the fourth quarter. And again, that's really because as they continue to grow, you might expect the adoption curves to be picking up even faster in areas like NGS and Palmetto. Operator: Our next question comes from the line of Adam Maeder with Piper Sandler. Adam Maeder: Congrats on a great start to the year. The first one for me, I wanted to ask a modeling question. So nice Q1 top line , you raised the full year outlook by more than the Q1 outperformance. You've given a lot of great modeling color in the past. So Joe, maybe for you or Alex, can you just kind of pull apart the updated guidance with iDose contribution versus the stent business versus corneal health and as we think about Q2 in particular and as it relates to Epioxa, I would appreciate if you could give us a little bit of modeling help. And then I have a follow-up. Joseph Gilliam: Sure, Adam. I'll dive in, and I'll give at least some introduced comments on that front. And if folks have additional questions, we could add in a little bit deeper. But as you said, it was a great start to the year. with really each of our franchises exceeding expectations, and we made considerable progress across all those fronts, including within interventional glaucoma and iDose in particular. And as a result, we were able to raise our guidance up to the $620 million to $635 million range. And as you think about that in your models by franchise on a handful of perspectives, first by franchise. On the international glaucoma side, I'd say really the dynamics here are somewhat unchanged. Obviously, we expect, as we move forward here, some of the currency benefits that you heard Tom call out in the prepared remarks will weight in. And so we do expect that going forward, we'll see sort of high single-digit growth for the remainder of this year. Now when you put all that together, that's going to translate into low double-digit growth for the full year. but the remaining quarters, we would expect single-digit growth in that franchise. On the Corneal Health side, Obviously, I think everybody knows there's a fair number of moving parts there. It was a strong first quarter. But we do continue to anticipate volatility associated with both the TREX and Epioxa transition, but also the temporary permanent J-code transition over the course of, call it, Q2 and Q3. And so when you put all together with the performance and what we're sort of seeing we now expect kind of high single-digit growth for this franchise for the entire year. with some puts and takes in the individual quarters as we get there. And as you've heard me say in the past, we certainly expect to be exiting the fourth quarter with a pretty strong performance curve as we start to pull through Epioxa in a more meaningful way. On the U.S. glaucoma side, again, another strong start to the year, we would adjust our views there probably to be more in the, I'll call it, low 30s type growth for the full year, and that's really driven by still an ongoing view that going forward we should expect kind of flattish non-high dose sales going forward until we've really been proven otherwise and continued sequential progress as we've been seeing with the iDose launch. So you put all that together, and I think as you said, we not only do we raise our overall guidance, but we raised the reach of our underlying franchises and the drivers. I will add just because you asked about, I think, for Q2 in particular, given there's a lot going on here, and it's all good, but I want to make sure we've got it as do as possible. that for the U.S. glaucoma franchise, as I alluded to earlier, in Q2, I think we expect sort of flat non-iDose and that continued sequential iDose expansion. In interventional glaucoma, we'd expect the high single digits as we talked about that benefit wanes. And the corneal side, I think as we said on the last call, we would expect in the second quarter to see a bit of a dip there on a year-over-year basis as we transition from Photrexa to Epi-On. Adam Maeder: Really appreciate all the color, Joe. And if I could just sneak in a follow-up. I wanted to ask about iDose and or reaching a point now where you have critical mass from a reimbursement standpoint. So Tom or Joe, can you just maybe talk about some of the new initiatives that you're going to start to put in place here. I think you've talked about growing the commercial team potentially looking at direct-to-consumer as we get into the latter part of the year. We just love some incremental color for kind of the next chapter. Joseph Gilliam: Yes, you're exactly right, Adam. We've always talked about you didn't want to put some of these things into place until you start to have a more solid foundation from a reimbursement standpoint. Certainly, what you're hearing in the context of our first quarter results and our guidance is increasing confidence in that foundation, both in terms of the 5 of the 7 MAX that are now stable by professional fees and the team is driving incremental confidence both on the reimbursement side as well as, obviously, the clinical and commercial side. But also now increasingly as we move forward here on the broader commercial Medicare Advantage. So I think as we've talked about in the past, as we move forward here, it's about driving increased awareness for iDose and interventional glaucoma and teams that help drive that broader environment of both education of patients as well as the process to get them treated by an interventional procedure like iDose. So we have been making significant investments for some time now in more of our reimbursement and business teams that surround the traditional sales force to really try to make sure that we can maximize both patient access and that broader awareness initiatives. So I think you should expect to see more of that certainly as we get into the second half of this year and as we get closer to exiting the year and heading into next based upon this trajectory where we're going to feel, I think, a lot more confidence in starting to make some of those more offensive investments. Operator: Next question comes from the line of Larry Biegelsen with Wells Fargo. Larry Biegelsen: Congratulations to you. Maybe one on iDose and one on Epioxa. Joe, if you could talk about how you've engaged with the MAX since the CAC meeting last year. Any updated thoughts on the likelihood of an LCD this year and the timing of those 2 RCPs you're running? And I had one follow-up. Joseph Gilliam: Yes, I'll start off at the beginning, and Tom can comment on the broader studies that we're doing associated with iDose here in a minute. So as we think about the engagement with the MAX, I'm not sure we have a particularly different strategy here. We've always engaged in an education process to make sure they understand our technologies, how they utilize the labels and indications for use around them. And we continue to do that. We continue to try to diagnose where we've got ongoing I'll call it, less streamline reimbursement in areas like CGS and WPS, and we continue to have momentum in some of those conversations. So hopefully, we're marching forward those 2 MAX in a productive way,, they can drive professional fee establishment similar to the other 5 larger MACs that have come before them. As it relates to the post-CAC conversation LCD conversation, really no changes on this front since our last call, Larry, and we've talked about it. At this point, we've not seen any signs of an LCD and we continue to believe it would be premature at this stage of the clinical adoption curve. Having said that, obviously, by nature of these things can be unpredictable and okay. So it certainly remains possible even if we believe it's less probable disappoint. Thomas Burns: And I think to address your question on Phase IV studies, Larry, that we've contemplated actually been enrolling for some time, once we receive NDA approval, we have done 2 major Phase II studies. The first would be iDose plus cataract versus cataract surgery alone to be able to demonstrate the incremental value of using iDose in combination with cataract surgery. And that study is actually fully enrolled, and we'll be following those patients over the course of this coming year. And we'll be looking to publish the data at regular intervals. And I think that will be a very powerful supplement to the data that we currently have on hand, again, another 22 peer-reviewed clinical trials. And then I think we were largely present in also doing a study looking at iDose versus iDose plus infinite because I want to show the incremental value of these 2 different mechanisms of action to be able to lower intraocular pressure to supremely low target pressures, which will by all evidence to be able to force the progression of glaucoma or progression in glaucoma. I think with both of these in hand, I think it will be timely in case in any event in the future, we're challenged by any magazine using either combination modalities or procedural pharmaceuticals plus MIGS or using iDose in combination with cataract surgery. Joseph Gilliam: One other thing I'll just add, Larry, I think even at a minimum on this these studies that Tom's are referencing as important as the broader payer community. So this is how you continue to expand that coverage irrespective of MAX and LCDs, et cetera, with the individual commercial players in Medicare Advantage plans to make sure that we're optimizing that access for our patients. Larry Biegelsen: And for my follow-up on Epioxa, Joe, I'm going to ask you kind of more of a big picture question. I think from our past conversations, you felt confident that Epioxa could return to peak Photrexa levels of roughly 18,000 to 19,000 eyes by the end of the decade. And if that's paid volume, that would be well north of $1 billion in revenue. So I guess, my question is you still -- how are you feeling about achieving that? And what is the ramp to that look like? Joseph Gilliam: Yes, Larry, I mean, I think I'll stop short of obviously making the longer-term predictions formally and just say I think we have been on record saying we view this as a potential $1 billion-plus franchise the pace in which we get there, we'll continue to monitor as we get into the actual true commercialization, especially if we get towards the second half of this year. But I think part and parcel of that is I don't think we view it just in the context of where we've been with Photrexa patient volumes. We're making the investments we're making, which are enormous moving forward to drive increased awareness and detection and ultimately action and access in the hopes that we can treat, quite frankly, far more than that. We believe that there are more than the 18,000 to 19,000 eyes at any given time that should be getting diagnosed and treated. And so from our standpoint, a lot of the DTC and the things that you've heard Tom reference, we'll be putting those investments towards hopefully growing this overall market from a volume perspective over that period of time and getting more and more of these patients treated. Thomas Burns: And I would just add on that, if you think about what the possibilities are to build this marketplace over the planning period, and it's really important to be able to recognize what we have beyond this planning care, certainly at the tail end of the planning period, this would be the second-generation customized algorithms that we have in place for the treatment of keratoconus that can't help but the market expanding if we show demonstrable changes in K-MAX for these patients. and have the possibility of actually increasing their best corrected visual acuity by virtue of customized algorithms that we're going to be able to dispense and use on these patients with keratoconus. So I'm very bullish not only on the near term of all the different mechanisms we're putting in place to build the marketplace, but our possibility of having a second wind moving into the 2030s, which will increase our presence in this rare disease. Operator: Your next question comes from the line of Ryan Zimmerman with BTIG. Ryan Zimmerman: Congrats on strong start here. Just kind of dovetailing on some of the questions before. There's been obviously a lot of investor concern about these LCD risk. I know you just addressed it. But Tom, I guess my question is around the existing body of evidence. I'm wondering if you could kind of talk about it in contrast to the Phase IV study. And remind us what percentage now that we have quite a track record with iDose, what percentage are you seeing today either in combination with cataract or with another MIG in terms of the iDose usage? And if some of the studies already bear out evidence of combinatorial usage of iDose with other products or procedures, do you think that is sufficient or the Phase IV study is really necessary to kind of refute any concerns there? Thomas Burns: I'll let Joe start and I might add some color. Go ahead, Joe. Joseph Gilliam: Yes. I'll start on the -- in the context of the trends that we've seen. Certainly, I think they remain consistent, Ryan, with the past commentary. The relative percentage of the procedures done today where surgeons are treating glaucoma with iDose and at the same time, in conjunction with the cataract procedure, it's growing as expected, given obviously, Glaukos has already changed the standard of care for those patients. But at the same time, our efforts remain focused on that interventional glaucoma opportunity, and we continue to see rapid growth in the number of stand-alone procedures. So I would say that the majority of patients last year still saw a stand-alone iDose procedure, but the mix is certainly shifting towards in combination with cataract or in combination with another mix as you might expect, because these physicians are trying to obviously do everything they can to slow the progression of the sight-threatening disease. Thomas Burns: And I would just say, based on the question that you have, most of the Phase IV studies we do and as Joe has mentioned, are really for the payers and for moving into commercial payers and Medicare Advantage. I think surgeons a priority already have the confidence that putting iDose in combination with cataract surgery is going to yield an incremental effect. I think that you will see that in any channel actually do. Likewise, the use of combination therapy of iDose plus an iStent infinite, surgeons will have high confidence that they're going to treat incremental effect. So the studies we're doing are less to be able to drive that portion of the market. They're more to validate surgeons already existing confidence in using these technologies together. Ryan Zimmerman: Understood. And then maybe a question for Joe and Alex even, which is just operating expense guidance and your thoughts on profitability. I mean it's almost getting to a point where despite your best efforts, you will become profitable in kind of the next year. And I'm wondering kind of how you think about the ramp in sales -- or excuse me, the ramp in expenses needed for Epioxa commercialization and kind of what that does or doesn't do to your time lines or at least in our model, our time line to profitability? Alex Thurman: Ryan, it's Alex. I'll start, and I'll start with profitability. Again, just to reiterate what Tom had mentioned in his opening remarks, our near-term focus in managing the business do so on a cash flow breakeven and driving basically operating leverage within the P&L, which we're pleased to say we saw in the first quarter, and we're glad that, that execution is happening. But as we look ahead to your point, we certainly can see with the commercial launches of iDose that we definitely have a fairly clean line of sight towards that pathway of profitability over the next few years. To your point, some of it will depend on the ramp of these commercial launches and the associated revenues that come with it. But as we continue to manage the business towards that cash flow breakeven, you'll see from an operating expense side that we continue to reinvest in the business and reinvest in these commercial launches. And we've talked about the fact that our operating expenses will grow this year, year-over-year. And we feel that way. And I'll just give you some commentary now that as we did overachieve in the first quarter, Tom and I and Joe have talked about adding additional fuel to fuselage and these commercial launches. So you should see the operating expenses tick up slightly and modestly from what we talked about at the beginning of the year, but still in the high teens and still showing that operating leverage overall as we progress throughout the year. Joseph Gilliam: I think, Ryan, the overall -- when you hear Tom and I talking about the incremental spending from DTC or otherwise, it's important to note that, a lot of that is by its very nature discretionary. So as we look forward, you're thinking about making those investments alongside the significant growth that we're achieving and hopefully with the hopes of a return on investment that makes that certainly worth the incremental spend associated with it. So we'll be in a process here where we're continuing to evaluate the effectivity of those efforts and what that return looks like before diving in with 2 feet, if you will, to go full spend on DTC related efforts. We've always been pretty disciplined in how we thought about those types of things. Operator: Your next question comes from the line of Allen Gong with JPMorgan. K. Gong: Thanks for the question. I wanted to start off with one actually on the core U.S. glaucoma business. I think iDose clearly had a really strong quarter, but underlying years glaucoma also did quite a bit better than expected and grew at a healthy clip year-over-year. albeit also a bit of an easy comp, I believe. So when I think about your forecast, your reiteration for flat for 2Q and the year, what are you seeing that kind of supports that outlook? Is it just conservatism? Or are there real challenges that you're seeing out in the market? Joseph Gilliam: Yes, Allen, thanks for the question. I mean you're right in the context that this was the second straight quarter where we've seen about the restoration of growth in that non iDose [ remainder ] or as you said, I think, core U.S. glaucoma franchise. So I think we've certainly seen signs of stabilization of the underlying market there. And I think that our teams are doing a great job in -- on the performance side within that more now more stabilized market. As we go forward, I think we're just not ready yet to make that call. that, that is, I'll call it, the new normal that we're operating in. It's been an encouraging 2 quarters. But as we look forward here, I think it's still safer for us and for investor expectations to be in that sort of more flat year-over-year basis until we've proven otherwise on a sustained basis. There are some things in there. Obviously, I think we benefited a little bit in the quarter from some supply chain disruptions on the competition front. It's hard to measure that. I don't think it's material, but that should subside as we move forward here. So I think we just want to play a couple more innings here of this on that side before we rerate our view on guidance there. K. Gong: Got it. And then, I guess, a follow-up, moving on to Corneal Health. You talked about how you've reached coverage of 65% of the U.S. population with line of sight to reaching 95%, I believe, the number was. How quickly do you think you can get to that 95%? Is that a target you think you can reach by the end of the year? Or is it going to maybe slow down a little bit now that you grab some of the low-hanging fruit? Joseph Gilliam: Yes. Thanks, Allen. In some ways, it's actually been accelerating, as you might imagine, once you announced commercial availability and the transition plan becomes more real. What we've seen is more of an acceleration than a deceleration on that front. Having said that, you also know that hospital systems and even certain other customers have longer cycles for bringing on new technologies and new drugs to the pharmacy network and the like. And so I think we'll continue to make substantial progress here every month and certainly hope that we're getting there or close to that target in terms of realized side of care network by the end of the year. Operator: And your next question comes from the line of David Roman with Goldman Sachs. David Roman: Maybe I could just start on Epioxa here. Could you maybe talk to us a little bit about some of the specific market development efforts that you have underway. And maybe you can kind of break them into whether it's physician and practice education, patient assistance programs and then engagement and education with payers? Joseph Gilliam: Yes. Sure, David. It's Joe. On the Epioxa side, I think about it kind of as follows. So I won't repeat what Tom has already said, and we comment on. There's a foundational element that's first and foremost, when you're kind of going through the stage of a launch. And that is that you get the Sidecar network established, affected trained and everything ready there. The second layer of that is that you're engaging with the payers in a way to establish access pathways and then ultimately from there, further streamlining and optimizing those. And then as you go alongside of that, you start to dial up, I'll call it, the more physician-related and even patient-related marketing efforts. But you don't want to do that too soon in that life cycle until really the overall ecosystem is ready. So a lot of where we're at right now is around the last part of what you said, which is making sure that as we're having success with the site of care network and on the patient side, that the machinery in the middle is working as efficiently as possible to make sure that we're working things through the hub and through our specialty pharmacy, and we're providing that visibility to our customers and to our patients, that our co-pay assistance programs are working as they're intended. And all the stuff that probably is a little less interesting to investors but are -- is critically important to the ultimate success here as we move forward. And as I mentioned earlier in the call, we're really encouraged by that initial burst, if you will, of patients that are going in there. And now we have to get through that process of trying to get them on therapy which can be a lengthy one when you're dealing with a miscellaneous J-code. And so navigating that is paramount for us before we get obviously the formal J-code in the second half. David Roman: Very helpful. Maybe just a follow-up here on iDose. And I know you talked a little bit about this, but could you just talk to some extent whether there was any contribution here from having the reimplantation approval that came early in the first quarter? To what extent that may be giving physicians increased confidence implanting iDose? And how we should think longer term about the interplay between having the readministration label as an iDose TREX? Joseph Gilliam: Yes. Well, I can confirm that we've now seen numerous successful readministration procedures as some of those earliest patients are getting out several years. It's not the predominant procedure being done. It's still a small fraction, but we've seen multiple surgeons do readministration and do so successfully. We've seen payer policy updates occur and a lot of, I'll call it, general progress on that front. So I think we're encouraged, and this is sort of in line with what we always expected that has the benefits of the initial procedure start to wane that both the patient and the provider are going to want to continue that therapy given the clear benefits to the patients. So we're seeing that start to happen. And I think as we look out over the long run, certainly, readministration becomes a much more material part of that overall mix. every month and every quarter that we move forward here, it should be more and more relevant to what we're looking at. But out of the gate, we're encouraged by what we're seeing. Operator: Your next question comes from Richard Newitter with Truist Securities. Richard Newitter: Congrats on the quarter. Just wondering if you could give us any kind of color on what's happened to the provider base as this transition to Epioxa is taking place? I'm not looking for you to necessarily give us a specific number of doctors or your installed base per se. But do you guys envision just a big concentration over the next few quarters in a small number of providers' hands to getting all of this refined and figured out from a consistency on the payment standpoint? Or is this potentially going to be broader and not as concentrated than maybe what I'm suggesting, as we think through this? Just trying to get a sense for is it really a dramatically fewer number of doctors? Or is it going to be potentially broader than that? Joseph Gilliam: I appreciate the question, Richard. I think -- well, first, I think on the definition of how you do concentrate it. I mean I think relative to our iDose user base, for example, inherently in keratoconus even with Photrexa, you had a relatively concentrated group of centers and sites that were doing the procedures. Now I won't surprise you and I think that with Epioxa, it was our intent, obviously, to make sure that your initial site of care network is as concentrated as you can reasonably be to try to make sure you're close enough to the vast majority of the U.S. population. So inherently, our Wave 1, if you will, efforts have been very targeted around the country in that context. But I'll tell you, in some respects, our wave 1 efforts have gone maybe a little too well. And that's caused us to have to accelerate some investments to meet the needs of that customer base and their patients that are coming out of that. So there will always be earlier adopters than mid adopters in a launch, and we'll see that here, obviously, part of Epioxa. But I'm not particularly concerned about any significant concentration issues in any 1 or 2 or even 10 customers. I think it's going to be measured much more in hundreds of customers ultimately than it is in single digits. Richard Newitter: Yes. That's helpful. And then is there any one area where the spend that you're stepping up from a position of offense, clearly is directed now that you've had some early learning experiences? In other words, where are the frictions most notable either to a doctor not wanting to do this, not wanting to buy Epioxa and move forward? Or is it more on the pull side from the patients and the demand awareness increase standpoint? Joseph Gilliam: Yes. I would say it's actually maybe a bit more -- and so if you think about this, whatever -- there's always going to be conversation in education, both the sales force and the broader teams to make sure people understand what we're doing, why we're doing it, how we're doing it as it relates to the Epioxa launch. And certainly, in the future, as we've talked about, there'll be a lot more of that spend oriented towards, I'll call it, more growth and DTC education related. Right now, in this moment, where a lot of that spend is going, it should surprise you, is much more in that initial lift, confidence and process associated with claims prosecution and adjudication. It's about making sure that customers understand how it works that they're successfully seeking prior authorizations that were supporting that process where appropriate to plan and then ultimately getting those patients access to that care. So a lot of it is much more in the machinery, I'll call it within the market access world than it is necessarily in marketing or even sales from that standpoint. Operator: Your next question comes from the line of Mason Carrico with Stephens Incorporated. Harrison Parsons: This is Harrison on for Mason. Would you be willing to provide some color on the utilization of the various cohorts of surgeons trained on iDose? Is there portion of the surgeon base today that you would say has matured at this point with more stable utilization? Or are you still seeing pretty robust utilization growth across these older cohorts of surgeons, too? Joseph Gilliam: Yes, Harrison, I'm not sure I would say that we're reaching stabilization, if you will, in any one cohort. I mean if you think about it, even for some of the earliest adopters, there's still ongoing enhancements to how they think about interventional glaucoma, the amount of time they're spending on that versus other areas of their practice, let alone, as we talked about coming into this year and again on this call, the movement from, I'll call it, the more traditional fee-for-service patient population into the commercial and Medicare Advantage world. So I think we continue to see growth across both our more mature customer base as well as certainly with the addition of new surgeons and new practices throughout the country. So we're still pretty early in that overall evolution curve, if you will, of this launch. Harrison Parsons: Got it. Yes, that's helpful. And then second question here. Could you update us on the progress you've made this year from a commercial payer standpoint on iDose? I think the middle of last year, you called out more than 50% of Medicare Advantage and commercial policies had a positive policy in place. Where does that percentage stand today? Joseph Gilliam: Yes. So I'm not sure it's changed a significant amount in this past quarter, but just to put a line of sand sitting here today with iDose, we have about 99% patients have an access pathway in the commercial and Medicare Advantage arena. To the point you made in your question, about 50% of those patients are in plans where there's a specific policy attached to it and the remainder, where there's silence, we're certainly seeing successful pull-through on that. I'll also add that in these, I call the early days of the real efforts here, we're seeing a very, very high success rate in the context of the prior authorizations that are submitted for these patients across that landscape, which is what you'd expect given the statistics I just got done citing around the broader patient access pathways. Operator: Your next question comes from the line of David Saxon with Needham. David Saxon: Congrats on the quarter. I wanted to start on the specialty pharmacy channel or with RCM. So I mean, I imagine the docs doing Epioxa were previously doing buy and bill with Photrexa. So maybe you were seeing you. So what's the feedback been from them in terms of process and whether there's any friction in that kind of change of workflow? Joseph Gilliam: Yes, David. So I think that historically speaking, with the mix, there were certainly those customers who prefer to buy and bill Photrexa and those customers who acquired it through the pharmacy channel, in this case, in our case, Orsini, and that continues going forward. I think it will surprise you that certainly amongst our nonhospital-based customers the vast majority, certainly out of the gate are choosing to access the drug via our specialty pharmacy. And so that does mean some of them are doing this for the first time with our channel. I think it's a little too early to comment specifically around that dynamic because, again, as what I said earlier, when you're in the miscellaneous code environment, even with a perfectly streamlined, I'll call it, hub and specialty pharmacy process, the process to getting that access for the patient is much more elongated. And we've only had the drug on the market now for a month. So from that standpoint, I think we're still in the early days of adjudicating those claims and getting access to the drug via the SP channel. But more to come on that. And we're certainly encouraged with the work that Orsini's been doing to make sure that they're in network with these various plans. And I think ultimately, that's going to accrue to the benefit of our customers who choose that channel. David Saxon: Great. And then maybe one for Alex, just on the group gross margin. So maybe remind us what your expectations are for the year. And then as we go through iDose and Epioxa looking to next year, kind of how we should think about gross margin potential? Alex Thurman: You bet. Thanks, David. I mean -- we saw 84% margin in the first quarter, which was up 120 basis points from last year. So we -- that was please to see that. In the last call, we -- I gave a range for the year of an expectation of 84% to 86%. And sitting here today, we still continue to feel comfortable with that guidance range for the year with expected accretion over the course of the year as products like Epioxa become a greater share of the mix. And then to your point, looking forward in 2027, we'll comment more further when we get closer, but you would expect accretion as these products continue to ramp. Operator: Your next question comes from the line of Michael Sarcone with Jefferies. Michael Sarcone: Thanks for squeezing me in here. So just a follow-up on the Epioxa specialty pharmacy question. I mean, when you think about buy and bill, understanding that specialty pharmacy is coming first, can you talk about options that you may have or are evaluating to enable or efficiently enable buy and bill for Epioxa down the road? Joseph Gilliam: Yes, Michael, I, probably, won't go too far into the details around that. But obviously, there's always an ongoing education process around from our reimbursement teams and the experts within that as well as some of our site-of-care teams and the like to make sure those customers understand how the buyable process will work, the key terms and conditions that we have in terms of our payment terms and things like that to make sure that we can enable that where customers ultimately choose to buy and bill the drug. Obviously, when they think about it from a business standpoint, that can be an attractive option to them when they've got the right building blocks in place to enable buy and bill activity. Michael Sarcone: Got it. Just a quick follow-up on iDose Trio. What's the latest and greatest there in terms of time lines and where we stand. Thomas Burns: Yes, I'd be happy to address that, Michael. The -- as we said before, we would complete and we have completed the clinical study for iDose Trio. We'll monitor those patients over the course of this year. We plan to file by the end of this year, and we expect to be in position for targeted approval in the fourth quarter of 2027. So we're hitting on all marks in all cylinders. And as we talked about before, when we did our human factors analysis, we saw a real strong preference for this new design on the order of 90%. So we're encouraged about what we think we'll be able to bring to the marketplace. And more encouraged by the ability to drive in-office use over time. Operator: Your next question comes from the line of Joanne with City. Joanne Wuensch: Can you hear me okay? Joseph Gilliam: We can. Joanne Wuensch: Excellent. Now when we do some of our due diligence on IDS, Physicians are still pushing back or pushing back, maybe still is a wrong word, on the price tag of it. And honestly, I'm a little confused by that since you do have the J-code and you do have the reimbursement in place. So I'm sort of curious what your initial reinterested like and what the responsive to that. Joseph Gilliam: Yes, Joanne, I think -- I mean, you'll always have customers with varying views, but I'm not so sure that, that's really a material of a driver today as it was when we launched. Any time you launch a pharmaceutical like we have with iDose or Epioxa. There's a period where you have to make sure that your customers understand the why and how, right? But at this point, sure, there will always be some of that. But for the vast majority of the customers, certainly, you can see with the results, we continue to add them and drive that forward. We can continue to overcome that challenge where it represents itself. Operator: And your next question comes from the line of Steven Lichtman with William Blair. Steven Lichtman: Just a couple of quick ones on Epioxa. First, as it relates to the transition from Photrexa, are you still anticipating it Photrexa to fully sunset by the end of 3Q? Or has there been any change in that plan? Joseph Gilliam: No change and consistent with what we've communicated to our customers that we would expect in the third quarter to have that transition taking place. And ultimately, we will have Photrexa available in limited quantities through a different mechanism where their physician may require an epi off-based procedure thereafter. But I wouldn't call that out as a real material consideration for certainly the commercial aspects of it for you all. But for those physicians who seek ongoing access to Photrexa. We do have a pathway which we're going to make it available then. Steven Lichtman: Great. And then obviously, we're at the beginning of the runway with Epioxa in the U.S., but just thinking longer term, what is the potential for expansion of your platforms outside of the U.S., whether it's Photrexa or with Epioxa. Joseph Gilliam: Yes. I think it's -- it has to be much more selective, and it won't surprise you, Steven that today's environment where you're navigating a combination of reference-based pricing initiatives as well as other things in terms of payer dynamics and the like. There are certainly some markets internationally that can support the type of therapies that we're talking about with Epioxa and with iDose. But also, we'll have to continue to evaluate that as the landscape shifts that we bring success for generations of products forward. and bring as much of this technology over time as we can internationally. But it's not something that at the moment I would be factoring in any material way into your models. Operator: Our final question comes from the line of Anthony Petrone with Mizuho Group. Anthony Petrone: Congrats on the quarter. Maybe one on just keratoconus just broadly, when you think about the disease state that it's just -- it's underdiagnosed you're getting most of these patients that come in with Stage 2 severity, just thinking about the Epioxa opportunity, what is the really true TAM from a patient standpoint in terms of this disease state? I know it's kind of considered an orphan disease, but I think the prevalence probably stretches to somewhere between 80,000 and 100,000 patients. So what is the true TAM in terms of prevalence in the U.S.? And what is the diagnostic pathway to get more patients into the funnel? Joseph Gilliam: I think, Anthony, it's a great question in the context of exactly the why behind what we're trying to achieve here. So when you think about keratoconus and as a condition in where we've been, the 18,000 to 20,000 eyes that happen getting treated, we believe is likely going to be proven to be a fraction of what really should be getting caught should be driven to detection and ultimately into therapy over time. I think our best estimates here suggests that there should be between 50,000 and 100,000 keratoconic eyes a year at a minimum that are getting diagnosed and treated with Epioxa cross-linking. And -- but we're going to have to find that number out ourselves as we move forward with increased debt initiatives around awareness and detection and ultimately access that therapy. But we do believe that over time that this could be proven to be more of a rarely diagnosed disease than a rare disease. But today, it operates like a rare disease and we're going to make those investments accordingly. Operator: With no further questions in queue, I will now hand the call back over to Glaukos Corporation for closing remarks. Thomas Burns: Okay. I want to thank you all for your time and for your attention today, and thank you as well for your continued interest and support of Glaukos. Goodbye. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Good afternoon, and welcome to the Carvana First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead. Meg Kehan: Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter 2026 earnings conference call. Please note that this call is being webcast and can be accessed along with our Q1 shareholder letter and supplemental financial tables on the Investor Relations section of the company's corporate website at investors.carvana.com. Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that this discussion contains forward-looking statements within the meaning of the federal securities laws including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of these factors can be found in the Risk section of Carvana's most recent Form 10-Ks. These forward-looking statements are based on current expectations as of today, and Carvana assumes no obligation to update or revise them. Our commentary today will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR website. And with that said, I would like to turn the call over to Ernie Garcia. Ernie? Ernie Garcia: Thanks, Meg, and thanks, everyone, for joining the call. The first quarter was another outstanding quarter for Carvana. It was another quarter full of records, including a record 187,000 cars sold in a single quarter, a record GAAP operating income of $581 million, and record adjusted EBITDA of $672 million. And it was our ninth straight quarter of being the most profitable and fastest growing automotive retailer, as well as our sixth straight quarter of 40% year-over-year growth. The quality of our customer offering, the fact that it naturally gets better as we get bigger, and our experience over the last thirteen years lead us to believe that demand is available at the speed that we are able to scale the business effectively. As it has been since the beginning, we expect our execution will be the biggest determinant of the speed and degree of our success. Execution in a complex operational scale business like Carvana that is growing at 40% is an inherently difficult problem. While the best case scenario in a vacuum is to avoid bumps in the road, those bumps are a reality of building ambitiously. This means success requires building a better system with better scaling properties, and assembling a team and building a culture that drives intensity, focus, accountability, and resilience. With the right team and culture, the bumps in the road create pressure that makes us better. In the fourth quarter, we hit a bump in recon that gave us another chance to prove that we assembled just such a team. The recon team is using that pressure to make us better. When we realized we were off track a bit, the first thing the team did was turn up the operational intensity across the network, setting higher expectations for each facility and leaning into the operational structures we have built over the last several years. This allowed us to make rapid progress nationwide. In addition, they quickly assessed the underlying cause of the variation in facility performance, most notably newer managers that could use more detailed direction and more powerful tools to help them execute at the level we were aiming for, and adjusted their road map to prioritize building the tools that mattered most immediately. Over the last couple months, they built additional data integrations, developed tools to help managers make faster, higher quality decisions in how they staff their lines and how they optimize flow through their paint lines, and implemented a productivity tracker to ensure feedback reaches the right groups quickly. To accomplish all this and to ensure the tools address real world operational needs, the product team spent weeks on the ground in the facilities that needed it most, rolling out, testing, and iterating with the operators until they were making a real measurable difference. We will continue to iterate on these tools, and we will roll them out to the rest of the facilities over the coming months. The result is that so far in April, we are operating just shy of our all-time best in labor efficiency throughout the network. This will take a little time to flow through to the financials as cars carry the cost of reconditioning at the time they were produced, not at the time they were sold. We still have a ton of work to do across reconditioning and other operational and technology teams, but every time a team reacts that quickly to a problem, it excites us. Once again, the people on Team Carvana have proven that they are exceptional, that they are resilient, that they are up to the challenges we will inevitably face as we scale Carvana to millions of transactions per year. We remain firmly on the path of achieving our mission of changing the way people buy and sell cars, and to selling 3 million cars per year at 13.5% adjusted EBITDA margin by 2030 to 2035. The march continues. Mark. Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis. Q1 was a strong quarter driven by our team's continued focus on profitable growth and strong execution. We set new company records for retail units sold, revenue, gross profit, SG&A expense per retail unit sold, GAAP operating income, and adjusted EBITDA. Retail units sold totaled 187,393 in Q1, an increase of 40% and a new company record. Revenue was $6.43 billion, an increase of 52%. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the first quarter was driven by our three long term drivers of growth: a continuously improving customer offering; increased awareness, understanding, and trust; and increasing inventory selection and other benefits of scale. The first quarter marked our ninth consecutive quarter of industry-leading retail unit growth and margins. Non-GAAP retail GPU decreased by $58, primarily driven by higher non-vehicle costs and lower shipping fees. Looking ahead to Q2, we expect retail GPU to increase sequentially but to decrease year over year due to approximately $100 tariff-related benefits last year, lower shipping fees and higher non-vehicle costs this year, and approximately $100 to $200 of impact from narrower industry-wide wholesale-to-retail spreads this year. Non-GAAP wholesale GPU decreased by $83, primarily driven by increased wholesale vehicle volume and gross profit per unit that was more than offset by lower wholesale marketplace gross profit and growth in retail units that outpaced wholesale gross profit. Non-GAAP other GPU decreased by $88, primarily driven by our decision to give back to customers in the form of lower interest rates, partially offset by higher finance and VSC attach rates. Q1 was another strong quarter for levering SG&A expenses. Our 40% growth in retail units sold led to a $170 reduction in non-GAAP SG&A expense per retail unit sold, including a $36 reduction in operations expenses and a $226 reduction in overhead expenses. Advertising expense increased by $92 per retail unit sold as we continue to invest in building awareness, understanding, and trust in our customer offering. With a nearly 2% market share in the U.S. used vehicle retail market compared to approximately 20% e-commerce adoption in non-automotive retail verticals, we believe we are in the early days of customer awareness and adoption of our model. We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure. Net income was $405 million in Q1, an increase of $32 million. Net income margin was 6.3%, a decrease from 8.8%. Adjusted EBITDA was $672 million, an increase of $184 million and a new company record. Adjusted EBITDA margin was 10.4%, a decrease from 11.5%, primarily driven by increased retail revenue per unit resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $581 million, or 86% of adjusted EBITDA, an increase of $187 million and a new company record. As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time. In Q1, we again reduced our net debt to trailing twelve-month adjusted EBITDA ratio to 1.1 times, our strongest financial position ever. Q1 was a record quarter that again demonstrated the significant power of our business model. Looking toward Q2 and assuming the environment remains stable, we expect a sequential increase in both retail units sold and adjusted EBITDA, leading to all-time company records on both metrics. We remain on track to deliver significant growth in both retail units sold and adjusted EBITDA in full year 2026. In conclusion, our Q1 results were outstanding. Our team is intently focused on driving profitable growth, and we remain excited about progressing toward our goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars. Thank you for your attention. We will now open the call for questions. Operator: We will now begin the question and answer session. The first question today is from Christopher Pierce with Needham. Please go ahead. Christopher Pierce: Hey, good afternoon. Ernie, in your remarks, you talked about new tools at underperforming sites where there are new managers. I just want to understand: are these tools brand new, and could they help top-performing sites further improve, or are they to bring those underperforming sites in line with your top-performing sites? Ernie Garcia: Sure. Well, first, I want to start with just giving gratitude and credit to the reconditioning team. I think they took it very personally when we did not have a perfect fourth quarter, and they reacted extremely well. That is why I wanted to make sure that I spent some time in our comments giving them credit. I am extremely impressed and proud of how hard they worked and how quickly they made a difference. I think there were a number of things that were done. The new tools that were discussed are net new tools, and those are tools that we hope will drive additional fundamental gains over time. I think that will take time and we will see how powerful that ends up being, but I think they are fundamentally value-added tools that are not in the vast majority of our facilities yet, so we will roll those out over time. To me, the way that we hope this goes over the next many years is we are scaling a big business that is operationally complex very quickly. We are inevitably going to run into bumps in the road. Every time you run into a bump, it is a chance to reevaluate what you are doing and to try to learn from it and get a little better. I think the team dug in, reevaluated the road map, found opportunities that are potentially bigger, and focused and made a huge difference quickly. We are very excited about those opportunities. I would not want to set expectations too high beyond that we think we are very much back on track, but if we had to pick a direction, the tooling that we are building is exciting and gives us more room for fundamental gains over time. Christopher Pierce: Okay. Perfect. Thank you. And then just a bigger-picture question. With new vehicle prices, tariffs, and gas prices, do you think there is some portion of people tapping out and dropping down to used, and could we see, when off-lease supply and more supply comes back, used go north of 40 million units for a couple of years because of this? And if that did happen, would that affect other GPU as you tilt more prime versus subprime? I would love to hear your thoughts. Ernie Garcia: Sure. Car prices are high. These numbers will not be exactly right, but the last numbers that I remember are kind of pre-pandemic: general consumer goods are up 25% give or take; cars are up 35% to 40%. So car prices, all else constant, are higher, and that has to be impacting people. Generally, the elasticities for cars at the aggregate level are not super high. People need cars to live their lives, and they get tired of the car they own, so aggregate transactions tend to be relatively stable. There is room, though—everything you pointed to is probably a directional positive for the overall market size over time. But realistically, the scale of those positives relative to the scale of our growth is very small. Our view is that most things that happen to the market are going to impact us in a proportionate way, but what we are doing is dramatically more powerful than that, so we stay focused on all the fundamental tools we are building, delivering great customer experiences, and doing the hard operational work to scale effectively. On your last point on rates and the mix between prime and non-prime customers, our balance of customer credit is pretty similar to the market overall. The profitability per retail unit sold for prime versus non-prime is not different enough to where moves in those distributions matter all that much to overall other GPU. Those things can move around; there will always be a little macro effect that moves things around by tens of dollars, give or take, but in general, the most important thing is that we keep delivering great experiences and stay focused on us. That is where our focus remains. Operator: The next question is from Daniela Haigian with Morgan Stanley. Please go ahead. Daniela Haigian: Hi, Ernie and team. Thanks for taking the question. My first one is on SG&A leverage. Most line items this quarter, including logistics, came in lower as a percentage of sales versus the run rate we have seen the last few quarters. How should we be thinking about operating leverage in fixed costs? Mark, you mentioned that. And then more near term, how should investors think about logistics expense in a rising fuel cost environment? Mark Jenkins: Sure. I think it is helpful to break that down into a couple of categories. One, operations expense: that is the expense associated with executing a transaction, providing customer service, fulfilling the transaction via our logistics network and last-mile delivery network, and all of those expenses that are more variable in nature. We had a strong quarter on that front, with operations expenses down slightly year over year. In the longer term, we definitely see an opportunity to march those down further on a per retail unit basis. In any given quarter, they can be impacted—you mentioned fuel prices. That would definitely have an impact because logistics is part of that operations expense. I would not expect that impact to be particularly large, but there is some impact there. The second category is overhead expenses. That is an area where we have shown a lot of strong leverage. Overhead expenses are more fixed in nature. They can grow due to investments that we make—for example, we are making some investments now in additional technology, including AI-related technology. That would be in that overhead expense number. So they can grow, but it is much more fixed in nature, and we do expect to see significant leverage in that overhead line item over time. Just to state the third: we have been marching up advertising spend. Given where we are in our company’s life, we think there is still a lot we can do to continue to raise understanding, awareness, and trust of our offering. We are in the relatively early days of online auto retail adoption. Obviously, we are playing a big role in telling that story, and we think there is a lot of value to us continuing to invest in advertising. Those would be the three big categories and some of the dynamics. Daniela Haigian: Thanks, Mark. That is helpful. Second question, a bit longer term, on CapEx. Recognizing you are only 20% utilized on your current real estate capacity of 3 million, but at this rate of growth, you are going to need to think about builds beyond that over the next few years. You had a helpful exhibit in last quarter's investor letter on eventually building out greenfield production. What would that look like? What is the team’s philosophy on building that capacity? Mark Jenkins: Sure. The way I think about our production growth plan—and a lot of our capital investment is really related to growing production and production facilities—right now, there are multiple ways we are doing that. One is adding staffing into existing facilities—that is no CapEx. Second, we are integrating ADESA locations, which basically means going into existing ADESA buildings that have already been constructed, implementing our Carly proprietary software system to do inventory and reconditioning management in those centers, and adding some equipment. That is a very CapEx-light way to add production capacity. Third is to start doing full build-outs of existing ADESA facilities. We have the land, and we can expand the buildings and structure in order to add more lines into those facilities. We did talk about that in our last letter. We think those are very high-quality investments to be making and expect to start making those investments over the course of this year. Last is greenfield IRCs. That is not a priority at this time. Our bigger priority is executing those first three types of production expansion. Up to this point, we have been really focused on the first two—ramping capacity in existing facilities and integrations. This year is the year where we will start doing some of those full build-outs, which we think make a lot of sense. Operator: The next question is from Rajat Gupta with JPMorgan. Please go ahead. Rajat Gupta: Great. Thanks for taking the question, and congrats on the execution around the reconditioning cost. I had a question on the wholesale-retail spread comment, Mark, that you made in the prepared remarks. Is that impact that you are already feeling in the month of April based on how retail prices are tracking? Or is that more of an expectation around May and June, or baking in some sort of slowdown in demand because of gas prices and sentiment tied to the war? Any more color around that $100 to $200 wholesale-retail spread headwind would be helpful. I have a quick follow-up. Mark Jenkins: Sure. What we are seeing on spreads and what we have seen year to date really starts with a very hot wholesale market in Q1. Wholesale prices really appreciated in Q1. That appreciation can happen in any given year as a lead-up to tax season, but the appreciation we saw early this year both started earlier and was of a larger magnitude than we have typically seen in past Q1s. A strong wholesale market should benefit us—we had one of our highest quarters ever on wholesale vehicle gross profit per wholesale unit sold in Q1, commensurate with that hot wholesale market. But what we are seeing is that wholesale appreciation was not fully passed on into retail prices, and that is causing a little bit of that wholesale-to-retail spread compression that we are pointing to. Rajat Gupta: Got it. And just to follow up on the previous question around SG&A: the sequential pickup in the overhead expenses—it is probably the highest we have seen in a while from 4Q to 1Q, particularly since the turnaround. You mentioned some investments around AI and such. Any way you could double click on that and give a little more detail? Are there any one-timers—maybe some of new car acquisitions—just a little more granularity would be helpful. And any color on overhead expenses for the year would be helpful. Thanks. Mark Jenkins: Yes, sure. There are some seasonal or one-time components in there as well as some investments. We typically see Q1 as a high quarter for payroll expense related to share-based compensation because we typically have large vesting of share-based compensation in Q1, larger than some other quarters. In addition, the weather events in Q1 actually did have some impact on overhead expenses where we spent much more than a typical winter quarter on snow plowing and removal, and so that is in that number. There are ongoing investments—things that I would not think of as seasonal or one-time—including technology investments and some incremental investments in facilities that I think will have us operating at a higher level on overhead expenses than we were in 2025. But I would not expect to see overhead expenses increase at a rate like that. Thinking of Q1 as something more like a new level is probably more appropriate. Operator: The next question is from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia: Hi, and congratulations on getting wholesale ops more optimized. With that, it sounds like you might be positioned to hold retail GPU for the full year, and I am curious on your thoughts on that—in terms of seeing improvement in the back half of the year again? Ernie Garcia: Sure. We try to stay away from giving too much precise color there. But the things we have generally said in the past we continue to believe. There is a little bit of seasonality in those numbers, and then there are fundamental gains that we are going to continue to seek to attack. Across the sum of the GPU line items plus expenses, we feel like we have clear visibility to 13.5% adjusted EBITDA margin, which is our goal. There are always a couple of little interesting stories that pop up from time to time—whether it is gas prices or impact from Iran or recon expense or whatever it is. As a general matter, we think we are in an environment that looks similar to the past, and we are just going to keep chugging forward. Sharon Zackfia: Secondarily—sorry, I am losing my voice—for the OBDD, there had been a lot of talk about tax refunds and the benefit that you might see in your business. That happened right around the time the war broke out and gas prices spiked. As you went throughout the quarter, did you see any change in the complexion of your customers across income cohorts, or does it look very similar to what you were seeing in 2025? Ernie Garcia: We grew by 40% in the quarter, so overall I would say we are extremely happy with the way the business performed and the way the team operated during the quarter. It is a little hard to massage out some of those effects. There was an expectation that tax dollars would be larger; data suggests that is true and that may lead to additional vehicle demand. We only see our own data, and that did coincide very closely with the Iran situation. It is hard to disentangle, but our view would be that it probably was not as strong as expectations in terms of converting to vehicle demand and was probably more similar and maybe even a touch softer than years past. Overall, not really a huge event for the quarter and hard to separate the tax season effect from the gas price effect. Since then, it feels like things are operating the way that we would expect, and that is true almost any way you look at the business—whether it is volume, seasonality, distribution of customers, or anything like that. Operator: The next question is from Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Hi, good afternoon. Great quarter—congratulations. With respect to gas prices, clearly the company had a very strong quarter and the commentary in Q2 has been very strong as well. As you think about gas prices and potential impacts to the consumer, and looking over time over prior spikes, have you noticed over time that your consumer acts differently when gas prices spike? Ernie Garcia: I think there are two potential impacts. One is what happens to aggregate sales and one is what happens to mix of sales. What we have seen in the past is that the impact to aggregate sales is usually pretty small and, over any reasonable period of time, largely massages out. In terms of mix of sales, we do see some movement—the expected things. Over the last couple of months, we saw large SUVs decrease as a percentage of sales a little bit. We saw EVs increase again as a percent of sales. Even over the last several weeks, we have seen that normalize or go back closer to baseline—not all the way to baseline, but closer. Those things will continue to migrate. The way we try to manage that is to build a system that is adaptive: we put all the cars that customers could want in front of them, and based on the demand signals we see every day, we adjust what we are buying every day to match that demand. Given how quick our turn times are, generally the system adapts very quickly. There will be impacts directionally as would be expected, but we do not expect them to be a central part of the story unless the impacts were to get much, much larger. Brian Nagel: Then my second question, with regard to the narrowing spreads between retail and wholesale. Is this more of a short-term phenomenon where it maybe started a couple of quarters ago and is now correcting? Or do you think there is some longer-term or multi-quarter shift happening within the marketplace? Ernie Garcia: Our pretty strong view is this is a transitory impact. It is hard to know exactly what drives these movements. The wholesale-retail spread generally follows a pretty clear seasonal pattern, and in any given quarter it tends to bounce around a bit around the normal seasonal expectation. This year heading into tax season, the wholesale market was really strong. Normally, the retail market would catch up on a 30- to 60-day lag. It seems like the retail market is catching up, but on a slightly longer lag. There is room for that to normalize relatively quickly, and room for it to kind of hold where it is. Either way, we do not think it will be a central part of the story. As we look at it today, the wholesale market is ahead of the retail market, and that led to the callout. Operator: The next question is from Jeffrey Lick with Stephens Inc. Please go ahead. Jeffrey Lick: Good afternoon. Thanks for taking my question. As you become bigger, you become a bigger part of the entire used ecosystem—not just retail but wholesale. Looking at your wholesale numbers, you wholesaled less as a percentage of your retail, down to 44.6% from 40.4%. Your marketplace units were actually down, and your wholesale GPU was $1,327. I am curious how that dynamic is playing out in terms of your ability to source and your decisions. You would think if you can get that much money wholesaling, you might have wholesaled more, but it appears that you retailed more. Can you talk about the dynamics there? Ernie Garcia: We are extremely excited with how the business is operating overall. One of the central things we are always trying to balance is making sure that we are managing the business as best we can while growing at very high rates. The wholesale side of the business does have operational impacts on the overall business, most notably in last-mile logistics, which is an important part of our system that we have to carefully manage to handle the growth. We are always making trade-offs there and trying to make sure we are doing smart things. In general, all the signs we see are very good; the teams are executing extremely well. The wholesale team continues to unlock fundamental gains and is doing great—you see that in the wholesale vehicle results. In wholesale marketplace, we are also building a lot of fundamental value that feels very exciting. We noted in the letter that we feel like ADECLAIR, our digital auction platform, is now a best-in-class platform. We have a lot of reasons for believing that, and it is pretty exciting. We have built something that is extremely high quality, growing very quickly, and adding value to the ADESA system and to the Carvana system as we buy cars wholesale and dispose of most of them through that platform. We also shared a number of speed stats that are fun—reductions in the rate at which we can move cars through the system. The goal of building the entirety of the Carvana system is to deliver incredible customer experience on both sides of the transaction and to minimize the expense necessary to allow customers to trade cars with each other. If you look at cars that we are buying retail, putting through our system, and selling to a different customer, that entire process, in the fastest case, took place in just under five days. The customer gets a value for their car, goes through verification, title work, schedules drop-off or pickup, we land the car at our hub, put it on a multi-hauler, drive it to an inspection center, inspect it, run it through recon, photograph it, put it up on the site, price it in an automated way, another customer finds it, goes through the entire purchase process, schedules delivery, we put it on a truck, deliver to them—and it is theirs. That took 4.8 days. That is remarkable. We are making a lot of investments to keep the system very tight, and we are getting a lot of fundamental value out of that. We think that is going to unlock a lot of value over time. Overall, we are very excited by how the system is performing. Operator: The next question is from John Colantuoni with Jefferies. Please go ahead. John Colantuoni: Great. Thanks for taking my question. On other GPU, can you give us a sense if you see an opportunity to incrementally invest some of the financing GPU into growth as you have done in recent quarters? Or is that reinvestment largely behind you so that other GPU is more or less at a run-rate level at this point? Ernie Garcia: Thank you. In the quarter, we were at 10.4% adjusted EBITDA margin. In the past, we have provided walks that we think are relatively straightforward to get to our goal of 13.5% that basically include leverage in fixed costs and getting to marketing dollar per unit spend that is similar to our more mature cohorts. If you do that walk, it continues today to be pretty straightforward, and the math is approximately the same. What that leaves from there is room for any place where we make fundamental gains—whether we get more efficient in any of the GPU line items or in any of the variable cost line items—that gives us room to share value with customers. Where we share value with customers will not necessarily always be in the exact place we unlock it, but we are seeking to unlock it in every part of the business. We have projects that we are very excited about in every single one of those line items—every expense line item, every revenue line item—and they are all credible projects that we think can make meaningful differences in the business. We have not done them yet, so we have to go unlock that value. Then, as we unlock it, our plan is to share that with customers. We do think there is going to be value there to share with customers. If we execute really well, it could be significant, and even with doing that, we can hit our goals, which has us excited—but there is a lot of work to do. John Colantuoni: And one on advertising. Mark, you talked about spending more. Could you give a sense for what advertising channels you are seeing the best returns, and how you think about advertising fitting into your broader growth strategy over time? Is there a near-term ramp in spend in a particular market and then, once you hit a level of mind share, you can pull back? Mark Jenkins: Absolutely. Our long-term growth strategy has three pillars. One is continuing to improve the product and customer experience—an area where we have made and hope to continue to make significant gains. Second is building increased awareness, understanding, and trust—that is the pillar where advertising plays a role. Advertising cannot be the only component—great customer experiences, word of mouth, and repeat customers also matter—but advertising is certainly a component. Third is increasing collections and other benefits of scale, including adding more inventory pools to put more cars closer to customers. On advertising, we still feel like we are in the relatively early days of telling our story, so we do see opportunities to continue to advertise more. I would expect that advertising to be very broad-based across many different channels as we seek to reach different audiences and meet them where they are. In the very near term, we have not provided too much commentary on our advertising outlook, but if you look over the last two to three quarters, you will see relatively consistent advertising expense per unit, and I think that is a reasonable way to think about where we are today. Operator: The next question is from Analyst with Northcoast Research. Please go ahead. Analyst: Thanks for taking the question. I wanted to switch gears a bit and talk about your priorities on the new car side. I think you are up maybe six or seven Chrysler or Stellantis dealerships now. Any updated perspective on where you are seeing benefits? I know you have said in the past it is a learning process, but with the pace of these acquisitions continuing, hoping you could provide more context. Ernie Garcia: Thank you. I am going to apologize in advance—you are welcome to ask another question—but our answer remains the same. It is still early. Stay tuned. We will share more when it is time to share more. And as I said, if you have another question, you are more than welcome to ask it. Analyst: Understood. I will stick on the other businesses as well. We continue to see mobility and autonomous offerings rolling out in more cities. You have a really good asset, and we have talked about capacity at the reconditioning centers. Have you game planned how you could facilitate those businesses potentially as a service provider, and any updated thoughts on evolution of the business model? Ernie Garcia: We are always paying attention, and we try to be thoughtful about what opportunities exist given the assets we have built. We balance that with where the best place is to put our focus. We clearly have an opportunity to continue to grow a lot very quickly, and that takes operational discipline and effort. That will continue to be our primary focus for the foreseeable future, but we are always paying attention. Operator: The next question is from Marvin Fong with BTIG. Please go ahead. Marvin Fong: Great. Thanks for taking my question. Congratulations—I think this quarter you are the top used car dealer in the country. Question on inventory. From the Q, it looks like it grew quite a bit less than sales. Was that partly a function of bringing operational efficiency up and getting recon in order? Secondarily, with what looks like pretty lean inventory relative to your sales growth rate, how do we think about your pricing power—acknowledging what you said about spreads? It would seem to me you have pretty good ability to exercise inflation power with this level of input. Thanks. Ernie Garcia: Last quarter, inventory was up approximately 40% year over year. This quarter, it was up a little over 30% year over year. That directional change is correct and implies our turn times have gotten a bit faster. That can be a not-surprising seasonal move as you head out of tax season where you tend to have the biggest discrete change in sales rates, and you can quickly eat through inventory that you are building up prior to that. There is no question that if we could press the inventory button and have tens of thousands more cars, we likely would, and that would probably result in additional sales as long as we were able to manage all the recon and operational complexity. That is part of building this machine. We have to keep building it; as we build it, we will get to bigger scales. As we get to bigger scales, we will have more inventory and more selection for our customers, which will result in better conversion rates. That is the flywheel of the Carvana business that we have to keep working hard to unlock. Marvin Fong: How would you characterize the pricing environment? One competitor is out there discounting. It is a fragmented market, but what is your view on pricing discipline across the industry? Ernie Garcia: Nothing too notable to call out. In a way, that is implicit in the wholesale-retail spread we talk about. When we measure that, we are looking at various wholesale market indicators and various retail market indicators, and that captures where pricing is for the industry in sum total. We noted some mild differences versus average, but I would not associate that with pricing discipline so much as the evolution of the last couple of months. Nothing notable to call out there. Operator: The next question is from Andrew Boone with Citizens. Please go ahead. Andrew Boone: Thanks so much for taking the question. Ernie, I wanted to go back to some of the tools you rolled out this quarter at IRCs—specifically centralized planning. Can you talk about moving some of your lower-performing IRCs more towards best-in-class performance through more centralized planning? What is the unlock, and how do you create more of a uniform system across all IRCs? And in the letter, you called out ADESA Clear as a best-in-class digital auction. Can you speak to the longer-term opportunity of what you may be thinking about for Clear and the broader potential for that asset? Ernie Garcia: We are extremely excited about the way the recon team executed in this last quarter and the tools they built. The tools that enable more centralized planning are very exciting in concept. The early reads are good. We will be rolling them out over the next several months, and then we will get a better sense of the near- and medium-term quantitative benefits. We certainly think there are benefits that can show up over time. One benefit is collapsing the distribution of performance across locations, which is driven by differences in quality of execution and partially by differences in scale. Last quarter, we talked about there being a couple hundred dollars’ spread between our top quartile and bottom quartile of performers. Despite the fact that we improved the overall number this quarter, that spread remains about the same. That opportunity is certainly there, as is getting fundamentally better across the sum of the facilities. Unlocking that takes time, and it is hard to do while simultaneously growing at 40%. It is a clear opportunity and hard to execute fast, but it is something we are always paying close attention to and seeking to unlock as quickly as we can. With Clear, we are very excited by what we have done. To make progress, you have to decide what to focus on. In Clear, we built what we believe is a best-in-class platform by focusing a lot on the buy side. There are seller-side and buyer-side tools. We simplified the problem by using ourselves as the primary seller, so we are not required to build as many sell-side tools. We have been able to build a platform for the buy side that we think is highly differentiated, with room to differentiate further. That is showing up in the results and has positively contributed to our wholesale vehicle gross profit per wholesale unit. In aggregate, the sum of Clear plus our resale platform plus the general ADESA business and our ability to wholesale cars physically means we are, in aggregate, the most economic buyer for cars for any seller that is selling pools of cars. That is fundamentally valuable, that we are well positioned to provide as a service and to benefit from as a business. There will be a long road map of making sure all those tools fit together well and reduce to simple offerings for our customers that result in great business performance. The foundations have been laid and are continuing to be laid, and it is an exciting capability add to our overall system. Operator: The next question is from John Babcock with Barclays. Please go ahead. John Babcock: I want to go back to the discussion on retail GPU. You gave some color for the upcoming quarter, which is helpful. I also want to reconcile how you performed from 4Q into 1Q. Last quarter you talked about headwinds from reconditioning costs and depreciation. How did 1Q end up relative to that? What factors, in addition to those, might have impacted GPU? There was strength on the used vehicle side—did that contribute? Any commentary would be useful. Mark Jenkins: Retail GPU was down slightly year over year in Q1—it was pretty close to flat, but down slightly. A couple of key drivers there are things we talked about in Q4 as well. We are having great success in our logistics network getting cars to customers even faster and with shorter distances. That manifested in Q1 with an all-time low logistics expense per retail unit sold. As we brought down distances for outbound shipping, we also brought down our shipping revenue and passed those gains on to customers. That is great for customers, but it had a negative impact on retail GPU, both in Q4 and Q1. We have also talked a lot about elevated retail reconditioning costs, where we have made lots of progress, as Ernie discussed at length. Those were a couple of the key drivers that applied to both Q4 and Q1. John Babcock: Did the depreciation change much from April to January? Mark Jenkins: I do not think we feel like we had major unusual seasonal patterns there, if I remember correctly. John Babcock: Thanks. And back to reconditioning costs—you talked about centralizing that a little bit. Are you comfortable doing that? Do you think there will be any added bureaucracy or added time? Are you maintaining flexibility at the reconditioning center level to ensure they can make decisions quickly? Mark Jenkins: It is really important to strike a balance. The teams on the ground are there every day, hands-on with the dynamics and cars flowing through and all the people that are there and their various strengths and abilities. It is important to have a lot of on-the-ground input into the way the reconditioning centers function. At the same time, there are a lot of very quantitative decisions that can help the centers run better. For example, if you have a given number of people at the center on any given day with a given distribution of skill sets, what is the optimal way to distribute that team across the various stations in the reconditioning process? You can do that by hand on the ground manually, but it is also a problem that can be solved with algorithms and data. Pairing those two things together—a very strong quantitative focus via software and better use of all the data we are collecting in the centers—with the teams on the ground is where we think the special sauce is. We have been investing in reconditioning technology over several years, but we have not solved that problem yet, and that is a place we have been focusing. Operator: The next question is from Michael McGovern with Bank of America. Please go ahead. Michael McGovern: Hey, thanks for taking my question. On the labor hours per unit metric that you gave, it seems like it is really efficient right now. How much more efficiency can you gain there longer term? Which parts of the chain have decreased the most in terms of labor hours per unit, and how does that flow through into GPU longer term? Ernie Garcia: We have talked in the past about our expense per unit in recon, and the number one driver of those expenses is labor. It is a big part of the direct cost and is highly correlated with the other costs. When we are looking for operational metrics that move very quickly so that we can manage and make quick decisions, that is a metric we tend to look at. It has clearly gotten better. The kind of numbers we discussed in terms of cost drift in Q4 were driven largely by a drift in HPU. We are back now to where we were last year in Q2, which was our all-time best. As we said, there is clearly room for additional improvement from here. That room exists both by improving the sum of all centers and by getting centers to operate more like our best centers. There is opportunity there that can matter—that is meaningful dollars—but it takes time. We do not want to set expectations that it is coming in the next couple quarters. It will take time for us to unlock and get the full benefit, but it is there and it is exciting and meaningful. It just has to be done at the same time that we are also executing well enough to grow at very high rates of speed. Those two things are hard to do together, but I think the team is up to it. Michael McGovern: Got it. Quick follow-up. Recon headcount growth is still pretty elevated. From here, is there some shift in how efficiently you are able to train new reconditioning hires and keep growth elevated in recon headcount while also keeping new employees really efficient? Ernie Garcia: Mark talked a lot about centralization and automation. That can also be thought of as reducing the complexity and the learning curve in many positions. We built these centers in a way where you can take a focused skill set and have people who really know how to do something well do that over and over again, and then you can train them in new skills and move them to different parts of the line. That gives us access to a broader pool of talent than many others trying to provide similar functions, and we think that is an advantage. As we continue to build out Carly—the systems inside Carly that make individual operators more efficient—and as we build out manager tools that make manager decision making more straightforward so they can focus on identifying best performers, keeping people motivated, and keeping the system moving, that generally makes things easier to learn and easier to train. We are also investing in tools that allow us to hire people more quickly and get them up to speed more quickly. That is another area the team has been focused on for a long time. It is all part of continual improvement. We have made a ton of gains over the last many years, but there is clearly a ton of room to continue to make gains, and that is what the team is focused on every day. Operator: The next question is from Michael Montani with Evercore ISI. Please go ahead. Michael Montani: Good afternoon. Thanks for taking the question. First, on the diesel front, could you help us understand any exposure you might have there? Obviously, impressive improvement on logistics this quarter, but we were thinking about it as potentially a low single-digit earnings headwind in isolation. The other question is strategic: you continue to have underlying gains in GPUs. I know there is some quarterly noise, but how should we think about the propensity to reinvest those gains to further accelerate share versus being happy at these levels with this kind of unit growth and passing some of that through? Mark Jenkins: There is an impact of fuel prices on the operations of our business. That takes a couple of forms. One, there is a cost of sales impact for inbound transport. There is also an SG&A expense impact, which is in the operations expense, broader variable cost category in SG&A. I would expect to see some impact from higher fuel prices in the second quarter, but not one that is particularly large. I think of it as being in the normal range of quarter-to-quarter fluctuations as we see things move around. Ernie Garcia: On reinvesting gains, without being too repetitive from previous answers, we do think we have opportunities across the entire business, and the path from where we are today to 13.5% adjusted EBITDA margin is pretty straight with leverage and advertising expense. We think the gains that we make we can largely pass through to customers. The opportunities are many, but like anything hard, we have to actually do it. When we do it, we will find out how fast we can do it and how big those gains are. We do expect to share additional gains with customers over time—hopefully meaningfully—while still marching toward our goal. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ernie Garcia for any closing remarks. Ernie Garcia: Thanks, everyone, for joining the call. Carvana team, awesome job—another great quarter. You have a lot to be proud of. Recon team in particular—awesome, awesome job. Thank you for reacting the way that you did. To everyone across the business, when we hit a bump, let us react the way Recon did. No one can stop us but us. Let us just keep marching. Thanks, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to the Equinix, Inc. First Quarter Earnings Conference Call. All lines will be in listen-only mode until we open for questions. Also, today's conference is being recorded. I would now like to turn the call over to Mr. Ryan Burke, Vice President of Investor Relations. You may begin, sir. Ryan Burke: Good afternoon, and welcome to our first quarter conference call. Before we get started, I want to remind you that some of the statements that we make today are forward-looking in nature and involve certain risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and in our filings with the SEC, including our most recent Forms 10-Ks and 10-Q. Equinix, Inc. assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is our policy to not comment on our financial guidance during the quarter unless it is done through an explicit public disclosure. On today's conference call, we will provide non-GAAP measures. We provide a reconciliation of those measures to the most directly comparable GAAP measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We have made available on the IR page of our website a presentation to accompany this discussion, along with certain supplemental financial information and other data. With us here today are Adaire Fox-Martin, CEO and President; Olivier Leonetti, CFO; and Phillip Konieczny, SVP of Finance. At this time, I will turn the call over to Adaire. Adaire Fox-Martin: Thank you. Hello, and a warm welcome to our Q1 2026 earnings call. This quarter's results reflect continued strength across the business as we capitalize on a large and growing set of opportunities. Demand is broad-based and durable, execution is driving efficiency, and AI continues to fuel infrastructure investments that play to our strengths. Before I get into our results, I would like to start with some important market context. Over the course of the past year, my conversations with customers have changed. A year ago, they were about piloting AI. Now our conversations are focused on enterprise-wide adoption—adoption at scale. Two forces are driving this shift. Inference has grown from experimental workloads to an engine of real-time business decision-making, and agentic AI is moving from demos into distributed deployments, with agents acting autonomously to achieve business outcomes. The reality is that most enterprise architectures are not optimized for these workflows. Agents need private, low-latency paths to data wherever it lives. They perform best at the edge, closest to where the decisions get made. And they must be able to move freely across models and clouds whilst staying within jurisdictional boundaries. Performance, cost, and compliance all suffer when today's agents run on yesterday's networks. Simply put, this deployment gap is an architecture problem. Enterprises need infrastructure that is purpose-built for the way AI operates—distributed, interconnected, sovereign by design, and in close proximity to the data that matters most. This is a market that we are built to serve. Equinix, Inc. is not simply the world's largest digital infrastructure company; we are the world's most deliberately curated digital ecosystem. And our Q1 results demonstrate the progress we are making to capture the market opportunity. In Q1, our recurring revenue grew 10% on a normalized and constant currency basis, coming in at the high end of our expectations. This is our second straight quarter of double-digit MRR growth. At the same time, we are driving continued margin improvement. Q1 was also the largest quarter of total sales activity in our history, inclusive of annualized growth bookings and pre-selling activity. Total sales activity was up more than 5% year over year. We drove significant interconnection and CapEx billing growth, while reducing churn, reflecting ecosystem strength across our key operating metrics. And we are expanding our capacity whilst bringing new products to market that extend our runway for growth. Our progress stems from the extraordinary efforts of our team, and I am proud of the way our employees are stepping up to meet the moment. Let me now provide some color on our overall results and what is driving our performance. As you saw in our press release, our Q1 results do not include the ExScale Hampton lease. We are nearing execution on expanded mutually beneficial terms with our customer. Unknown Speaker will provide additional details on how you should model Hampton. Adjusting for the timing of Hampton, our Q1 revenue, AFFO, and AFFO per share results were all ahead of our expectations. Overall, our ExScale pipeline is robust, given that our remaining capacity is in major metros. Our momentum reinforces our confidence for the year. As such, we have raised our guidance across several key metrics. I am especially pleased with the strength we are building across the AI inferencing ecosystem. The expansion of our relationships with the world's leading hyperscalers, neo clouds, AI security vendors, and model providers serves as a magnet for agentic AI workloads. Eight of the top 10 AI model providers and four of the top five neo clouds are actively expanding with Equinix, Inc. They have placed more than 110 separate network nodes with us to support mission-critical and latency-sensitive elements of their architectures. Consistent with the prior quarter, approximately 60% of our largest deals in Q1 were AI-related. Additionally, large-capacity Fabric connections have tripled from just a year ago. We believe there is meaningful upside to come, given we are still in the early days of the agentic AI wave and inferencing adoption. This momentum is part of a broader uptick in customer demand spanning a wide range of AI, cloud, and networking workloads. Now let me highlight some recent wins and associated use cases. Qubit Pharmaceuticals, a quantum AI-driven drug discovery company, relies on Equinix, Inc. for the high-performance, low-latency infrastructure required to run millions of GPU-intensive molecular simulations. By deploying a dedicated GPU cluster in Equinix, Inc. data centers with direct cloud interconnection, Qubit has reduced experimental cycles by 20x whilst lowering costs by a factor of five. Most importantly, our solutions are accelerating the path from discovery to potential therapies that can save lives. Gammon Construction, a leading construction and engineering services company in Asia, chose Equinix, Inc. because of our neutral platform presence across major metros and connectivity solutions to enable their multicloud AI platform. They are using our Fabric interconnection portfolio to power their network infrastructure, which is the base for innovative solutions such as AI-powered robotics and drones for on-site risk assessments and smarter decision-making. During the quarter, we expanded our partnership with Options IT, the number one provider of infrastructure to global financial services firms. They selected Equinix, Inc. because of our presence in the locations that matter most to their operations and ecosystems, including London, New York, Singapore, and Tokyo. We are enabling Options IT to deliver private cloud and AI-managed infrastructure solutions to grow their business whilst meeting the data sovereignty requirements of their customers. We also grew our relationship with Maersk, a global leader in integrated logistics, as it digitizes critical supply chain infrastructure. Maersk recently selected Equinix, Inc. as its primary data center partner to support high-performance and AI workloads, including its first liquid-cooled AI deployment in Frankfurt. Our global footprint, secure and resilient operations, and industry-leading interconnection capabilities are supporting Maersk’s ongoing network transformation and long-term growth strategy. I am exceptionally grateful to all our customers and partners for trusting Equinix, Inc. to help move their business forward. The outcomes we are enabling for them reflect rigorous execution against our strategic pillars. Starting with Serve Better, we delivered annualized growth bookings of $378 million in Q1, up 9% year over year, with approximately $140 million in pre-selling activity on top of that. As I mentioned earlier, that is 35% growth in total sales activity in the quarter, resulting in a record backlog. Transaction volumes continued to demonstrate a broad base of workload requirements, with over 3,800 transactions spanning more than 3,100 unique customers in the quarter. Importantly, we also saw increased customer adoption of our self-service portal. Our portal is a key area of focus as we work to create a better experience. It also drives efficiencies within Equinix, Inc. compared to traditional quote-based ordering. This is one example of our broader focus on digitizing processes and workflows across the company. Customers placed 20 thousand orders through our portal in Q1, up 12% year over year, and we intend to continue driving enhancements to this solution. Turning to Solve Smarter, our customers consistently raise two key challenges to us. The first is AI infrastructure fragmentation. Enterprises are spending too much time and budget navigating dozens of disconnected AI model providers, GPU clouds, data platforms, and security services. The Equinix Distributed AI Hub we introduced at NVIDIA GTC solves this by giving enterprises a single private, low-latency connection to the entire AI ecosystem. Unlike AI marketplaces built by providers with their own services to sell, our Distributed AI Hub is completely neutral, providing access to all models and clouds so customers can select what is best for them. The second challenge facing customers is network complexity. Most enterprise networks are not designed to handle distributed AI workloads, and it is resulting in degraded AI performance, inflated costs, and compliance risks. Equinix Fabric Intelligence solves these problems by monitoring network performance in real time, automatically adjusting configurations, and flagging anomalies before they become outages, all without human intervention. Unlike other network management tools that sit on top of the network, Fabric Intelligence is built directly into our Fabric interconnection platform. This is a structural competitive advantage given the more than 500 thousand live interconnections across our ecosystem. Our innovation is extending our market leadership and driving growth. Total interconnection revenue was up 9% year over year in Q1, boosted by Fabric revenue growth of 26% year over year. Fabric bookings were up 70% year over year as our attach rate continues to increase. These growth rates are all on a normalized and constant currency basis. On Build Bolder, we continue to expand our capacity to meet demand. We have 46 major projects underway across 32 markets, including six ExScale projects. More than 70% of this retail expansion CapEx is within our major metros, with the remainder focused on critical expansion markets, particularly in our Asia region. Given the strength of our pre-sales motion, approximately 25% of our 2026 retail capacity expansion has already been sold. We continue to meaningfully grow our pipeline for new powered land and capacity expansion opportunities that can enhance our long-term growth prospects in key metros and deliver attractive returns. And we are not just growing, we are doing it responsibly. Last week, we released our annual sustainability report. It shows how we are building essential infrastructure the world needs in ways that are affordable for our communities, sustainable for our planet, and reliable for our customers. These have long been core Equinix, Inc. values and they will continue to guide our future investment decisions. In Q1, we announced an important investment in one of the world's most sustainability-focused markets, as we signed a joint agreement with Canada Pension Plan Investment Board to purchase AtNorth. This deal will further enhance our position in the Nordics by giving us access to an installed and active development pipeline of approximately 800 megawatts expected to come online over the next five years. AtNorth's footprint in key markets such as Copenhagen is complementary to our existing EMEA operations and is well positioned to serve enterprise, cloud, and AI growth. The transaction is subject to closing conditions and is expected to be immediately accretive to AFFO per share upon closing. Overall, Q1 demonstrated continued momentum across the business, and we see significant opportunities to accelerate growth as we deliver on our strategy. I am now going to turn the call over to our new CFO, Olivier Leonetti, to go into more detail on our financials. Unknown Speaker joined us in March and has already proven to be an excellent addition to our leadership team. Previously, he was CFO of Eaton and Johnson Controls, two large suppliers to the data center industry. He has a strong track record of delivering profitable growth and creating shareholder value, and we look forward to his contributions to our success as we work to deliver healthy revenue growth, margin expansion, and superior returns. Over to you. Olivier Leonetti: Thank you for the kind words, Adaire. I am delighted to be here. Nearly two months in, I am excited about the strength of the markets we serve and very impressed by Equinix, Inc. company culture, vision, and unique positioning to serve accelerating customer demand. I look forward to helping enable our vision by prudently allocating capital and thoughtfully utilizing our balance sheet to drive durable, profitable growth. As Adaire summarized, we are executing well across our business. This was the largest quarter of total sales activity on record, up 35% year over year, reflecting broad demand and strong execution. Customer activity increased across all of our verticals, products, and channels. Turning to Q1 results on Slide 7, and with all figures discussed on a normalized constant currency basis: Recurring revenues were $2.3 billion, up 10% year over year, as our bookings performance from the second half of last year is converting into revenue. Total revenues were $2.4 billion, up 8% year over year. Adjusted EBITDA was $1.2 billion, up 13% year over year, resulting in a 51% adjusted EBITDA margin, which is up 190 basis points quarter over quarter and 300 basis points year over year. This is a result of our continued cost discipline, forward cost benefits, and scaling our operating leverage. As we have discussed, driving additional efficiency will be a focus moving forward. Quarterly AFFO surpassed the $1 billion mark for the first time, increasing 11% year over year, and AFFO per share was $10.79, up 10% year over year. Please note that, adjusted for the Hampton ExScale lease signing, which I will provide details on in a moment, we came in above the midpoint of our Q1 revenue and adjusted EBITDA guidance ranges. As Adaire mentioned, we are near execution on the Hampton ExScale lease. These types of negotiations are fluid, and we have adjusted the expected timing while discussing expanded mutually beneficial terms with our customer. Here are the moving pieces as they relate to guidance over the past couple of quarters. Our guidance for Q4 2025 assumed $54 million of non-recurring revenue from the deal based on the original terms being considered. Our guidance for Q1 2026 included the expanded terms, with an expected contribution of approximately $80 million of revenue, $65 million of AFFO, and $0.65 of AFFO per share. The expanded economics are now included in our guidance for Q2. This timing shift does not impact our full-year outlook because the economics were already incorporated. Now to our non-financial metrics, which also demonstrate strong momentum. We increased physical and virtual net interconnections by 5.8 thousand, with particular strength in Fabric additions. We added 4.1 thousand net cabinets billing, and our backlog of cabinets sold but not yet installed is at a record level. Churn came in at 1.7%, primarily due to the benefit of some delayed churn and a focus on execution during our renewal process. For the full year, we are tracking towards the low end of our 2% to 2.5% guidance range. And MRR per cabinet increased to $2,524, up 7% year over year, reflecting the firm pricing environment and continued increase in density. On Slide 12, our capital investments continue to deliver very strong returns. Consistent with prior years, this quarter we completed the annual refresh of our stabilized pool, which increased by five IBX data centers. Our 192 stabilized assets increased recurring revenue by 6% year over year, are collectively 82% utilized, and generated a 26% cash-on-cash return on growth PP&E. Turning to our capital on Slide 10, at quarter end, we had approximately $3.1 billion of cash and short-term investments on the balance sheet, and our net leverage was 3.8x annualized adjusted EBITDA. During the quarter, we issued $1.5 billion of senior notes at a blended effective rate of 3.1%, reflecting proactive execution in the market and our ability to take advantage of lower-cost debt around the world. Our balance sheet and diversified capital program are competitive advantages in all macro environments, particularly so in the kind we see today. In combination with significant retained cash flow, we continue to access lower-cost sources of capital to fund our robust growth opportunity. Now looking at capital expenditures on Slide 11, total capital expenditures for the quarter were about $1.3 billion, approximately 90% of which was growth and value-accretive capacity expansion. We continue to expect mid-20% unlevered cash-on-cash returns on investment. Since the last earnings call, we opened six projects, adding critical capacity to meet demand across six metros. Before we get into guidance, I will briefly address the energy environment given developments in the Middle East. We systematically hedge energy costs to provide predictability to our customers and broader stakeholders, particularly in volatile periods. Globally, we are more than 90% hedged for 2026, and, as usual, we are progressively hedging into the future. As a result, we expect minimal impact for 2026, even if energy prices were to remain elevated. Finally, please refer to Slides 13 to 17 for an update of 2026 guidance, with all growth rates discussed on a normalized and constant currency basis. Based on the robust environment and the team's execution, we are raising guidance across key financial metrics. For the second quarter, we anticipate continuing strength across the business including MRR growth of 10% to 11% year over year. For total revenue, the largest piece to consider is that it includes the expanded economics from the Hampton ExScale lease signing that I provided a moment ago. Again, please note that these economics were already included in our guidance for the full year; they simply shifted from Q1 into Q2. For the full year, we are raising total revenue guidance by $21 million based on our Q1 outperformance, improving expected total revenue growth range by 100 basis points to 10% to 11%. We are raising adjusted EBITDA guidance by $24 million, resulting in adjusted EBITDA margins of approximately 51%, a 200 basis point improvement over last year. Additionally, we are raising AFFO guidance approximately $40 million, improving our expected AFFO growth range by 100 basis points to 10% to 12%. This corresponds to a similar 100 basis point improvement in our expected AFFO per share growth range to 9% to 11%. We continue to execute on our capacity expansion to meet robust customer demand. Excluding ExScale and land acquisitions, we now expect total capital expenditures to approximate the top end of our prior range at $4.1 billion, including $280 million to $300 million of recurring spend and approximately $3.8 billion of non-recurring spend. Given our confidence in the growth opportunity in front of us, the team continues to evaluate opportunities to accelerate our capacity to deliver growth and value to our shareholders. Overall, we are pleased with our progress and confident in our plan. We will continue executing with discipline to deliver on our goals and create shareholder value. I now turn the call back over to Adaire. Adaire Fox-Martin: Thank you. Our Q1 results demonstrate strong performance, and our outlook reflects underlying strength across the business. We see immense opportunity ahead to drive revenue, enhance margins, and deliver attractive AFFO per share growth. But we take nothing for granted. Our continued success demands focused execution against our strategic priorities and disciplined investment to unlock structurally higher returns. Above all, it calls on every member of our Equinix, Inc. team to deliver exceptional value for our customers each and every day. This is the mindset guiding us forward. And I am confident in our direction. We are well positioned across our markets, we are building momentum in key growth areas, and we remain focused on delivering against the goals we have set. With that, let us open the line for questions. Thank you. We will now open the call for questions. Operator: Our first caller is Ari Klein with BMO Capital Markets. Your line is open. Ari Klein with BMO Capital Markets. Your line is open. We will go to the next caller, Michael Rollins with Citi. Your line is open. Michael Ian Rollins: And Unknown Speaker, congratulations on joining the team. I had a question about some of the comments you made earlier in the call. So I think, if I got this right, you mentioned that eight of the top 10—maybe it was AI model providers—and four of the top five neo clouds are actively expanding with Equinix, Inc. for AI, 110 separate network nodes. I am curious if you could provide more color. Is that 110 in addition to whatever cloud nodes they typically would have? And can you characterize the types of interconnectivity demand that you are already seeing for those AI nodes and how that is informing you, maybe early in this environment, of the type of growth that is out there from AI for your business model? Thanks. Adaire Fox-Martin: Hi, Michael. Thanks so much for the question. Maybe let me just clarify a couple of points. I mentioned that it was eight of the 10 AI model providers—the LLMs—and four of the five neo clouds. They have deployed between them 110 or so separate network nodes at Equinix, Inc., and that is in addition to all of the nodes that we see being deployed by the hyperscalers in order to manage their connectivity journey. When we look at the role of the neos here, we can see that for many of them their journey is evolving a little. Their value proposition was always based on pricing and based on GPU access and largely facilitating large training footprints, mostly focused with the SaaS providers and the hyperscalers. As we can see, they are transforming into AI inference workloads and looking to pursue enterprise customers and medium-sized businesses. We see them as potential inference magnets for our ecosystem going forward, and we see many of them converging, as I have mentioned already, and engaging at Equinix, Inc. It is about a couple of things in terms of the use cases. It is about network nodes that provide connectivity to the CSPs and the NSPs for the neos and the LLMs. It is about AI inference nodes for densely populated metros—so a little bit of a different picture. And it is about Fabric access to the enterprise customer base of Equinix, Inc. So that sums up the three things that we are seeing for the neo use of our environment. Operator: Thank you. Our next caller is Cameron McVeigh with Morgan Stanley. Your line is open. Cameron McVeigh: Hi, thank you. I wanted to ask about the $140 million in pre-leasing activity. Just curious how tenant appetite is changing and if tenants are willing to commit further in advance and for longer terms, and really how that is translating to the terms for Equinix, Inc., whether through pricing, terms, or deposits? Any color there would be helpful. Thanks. Adaire Fox-Martin: Pricing remains firm whether we are looking at pre-sales or bookings within the quarter. I think the pre-sales booking really provides our customers with security—security in terms of the infrastructure that they are defining and the opportunity to ensure that they are solving for their own compute and energy future. This is something that I think was not done only in the recent past, but we are seeing a great benefit from that in terms of conversations with our customers and our long-term ability to serve them. Would you like to go to the next caller? Operator: Yes, please. Matt Niknam with Truist. Your line is open. Matt Niknam: Hi, thanks so much for taking the question. Congrats on the quarter. My question is more big picture around macro. Have you seen any macro dynamics, particularly around rising memory or fuel and energy costs and the prospects for higher IT costs later on in the year, affecting customer behavior at all, whether it is pulled-forward demand or pushed-out deals if customers are running into supply shortages? Thanks. Adaire Fox-Martin: As it relates to concerns about energy costs, Unknown Speaker mentioned our hedging program, which means that we are in a position to be able to continue to support our customers at the price points at which we are operating today. Based on the demand environment that we see, it is a very durable and broad-based demand environment. It is very diverse, and we are not seeing any pullback from customers as it relates to increasing costs at this point in time. I think you can see that reflected just in the sheer scale of the number of transactions and that those transactions occurred across all of our customer segments and actually across all industries that were all growing at roughly the same percentage in Q1. Operator: Thank you. Our next caller is Frank Garrett Louthan with Raymond James. Your line is open, sir. Frank Garrett Louthan: Great. Thank you. As you see the rising demand for AI inferencing, is there any difference in the incremental capital required that you are seeing to fulfill those new workloads versus what you have traditionally seen? And can you quantify that, if there is? Thanks. Adaire Fox-Martin: No, we do not see any difference in incremental capital that will be required. Notwithstanding the fact that our strategy has been to be very metro focused, we are located in 77 metros across the world, and we will continue to build on that footprint. That is already embedded into how we have managed our capital, because that is part of our 27-year history, and therefore we do not anticipate any capital differences. I am going to ask Phillip to add an additional comment here. Phillip Konieczny: The only thing that I would add to that, Frank, is that we are always skating to where the puck is going, as they say, and thinking about the types of requirements that are needed for the deployments. When you look at some of our facilities that we are going to be bringing online in the next few years, the densities that we are building towards are much higher and much more suited for a lot of the requirements that we are hearing from our customers. We are always thinking about where we need to go and what the requirements are of our customers, and we are building towards that. Frank Garrett Louthan: Is that increasing or decreasing the returns that you are looking at going forward with that higher density requirement? Phillip Konieczny: The returns we are underwriting, even with those higher densities, are still in that mid-20% range that we have been talking about for a long time. Operator: Thank you. Our next caller is Vikram Malhotra with Mizuho. Your line is open, sir. Vikram Malhotra: Thanks. Good evening. Thanks for taking the questions. I just want to clarify two things. One, just the bookings dipping sequentially—how much of that is seasonal? And maybe you can give us some composition of traditional enterprise versus maybe chunky bits? And then secondly, the interconnection business—given the rapid tripling almost of the Fabric business, how is that playing into interconnection revenue growth overall? You mentioned network enhancements needed there, so I am wondering, how does that flow through? Does that mean in the future we see a greater pickup in the interconnection side? Thanks. Adaire Fox-Martin: On the sequential nature of our annualized gross bookings, Q1 is seasonally a quarter that has traditionally been lower. That said, I am especially pleased with the performance that we had in Q1 given that we came off the back of such a large Q4. The team worked really hard to deliver what was our largest Q1 ever and to drive our largest backlog ever. I look forward to moving that into revenue in the future, and I am proud that the delivery of our bookings in Q1 is not just related to top line; we did it at growing margins and growing profitability too. Across the Q1 booking profile, we saw strength across various industries, and we also saw very broad-based strength in our under-1 megawatt deal cohort. As it relates to interconnection revenue and interconnection revenue growth, we are very pleased by the performance we have seen here. Our interconnection revenue growth was 9% on a normalized and constant currency basis. Fabric revenue growth was 26%, and our Fabric bookings grew 74% year over year. This kind of growth and the value proposition we are delivering to customers are really behind our investment strategy around our Distributed AI Hub and our Fabric Intelligence, which is in pre-preview with a number of customers and partners who are very positive about the outcomes that we are driving with this solution set. Operator: Thank you. Our next caller is Jonathan Atkin with RBC. Your line is open, sir. Jonathan Atkin: I wanted to just follow up on that last response and maybe ask you more directly. Is there a scenario over the next couple of years where interconnection growth would exceed growth that you are seeing and would represent a meaningfully increased percentage of your overall revenue composition? Adaire Fox-Martin: In some ways, we are probably seeing that in our stabilized assets where our stabilized assets are growing at 6% and interconnection within that asset group is growing at 9%. I do believe that there is opportunity for us to continue to grow our footprint and the range of services that we are offering to our customers here because we fill a very specific niche in the market in terms of providing that neutral environment where the ecosystem around AI converges. There is potential for upside here, but that is not yet factored into our plans. Operator: Thank you. Our next caller is Analyst with Evercore. Analyst: Hi. Thank you for the question, and welcome, Unknown Speaker. I appreciate the color on energy hedging. Just given your exposure to the Middle East, I wanted to understand whether recent geopolitical crosscurrents in the region have had any impact on your operations, specifically related to your ability to sell and/or add IBX capacity? Thank you. Adaire Fox-Martin: Thank you very much for the question. First, the most important thing for us is the safety of our employees, our customers, and our partners, and that was our most important priority as we navigated recent events in the Middle East. Thankfully, all of our people have remained safe and our facilities are fully operational. We do have a limited footprint across the region. We have a total of six data centers across the Middle East region, comprising about 1% of total revenues. We have one project underway in Dubai at our DX3 facility, which is a construction project, and we have seen the RFP stage of that project be impacted due to the conflict. So, limited operational impact—we were able to keep our facilities up and running—but we are watching the situation very carefully. Our long-term view is that the region will continue to see growth and investment in digital infrastructure as the Middle East itself looks to position itself as a global AI hub. Operator: Thank you. Our next caller is Nicholas Del Deo with MoffettNathanson. Your line is open. Nicholas Del Deo: First, I want to congratulate Unknown Speaker on his appointment, and my question is also for him. I was wondering if you could elaborate—share with us your high-level capital allocation and operating philosophies, and whether your previous vantage point as a supplier to the data center industry provides any initial insights into areas where you think Equinix, Inc. might go to improve the business or things you will be focused on? Olivier Leonetti: Thank you for your question, Nick. First, regarding capital allocation, we are going to keep the course that has worked pretty well for the organization. To fund our ambitious CapEx growth program, we want first to use debt as a way to finance our growth. We can do that based upon the leverage we have today—triple-B+—and the 3.8x I mentioned in my remarks. We will use equity on an opportunistic basis, but the key is going to be to use debt. Relative to impressions as a former supplier to Equinix, Inc., we were very impressed by what we had seen. We view Equinix, Inc. as a pioneer in this market. After two months here, I have been impressed by the quality of the team, the culture, and the rigor with which we run the operation. What we have said before, you see that play: we have high-quality data centers in top-tier markets, we are connecting the world, and we are ready to power the AI agentic workloads. We are very differentiated, and I look forward to helping Adaire and the team grow this business even more. Nicholas Del Deo: Any particular areas where you are looking to drill down more? Or too soon to say? Olivier Leonetti: We want to enable the strategy that Adaire has outlined—Build Bolder, Solve Smarter, Serve Better. I am going to be a tool among many others to enable this strategy, but no change today, not that there was a need to. Operator: Thank you. Our next caller is Analyst with JPMorgan. Your line is open, sir. Analyst: Hi. I just wanted to follow up on the churn—1.7% is super low, but I think you mentioned some of it is delayed. Should we go back into the range? Should 2Q be above range and/or the rest of the year at the higher end, or could we be seeing maybe the lower end for the full year? Adaire Fox-Martin: As you saw, at 1.7% we were below the low end of our range. There were two elements as to why that was so. One was the timing of some churn, including in our Metal business, moving forward into this quarter, and the other is just the continued focus that we have had on the renewal process from our teams. We are very pleased with the performance in Q1. Notwithstanding that, we do not want to call victory too early. Therefore, to keep our churn in the range of 2% to 2.5% for the rest of the year is the right thing to do. We do believe that our focus on our available-to-renew contracts—doing that much earlier in the cycle—is starting to have an impact. We will watch those trends closely over the next several quarters, and our aim is to bring churn down consistently over time. But for now, we are holding to the 2% to 2.5% range for the year. Operator: Our next caller is David Guarino with Green Street. Your line is open, sir. David Guarino: Thanks. As we think about modeling in these large one-time fees related to the ExScale leases, is there any framework you can provide us to estimate and forecast how large they might be? And then, tied in with that, we heard some rumors that the Manukau campus might have been pre-leased, but you did not comment on that at all. Could you give an update on what is happening with that project and how soon we could maybe expect another large ExScale leasing fee after the Hampton one? Adaire Fox-Martin: These transactions are always very complex and multifaceted, particularly as we have very high-demand assets in locations that are energized within the right time frame and in great locations. As we look forward into the second half of next year in terms of Manukau, it is not timing that we have put into the short term. It is something that we are still working on. We have a very robust pipeline of interested parties, and we want to ensure that we are maximizing the outcome for our customers, our shareholders, and the company. As we look forward into the second half of the year and into 2026, the guide assumes a total NRR of approximately 5.8% for the full year, and a portion of that is associated with ExScale leasing. Olivier Leonetti: Additional comment, if I may, David. If you look at the balance of the year, with the exception of the ExScale deal we have mentioned many times now, the rest of the ExScale deals are qualitatively small in nature, and we believe that the risk is balanced for the rest of the year. Operator: Thank you. Next, Analyst with Goldman Sachs, your line is open. Analyst: Hey, good afternoon. Thanks for the question. Adaire, you talked about agents performing best when closer to the edge. Have you seen some customer workload repatriation or a shift in investment away from public cloud as a result? And then, when enterprises decide to do more at the edge, could you talk a little about the customer decision tree between co-located data centers versus on-prem today? Thank you. Adaire Fox-Martin: The reality of the environment that our customers operate in is the environment that we have been describing on many of these calls, and that is a hybrid, multicloud environment where data sits across a plethora of platforms. That creates the opportunity for a neutral platform like Equinix, Inc. to serve customers who want to run agentic workflows across those environments but need to access information that sits in more than one location. I would say that customers have a multicloud environment and they are looking at the cost associated with their environments, as well as important considerations in locations like Europe around sovereignty and compliance to sovereignty legislation, which may mean that certain parts of their dataset need to move into a private environment or be repatriated from cloud. But I would not say that this is a broad-based conversation across our customer base. As we talk to CIOs, it is less about on-prem versus cloud and more about the journey from token management and token cost all the way through to sovereign data controls that ensure the organization is compliant with whatever set of data governance rules they have in place. That is an important conversation because we can help customers navigate it by providing, through the Distributed AI Hub, access to all of the players as well as to private SLM models, which our customers have for smaller, less intense AI activity. So the conversation is really about how you navigate from token and training all the way through to that compliance conversation, often driven by sovereignty in some locations. Operator: Thank you. Our next caller is Analyst with Bernstein. Your line is open. Analyst: Thanks. You have talked about potentially building multiple incremental gigawatts with the Build Bolder program. With the full-year CapEx plan now around $4.1 billion, is this the kind of annual spend we should anticipate for the next couple of years? Is it more front-loaded? Do you think the intensity will ramp as you are moving into more large campuses? And a short follow-up: Are you anticipating maintaining the cash-on-cash return level throughout that build process? Adaire Fox-Martin: Thank you for the questions. We have 3 gigawatts currently either in land under control or in development today at Equinix, Inc., so that is the broad base of the portfolio that we are working with. As Unknown Speaker mentioned in his prepared remarks, we are at the top end of the range that we mentioned for CapEx earlier at Analyst Day last year. We are continuing to meaningfully grow our pipeline for new powered land and capacity expansion opportunities to enhance what we see as the long-term growth prospects in key metros, which we know deliver very attractive returns. We are excited to position ourselves for growth, but you can see that we are at the top end of our range as it relates to CapEx from the Analyst Day event when we provided that guide last year. Unknown Speaker will comment on the returns. Olivier Leonetti: The diligence we have before we do deals and deploy new CapEx is very strong. The mid-20% to 25% is a target—that is not an aspiration. We are seeing that quarter after quarter, and we feel very comfortable with achieving that return target as we are in a market where demand exceeds supply. We can be very selective about the deals we take. We are very differentiated today, and interconnection is more and more an important part of the value proposition of the company. We feel very confident about this mid-20% to 25% target. Operator: Thank you. Our next caller is Analyst with Stifel. Your line is open. Analyst: Yes, thanks for taking the questions. Unknown Speaker, good luck and I look forward to working with you. You talked about Maersk in one of your customer highlights and they had a liquid cooling deployment in Frankfurt. Maybe overall, can you give us a sense of where customer demand is for liquid cooling activity today? How many active or signed deployments are using direct-to-chip or immersion cooling, and how quickly is that moving from pilot to maybe scale production? Thanks. Adaire Fox-Martin: Thank you for the question. We had quite a significant quarter in Q1 as it relates to liquid cooling orders generally, of which Maersk was one. We saw approximately 50% growth in terms of our liquid cooling deployment. Today, we have 36 deployments across our footprint of customers using liquid cooling to facilitate the workload and density of the systems that they have put in place. It is active across all our regions, and it is something that we continue to evaluate and work closely on with our customers. In Q1 specifically, we had six deployments and seven orders across all of our regions, up 50% quarter on quarter. Operator: Thank you. Our last question comes from Analyst with Guggenheim Partners. Your line is open. Analyst: Wow, I made it. Thank you. Kind of a follow-up from the previous question: As you think about these fairly power-dense agentic workloads out at the edge of the network, are you encountering situations where either from a physical space or power, or just a thermal standpoint, you are running into constraints? I am just trying to understand how much of a challenge that is. Thank you. Adaire Fox-Martin: The availability of power would be the largest constraint in our environment. As densification increases, we would often need to put some space on hold around that particular implementation in order to ensure that, at an IBX, we are meeting not only the obligations of the highly dense workload but also the service level agreements and obligations that we have with the other customers who are sharing that space and power. That is one of the reasons why you see the yield on our MRR per cabinet grow so effectively, up to $2,524—up 7% year on year—partly due to the increase in densification and, of course, the association of value-added products like interconnection with every installation as one of the measures of that. Operator: I just want to thank you all for joining us for our Q1 call. Have a great rest of your day. Thank you. This concludes today's conference call. You may disconnect at this time.
Operator: Greetings, and welcome to the Microsoft Corporation Fiscal Year 2026 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Neilson, Vice President of Investor Relations. Please go ahead. Good afternoon. Jonathan Neilson: And thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Brian Defoe, Deputy General Counsel and Corporate Secretary. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provide the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, our predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, the comments made during this conference call, and in the Risk Factors section of our Forms 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I will turn the call over to Satya. Satya Nadella: Thank you very much, Jonathan. It was a record third quarter powered by the continued strength of Microsoft Cloud, which delivered $54 billion in revenue, up 29% year over year. Our AI business surpassed $37 billion ARR, up 123%. We are at the beginning of one of the most consequential platform shifts that will change the entire tech stack as agents proliferate and become the dominant workload. This will drive TAM mix and change the value creation equation across the entire economy. To capture this opportunity, we are executing against two priorities. First, we are building the world's leading cloud and AI infrastructure for the agentic computing era. Second, we are building high-value agentic systems across core domains such as productivity, coding, and security. These two layers reinforce each other, and we are focused on driving competitive value and differentiation for customers across each so that they can maximize their outcomes. Today, I will focus my remarks on both priorities starting with infrastructure. We are optimizing every layer of the tech stack from data center design to silicon to system software, the model architecture, as well as its optimization. This is translating into operational gains. We have reduced doctor lifetimes for new GPUs in our big regions by nearly 20% since the beginning of the year. Our Fairwater data center in Wisconsin came online earlier this month, six weeks ahead of schedule, allowing us to recognize revenue earlier. And we delivered a 40% improvement in inference throughput for our most used models across Copilot, driven by our software and hardware optimization work. All up, we added another gigawatt of capacity this quarter and remain on track to double our overall footprint in just two years. We are moving aggressively to add capacity aligned to the demand signals we see, and we have announced new data center investments across four continents. We also continue to modernize our fleet with our first-party innovation alongside the latest from NVIDIA and AMD. Across our fleet, millions of servers are powered by our custom networking, security, and virtualization silicon, including Azure Boost, as well as our first-party CPUs and accelerators. Our Maya 200 AI accelerator, with over 30% improved tokens per dollar compared to the latest silicon in our fleet, is now live in our Iowa and Arizona data centers. Our Cobalt server CPU is deployed in nearly half of our data center regions running workloads at scale for customers like Databricks, Siemens, and Snowflake. As our largest customers scale their AI deployments, they are increasingly leveraging other services across our platform and choosing to run those workloads on Cobalt. And we are expanding Cobalt supply significantly to meet this demand. The next layer up from infrastructure is the agent app platform. It starts with model choice. We offer the broadest selection of models of any hyperscaler so customers can choose the right model for the right workload across OpenAI, Anthropic, open source, and more. Over 10,000 customers have used more than one model on Foundry, 5,000 have used open source models, and the number who have used Anthropic and OpenAI models increased 2x quarter over quarter. For example, Bayer is using multiple models in Foundry to create its own in-house agent platform with more than 20,000 active monthly users. All up, over 300 customers are on track to process over 1 trillion tokens on Foundry this year, accelerating 30% quarter over quarter. We also remain focused on our first model work to differentiate our high-value copilots and agents and reduce COGS. We introduced MAI Transcribe One, a state-of-the-art speech-to-text model, and MAI Image Two, one of the top image generation models in the world. These models are already powering first-party scenarios like image generation in Bing and PowerPoint, and we are working towards having Transcribe One power transcription in Copilot and Teams. Early signals show a 67% increase in GPU efficiency with Transcribe One and up to a 260% increase in Image Two. We also brought MAI models to commercial customers like Shutterstock and WPP for the first time through Foundry. And we are innovating on OpenAI IP to drive product evals and lower COGS. Two recent examples are what we have done with step retrieval with WorkIQ and Copilot and how reasoning adapts to intent complexity in Researcher with much reduced latency and increased accuracy. The next layer up is all about enterprise data and context. Across Fabric, Foundry, Microsoft 365, and our security graph, we are building a unified IQ layer for organizational intelligence. Thousands of enterprises already are accessing context across these IQ layers. And as AI usage grows, so does the context layer, creating a flywheel that continuously improves the grounding, relevance, and effectiveness of every agent they use and build, making our IQ layers an unmatched context engine for organizational intelligence. More broadly, our database business accelerated quarter over quarter. Cosmos DB alone saw 50% year-over-year revenue growth driven by AI app workloads. We now have 35,000 paid Fabric customers, up 60% year over year. And the amount of data in Fabric OneLake increased nearly 4x year over year. Over 15,000 customers now use both Foundry and Fabric, up 60% year over year, as enterprises connect agents to real-time operational, analytical, and unstructured data that Fabric brings together. And we are very excited about the continued progress with Foundry Agents Service and how customers can now build durable, stateful agents that run across time boundaries, orchestrate tools and models, and close the loop with evals and improvement over long-running workflows. Beyond Fabric and Foundry, we are also helping knowledge workers build agents with tools like Copilot Studio. Nearly 90% of the Fortune 500 now have agents built with our low-code, no-code tools, and we are seeing fast growth of our Copilot credit-consumptive offer, up nearly 2x quarter over quarter, as customers increasingly extend Copilot with custom agents tailored to their workflows. Finally, with Agent 365, we offer a control plane that extends companies' existing governance, identity, security, and management frameworks to agents. Tens of thousands of companies are already managing tens of millions of agents in Agent 365, and we expect this momentum to grow significantly as agents will increasingly need tools for identity, governance, security, and more. Now let me turn to the high-value agentic systems we ourselves are building on this platform. We are evolving our family of Copilots from synchronous assistants to async co-workers that can execute long-running tasks across key domains. In knowledge work, it was another record quarter for Microsoft 365 Copilot seat adds, which increased 250% year over year, representing our fastest growth since launch. Quarter over quarter, we continue to see acceleration and now have over 20 million Microsoft 365 Copilot paid seats. The number of customers with over 50,000 seats quadrupled year over year, and Accenture now has over 740,000 seats, our largest Copilot win to date. And Bayer, Johnson & Johnson, Mercedes, and Roche all committed to 90,000 or more seats. Copilot is uniquely valuable at work where nearly every task depends on organizational context. WorkIQ grounds Copilot responses in the full context of an organization, including people, roles, documents, and communications, all within the company's security boundary. The system of work behind WorkIQ alone spans more than 17 exabytes of data, growing 35% year over year. The liquidity and freshness of that data matters, with billions of emails, documents, and chats, hundreds of millions of Teams meetings, and millions of SharePoint sites added each day. And that context is getting even richer as Copilot grows; Copilot and agent conversations and artifacts they create feed back into WorkIQ, making it even more context rich. We continue to increase the pace of feature innovation across Microsoft 365 Copilot, introducing over 625 updates over the past year, up 50%. In Microsoft 365 Copilot, you now have access in chat to multiple models by default with intelligent auto-routing. In Agents, with Critique and Counsel, you can use multiple models together to generate optimal responses. As of last week, agent mode is now the default experience across Copilot in Word, Excel, and PowerPoint. And with CoWork, you now have a new way to delegate and complete work using Copilot. All this innovation is driving record usage intensity across Copilot. We have seen a surge in usage of our first-party agents, with monthly usage up 6x year to date. Copilot queries per user were up nearly 20% quarter over quarter. To put this momentum in perspective, weekly engagement is now at the same level as Outlook, as more and more users make Copilot a habit. When it comes to business applications, we are seeing a new pattern emerge as customers shift from the traditional seat model to seats plus consumption. The customer service category is at the forefront of this transformation, as nearly 60% of our service customers are already purchasing usage-based credits. For example, HSBC uses prebuilt agents with Dynamics 365 to manage customer inquiries across products, markets, and regulatory requirements, reducing resolution time by over 30%. And our agentic products in LinkedIn Talent Solutions, which help hirers automate time-consuming tasks like sourcing, screening, and drafting messages, have already surpassed a $450 million annualized revenue run rate. When it comes to developers, GitHub itself is seeing unprecedented growth driven by the proliferation of agentic coding, and we are hard at work to scale and meet this demand. We see this even with GitHub Copilot. Nearly 140,000 organizations now use GitHub Copilot in Enterprise, nearly tripled year over year. The majority of users leverage multiple models. We are also seeing rapid adoption of GitHub Copilot CLI, with usage nearly doubling month over month. And earlier this week, we announced our move to a usage-based pricing model for GitHub Copilot as we align pricing to actual usage and cost. When it comes to security, the physics of cybersecurity has changed as AI compresses the window between vulnerability and exploitation. To help mitigate risk immediately, we sim-ship Defender protections when updates for AI-discovered vulnerabilities are released. And we are on course to productize new multimodal AI-driven scanning harnesses as well. Already, the number of Security Copilot customers increased 2x year over year. Our data security triage agents alone handled over 2 million unique alerts this quarter. And we are helping customers secure their AI deployments as well. Thirty-five billion Copilot interactions have been audited by Purview to date, up 7x year over year. Finally, when it comes to our consumer business, we are doing the foundational work required to win back fans and strengthen engagement across Windows, Xbox, Bing, and Edge. In the near term, we are focused on fundamentals, prioritizing quality, and serving our core users better. You see this in the work underway across our consumer products. With Windows, we recently announced performance improvements for lower-memory devices, streamlined the Windows Update experience, and brought back focus to core features and fundamentals that matter most to our customers. And you also see this in Xbox, where the team is recommitting to our core fans and players and shaping the future of play. Last week's Game Pass changes are one example of how we are staying close to customer feedback. Monthly active Windows devices surpassed 1.6 billion, and over time, Windows value will extend to deliver unmetered intelligence at the edge. Our Edge browser has taken share for twenty consecutive quarters, and Bing monthly active users reached 1 billion for the first time. LinkedIn has 1.3 billion members, and we are seeing increased depth of conversation, and it is the leading B2B sales and advertising channel for large and small businesses. We set new records for monthly Xbox users in the quarter as well as game streaming hours, and in Microsoft 365 Consumer, we now have nearly 95 million subscribers, and early signals show increasing satisfaction as we make agent mode the default. Across everything I have talked about, we are also hard at work changing the way we work. Our north star remains the same: delivering customer value with the highest quality and top-class innovation, and this is what gives me confidence in our ability to shape the next phase of growth for our company and our customers. With that, let me turn it over to Amy to walk through our financial results and outlook. Amy Hood: Thank you, Satya. Good afternoon, everyone. We delivered results that exceeded expectations across revenue, operating income, and earnings per share, driven by strong demand and execution. As Satya shared, our AI business annual revenue run rate surpassed $37 billion this quarter, growing 123% year over year. And we are accelerating our pace of innovation as we execute against the expansive opportunity ahead. This quarter, revenue was $82.9 billion, up 1815% in constant currency. Gross margin dollars increased 1613% in constant currency, while operating income increased 2016% in constant currency. Earnings per share was $4.27, an increase of 218% in constant currency when adjusted for the impact from our investment in OpenAI. And FX was roughly in line with guidance at the total company level. Company gross margin percentage was 68%, down year over year, driven by continued investment in AI infrastructure and growing AI product usage. The impact from these investments was partially offset by ongoing efficiency gains, particularly in Azure and Microsoft 365 Commercial cloud. Operating expenses increased 98% in constant currency, driven by continued investment in AI, including R&D compute capacity, talent, and data to support product development across the portfolio. This quarter, growth was impacted by a low prior-year comparable, particularly in sales and marketing and G&A expenses. Operating margins increased slightly year over year, to 46%. Total company headcount declined year over year as we focus on building high-performing teams that operate with pace and agility. When adjusted for the impact from our investments in OpenAI, other income and expense was $961 million. Favorability was driven by gains on investments that were partially offset by losses on foreign currency remeasurement. Capital expenditures were $31.9 billion, down due to the normal variability from cloud infrastructure buildouts and the timing of delivery of finance leases. And this quarter, roughly two-thirds of our CapEx was for short-lived assets, primarily GPUs and CPUs. The remaining spend was for long-lived assets that will support monetization over the next fifteen years and beyond. This quarter, total finance leases were $4.7 billion and were primarily for large data center sites. Cash paid for PP&E was $30.9 billion, roughly in line with capital expenditures as the impact from finance leases was partially offset by differences between the receipt of goods and payment. Cash flow from operations was $46.7 billion, up 26% driven by strong cloud billings and collections, partially offset by an increase in operating lease payments. Free cash flow was $15.8 billion reflecting higher capital expenditures. And finally, we returned $10.2 billion to shareholders through dividends and share repurchases. Now to our commercial results. Commercial bookings grew 7% when excluding the impact from OpenAI, driven by consistent execution in our core annuity sales motions. Bookings decreased 46% in constant currency when including Azure commitments from OpenAI. Commercial remaining performance obligation grew 26% in line with historic seasonality when excluding OpenAI. RPO increased to $627 billion and was up 99% year over year with a weighted average duration of approximately two and a half years when including OpenAI. Roughly 25% will be recognized in revenue in the next twelve months, up 39% year over year. The remaining portion recognized beyond the next twelve months increased 138%. Microsoft Cloud revenue was $54.5 billion and grew 2925% in constant currency, reflecting strong demand across the Azure platform and our first-party AI applications and services. Microsoft Cloud gross margin percentage was slightly better than expected, at 66%, and down year over year due to continued investments in AI, partially offset by the ongoing efficiency gains noted earlier. Now to our segment results. Revenue from Productivity and Business Processes was $35 billion and grew 1713% in constant currency. Microsoft 365 Commercial cloud revenue increased 1915% in constant currency, ahead of expectations. Strong execution and improving product quality drove accelerating Microsoft 365 Copilot seat adds this quarter, with paid seats now over 20 million. ARPU growth was again led by both E5 and Microsoft 365 Copilot. Paid Microsoft 365 Commercial seats grew 6% year over year, with installed base expansion across all customer segments, though primarily in our small and medium business and frontline worker offerings. Microsoft 365 Commercial products revenue increased 1% and decreased 3% in constant currency, down sequentially as Office 2024 transactional purchasing trends continued to normalize as expected. Microsoft 365 Consumer cloud revenue increased 3329% in constant currency, again driven by ARPU growth. Microsoft 365 Consumer subscriptions grew 7%. LinkedIn revenue increased 129% in constant currency with growth across all lines of business. Dynamics 365 revenue increased 2217% in constant currency with continued share gains and growth across all workloads. Bookings growth was impacted by weaker renewals, as customers balance spend between the traditional per-seat and the emerging seats-plus-consumption model. Segment gross margin dollars increased 1813% and gross margin percentage increased slightly, again driven by efficiency gains at Microsoft 365 Commercial cloud that were partially offset by continued investments in AI, including the impact of growing adoption and usage of Copilot. Against a low prior-year comparable, operating expenses increased 119% in constant currency driven by the shared R&D AI investments mentioned earlier, as well as higher Copilot advertising spend. Operating income increased 2114% in constant currency, and operating margins increased year over year to 60%. Next, the Intelligent Cloud segment. Revenue was $34.7 billion and grew 3028% in constant currency. In Azure and other cloud services, revenue grew 4039% in constant currency, against a prior year that included accelerating growth. Results were ahead of expectations as we delivered capacity earlier in the quarter, enabling increased consumption across both AI and non-AI services. Strong customer demand across workloads, customer segments, and geographic regions continues to exceed available capacity. In our on-premises server business, revenue increased slightly and decreased 3% in constant currency with ongoing customer shift to cloud offerings. Segment gross margin dollars increased 1918% in constant currency. Gross margin percentage decreased year over year driven by continued AI investment and increased GitHub Copilot usage, partially offset by ongoing efficiency gains in Azure. Operating expenses increased 97% in constant currency, driven by the shared R&D AI investment noted earlier. Operating income grew 2423% in constant currency, and operating margins were 40%. Now to More Personal Computing. Revenue was $13.2 billion and declined 1% and 3% in constant currency. Windows OEM and devices revenue decreased 23% in constant currency. Windows OEM increased slightly and was ahead of expectations as OEM and channel partners continued to build inventory given increasing memory prices. Search advertising revenue ex-TAC increased 129% in constant currency with growth driven by higher volume and revenue per search across Edge and Bing. In gaming, revenue decreased 79% in constant currency. Xbox content and services revenue decreased 57% in constant currency, against a prior comparable that benefited from strong first-party content performance. Segment gross margin dollars increased 64% in constant currency, and gross margin percentage increased year over year driven by a sales mix shift to higher-margin businesses. Against a low prior-year comparable, operating expenses increased 76% in constant currency driven by impairment and other related expenses in our gaming business, as well as continued investments in shared R&D mentioned earlier that benefits the entire portfolio. Operating income increased 41% in constant currency, and operating margins increased year over year to 28%. Now moving to our Q4 outlook, which, unless specifically noted otherwise, is on a US dollar basis. Based on current rates, we expect FX to increase revenue growth by roughly one point in Productivity and Business Processes and More Personal Computing, with no meaningful impact to Intelligent Cloud. Overall impact to total revenue is expected to be less than one point. FX should increase COGS growth by roughly one point with no impact to operating expense growth. Starting with our commercial business, in commercial bookings, when adjusted for the impact from OpenAI, we expect healthy growth on a growing expiry base with consistent execution in our core annuity sales motions against a significant prior-year comparable. Microsoft Cloud gross margin percentage should be roughly 64%, down year over year driven by continued investments in AI and increased GitHub Copilot usage. Just this week, we announced a business model transition in GitHub Copilot that will align pricing with usage and value that takes effect on June 1. Now to segment guidance. In Productivity and Business Processes, we expect revenue of $37.0 to $37.3 billion or growth of 12% to 13%. In Microsoft 365 Commercial cloud on an adjusted basis, we expect revenue growth to be between 15 and 16 in constant currency, when normalized for the prior-year comparable that benefited from two points of in-period revenue recognition. On a reported basis, we expect revenue growth to be between 13 and 14% in constant currency. Building on the Copilot momentum we saw in Q3, we expect net paid seat adds to increase sequentially, which will drive continued ARPU growth. Microsoft 365 Commercial products revenue should grow in the mid-single digits against a prior year that benefited from higher-than-expected Office 2024 transactional purchasing. As a reminder, Microsoft 365 Commercial products includes components that can be variable due to in-period revenue recognition dynamics. Microsoft 365 Consumer cloud revenue growth should be in the low 20% range, down sequentially as we start to lap the benefit from last year's price increase. Growth will again be driven by ARPU and an increase in subscription volume. For LinkedIn, we expect revenue growth of approximately 10%. In Dynamics 365, we expect revenue growth to be in the low double digits, down sequentially with impact from a strong prior-year comparable and the bookings trends noted earlier. For Intelligent Cloud, we expect revenue of $37.95 to $38.25 billion or growth of 27% to 28%. In Azure, we continue to focus on accelerating the delivery of capacity and increasing fleet efficiencies. Therefore, we expect Q4 revenue growth to be between 39 and 40% in constant currency against a strong prior-year comparable that included accelerating growth. Broad and growing customer demand continues to exceed supply, and we continue to balance the incoming supply we can allocate here against our other high-ROI priorities: first-party applications, R&D, and end-of-life server replacement. As a reminder, year-over-year Azure growth rates can vary quarter to quarter, based on capacity, timing, and contract mix. In our on-premise server business, we expect revenue to decline in the mid-single digits with ongoing customer shift to cloud offerings. In More Personal Computing, we are lapping strong prior-year comparables, navigating complex PC market dynamics impacted by memory prices, and refocusing on delivering quality and value to consumers. Therefore, we expect revenue to be $11.75 to $12.25 billion. Windows OEM revenue should decline in the high teens with roughly six points of impact from a prior-year comparable that benefited from Windows 10 end of support, six points from inventory levels that we expect to come down for the quarter, and six points from a lower PC market as prices increase due to memory cost. The range of potential outcomes remains wider than normal. Therefore, Windows OEM and devices revenue should decline in the mid- to high teens. Search advertising revenue ex-TAC growth should be in the high single digits driven by revenue per search and volume with continued share gains across Bing and Edge. In Xbox content and services, we expect revenue to decline in the low teens, reflecting a prior-year comparable that benefited from strong first-party content as well as the recent price changes for Xbox Game Pass as we focus on delivering more value to gamers. Hardware revenue should decline year over year. Therefore, at the total company level, revenue should be between $86.7 and $87.8 billion or growth of 13% to 15%, with accelerating commercial growth partially offset by our consumer business. Our Q4 outlook for COGS and operating expenses includes roughly $900 million in one-time cost for the recently announced voluntary retirement program. Therefore, we expect COGS of $29.4 to $29.6 billion or growth of 22% to 23%, including roughly $350 million from the retirement program, and operating expense of $19.3 to $19.4 billion or growth of approximately 7%, including roughly $550 million from the retirement program. Even as we invested through the year in additional capacity to serve the growing AI platform, apps, and services demand, and inclusive of these one-time costs, we expect full-year FY '26 operating margins to be up about one point year over year. Excluding any impact from our investments in OpenAI, other income and expense is expected to be roughly negative $100 million as interest income will be more than offset by interest expense, which includes the interest payments related to data center finance leases. We expect our adjusted Q4 effective tax rate to be approximately 19%. Next, capital expenditures. We expect CapEx spend to increase to over $40 billion as we continue to bring more capacity online. The sequential increase includes roughly $5 billion from higher component pricing as well as the impact from finance leases, which add variability given full value is recorded in the period of lease commencement. For calendar year 2026, we expect the mix of short-lived assets to remain similar to Q3. We expect to invest roughly $190 billion in capital expenditures, which includes approximately $25 billion from the impact of higher component pricing. We remain confident in the return on these investments given higher demand signals and increasing product usage, as well as the efficiencies we are already driving across the platform. Even with these additional investments and continued efforts to bring GPU, CPU, and storage capacity online faster, we expect to remain constrained at least through 2026. Despite these constraints, and the continued need to balance incoming supply, we expect Azure growth to show modest acceleration in the second half of the calendar year, compared with the first half. Now I would like to share some closing thoughts as we look to next fiscal year. First, we continue to evolve how we operate to increase our pace and agility. Therefore, we expect headcount will decrease year over year. Operating expense growth will be in the mid- to high single digits, reflecting ongoing investments in R&D, inclusive of AI investment in compute, data, and talent to accelerate product innovation. Next, as a reminder, we will lap strong prior-year comparables impacted by Windows 10 end of support, elevated OEM inventory levels, as well as increased Office and server transactional purchasing. Finally, we remain focused on delivering a platform that enables customers to build and run AI solutions and on driving innovation in our first-party AI applications and services. Therefore, we expect another year of double-digit revenue and operating income growth in FY '27. In closing, we are committed to delivering innovation that helps customers create new business value as we enter the final quarter of our fiscal year. With that, let us go to Q&A, Jonathan. Jonathan Neilson: Thanks, Amy. We will now open the call for questions. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions? Operator: And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed. Keith Weiss: Excellent. Thank you for taking the question, and congratulations on another really solid quarter. Those Microsoft 365 Copilot numbers are super impressive and way ahead of most people's expectations. I wanted to ask a broader question on demand. We have been talking about strong demand for a while. We see it in our CIO surveys, and you definitely express it in what you are seeing in your business. Maybe in the short term, can you talk to us about how that demand translates into commercial bookings and how that might be changing? You mentioned different contracting cycles between seats and consumption that may impact that, and then we also have to think about renewal bases. Longer term, and maybe this opens it up to Satya, what is supporting this demand over time? Or said another way, who is paying for all this? Because while we see excitement for Microsoft in our CIO survey, our overall IT expectations are not increasing, and GDP growth is not really increasing. So at some point, how does this get paid for, and do you start to see the indications of where those dollars are going to come from? Thank you. Amy Hood: Why do I not start with the first half of your question, Keith, around how some of these models impact bookings? I think it is really important. You are right. We have the normal cyclical things that happen with bookings. It is the expiration base, or large multiyear Azure commitments that get signed, and that has always had some volatility to it. But if you take a step back, which is the broader question you are asking, you are really thinking through how we go from using a model that is historically thought of as a per-seat business to getting work done and being more productive as a seat or a worker plus an agent. When I think about that model, I start to think about it as a licensed business plus a consumption business applied far more broadly than I think people have thought about. It starts to mean that over time, bookings will actually also look a little different. It will still have that per-seat license logic, but it will also have a meter, just like you see in Azure. It may not all flow through bookings in the same way; you will just bill for usage. If that usage has great value to customers—then you will keep spinning and keep using those agents if they are adding direct value or growth to your business. I think it is healthy to start to think about that transition in a broader way. While you may not see it in the short term in bookings, if I were to frame how to think about the opportunity, I would think about it more in that light. Satya Nadella: Amy captured it. The basic transformation of any per-user business of ours—whether it is productivity, coding, or security—will become a per-user and usage business. That is the best way to think about it. It is already happening with coding, where you see it at scale. Some of the business model changes we made this quarter speak to that and also speak to the intensity of usage. Where are these dollars going to come from? At the end of the day, they will come from some eval and outcome that a business has where these agents—working on behalf of users or with users—have created value. That is where it starts, whether it is customer service, individual productivity, team productivity, or a business process. Some cost is either decreasing because of the use of agents, or some revenue is increasing because agents compressed workflows. That is what you broadly start to see. Even when people talk about Copilot, they use chat and chat with reasoning, they use CoWork, they use agent mode inside Word, Excel, and PowerPoint, but it is all done in the context of some task trajectory. When they see that the task trajectory is compressing the workflow, improving revenue, or decreasing cost, that is what is driving usage. It may not be pure seat coverage motions like in the past. This is more about getting intense users and intense usage, and that is what we are focused on. Amy Hood: Keith, maybe just to take a quick second—just a big thank you to you. It has been a real privilege to work with you over many, many quarters. We have really appreciated your coverage over this time, and congratulations on your next chapter. Thank you so much. Satya Nadella: Keith, it has just been fantastic with you. Keith Weiss: I really appreciate that. Thank you so much. Satya Nadella: Thank you. Operator, next question, please. Operator: The next question comes from the line of Karl Keirstead with UBS. Please proceed. Karl Keirstead: Okay, great. Thank you. Maybe, Amy, could you elaborate a little bit on the CapEx guidance you just provided? Obviously, it requires a fairly material pickup in CapEx in the second half of the calendar year, maybe to the tune of $120 billion. I am just curious about your confidence in working through the physical component constraints to hit that number. Does it involve greater use of partners? And how are you thinking about allocating that increased capacity between third party and first party? Do you have a general framework you would advise us to keep in mind? Thank you. Amy Hood: Sure. Thanks, Karl. I actually feel quite good about our ability to work through the physical limitations. I think of the industrial logic of the supply chain to be able to put that in place. Some of that, as we have talked about, is getting capacity online, but a lot of that is short term in nature—being able to get CPUs, GPUs, and storage put in place to better support the demand signals we have been seeing. We tried to give some help on part of that being price; I think that just helps give you a sense on volumes, and obviously it leans more to short-term assets when you see that type of impact of price on the number. In terms of allocation, you should assume—based on what you were seeing in Azure—looking for 39 to 40 in constant currency in Q4 means that we are able to use some to make sure we are able to meet demand as we can, and do that in a balanced way across Azure. Our Copilot usage in Q3 has really been on a different trajectory than we saw up to this point. That applies across coding, across productivity, and I have some confidence it will also apply across security. When we talk about some acceleration into what I would call the first half of FY '27—the second half of the calendar year—it means we are getting insights into our abilities to increasingly put pressure on efficiencies, speed up the deliveries into our data centers, and make that revenue-ready as quickly as we can. I would expect the pressure between first-party usage and being able to meet Azure demand will persist, as I said, but we are doing our best to get things in as quickly as we can—hence the CapEx number that we see in the second half of the year. Karl Keirstead: Okay. Terrific. Thank you. Jonathan Neilson: Thanks, Karl. Operator, next question, please. Operator: The next question comes from the line of Brent Thill with Jefferies. Please proceed. Brent Thill: Thanks, Amy. One of the big pushbacks we all get is that AI is going to be really expensive, yet you, Google, and Amazon are showing higher margins tonight as you report. What are investors missing, and why is AI a potential better margin for the industry over time? Amy Hood: Thanks, Brent. We have been talking about where this AI business of ours has been in the cycle compared to the cycle we saw with the cloud, which now seems very long ago, and how margins were actually better and have remained better in our AI business versus where we saw them in the cloud transition looking back. We have been really focused on making sure that the business models reflect how these applications are both getting built and the value that they are bringing. When you think about that type of value, it tends to be captured more in consumption and usage-based pricing models, and I think that has been a little underappreciated in terms of margins going forward. It has been important to make sure we leverage the IP we have. The IP we get from our partnerships is obviously free to us for a long time, so we are able to take that and apply it to benefit our margins in a healthy way. You have also seen us work hard on the first-party hardware stack—being able to take cost out of the infra stack as well. And then, of course, the efficiency work. We have been in an accelerated phase of trying to get as much capacity as we can into production. When you go through that, you also then start to focus on the efficiency work—on the hardware side as well as on the software side—to be able to deliver these types of margins. One of the real focuses we all have to have—and this dates back to Keith’s question—is that when you move to usage-based models, you have to make sure you are delivering incredibly high value to customers. The focus starts with customer usage that creates value. If that creates value and positive output, then the TAM expansion here and the ROI will be very good. Satya Nadella: Thanks, Brent. Operator, next question, please. Operator: The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed. Mark Moerdler: Thank you very much for taking my question, and congratulations on the quarter you delivered and the rate of growth and some of the commentary you have made on guidance. I would like to drill in a little bit on the CapEx and the spending that you are making. Obviously, the commercial cloud is growing fast, Azure is growing fast, and AI is growing even faster within your overall business. But there is a bit of a disconnect that makes investors a bit nervous between how fast they are seeing CapEx growing and how fast they are seeing revenue growing. Can you give some color about how the timing works out, or how much needs to be spent on replacement of equipment or first party, in order to build confidence that as we look toward this strong spending on CapEx, the core business will continue to be very healthy and that the margins will be good? Thank you. Amy Hood: Thanks, Mark. Let me start with Azure, which—given its size and its growth rates—where we have talked about acceleration from where we are, is the guide at 39 to 40 into a bigger number in the second half of the calendar year. When you start to see that type of growth rate on the size of the business we have, the amount of spend being done on short-term assets—which is the thing that correlates with revenue, as opposed to the third of that number that is going into fifteen-year assets, or some lumpy timing from lease contracts that can get confusing—I think in many ways this reminds us of the last cycle. When the TAM is so expansive and when shortages are generally growing between supply and demand, it gives you a lot of confidence in the ROI—certainly starting with the platform side. What you are really asking is whether, as we see these usage-plus-consumption models emerge at the app and services layer, are we starting to see the benefits of that? If you look at the last quarter, we saw some acceleration in the Microsoft 365 Commercial cloud number this quarter. We are guiding for that to be better again in Q4. I think that is where you are starting to see what investors have been asking about—when we will start to see that show up in revenue growth—and that is the first place I would point to. We can also point to it in GitHub, where you see revenue growth rates and usage consumption models result in acceleration in the top line. In general, we continue to see that. When you think about spending that amount of capital, putting it into production, seeing some delay before it turns into revenue-ready, having the book of business—over $600 billion of revenue that we still need to deliver—and that is before we are starting to see the acceleration in seats that we are seeing on Copilot, I feel very good about that number. Our real focus will be how much of that we can pull in as fast as we can. I want to be transparent: when you have revenue sitting there that can be grown faster, or efficiencies to gain, the focus needs to be on doing that—landing this CapEx as quickly as we can and converting to revenue as quickly as we can. Satya Nadella: I will add one point. One of the things we have learned in the last two years in AI—and what builds more conviction and confidence—is where the TAM is and the category economics of the TAM. It is fascinating that here we are in 2026, and the most exciting things are plug-ins in Word or Excel, or CLIs in coding. When you see that, it means we have a structural position in knowledge work, coding, and security—which are the big TAMs. Then you couple that with the right business model—user plus usage—that Amy referenced multiple times. Even the book of business we have is a true line. If anything, we want to make sure we are getting the CapEx to get the capacity in time for those increases in usage, which is going to be very key. The model capabilities are exponential. Think about agent mode in Excel—it kind of did not work until it started working, and that is because the model showed up. You have to be ready for those opportunities. Mark Moerdler: That is extremely helpful. I really do appreciate it, and again, congratulations on the quarter. Amy Hood: Thanks, Mark. Operator, next question, please. Operator: The next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed. Gabriela Borges: Hi, good afternoon. Thank you. Satya, I would love to hear some of your reflections on Copilot given the technical and commercial milestones that Microsoft has hit just in the last three months. Maybe share with us a little on your learnings from Copilot adoption to date—what you think is working, what is not working, and how that is informing your E7 strategy and the Copilot CoWork strategy. Thanks so much. Satya Nadella: Thank you for the question. The way to think about Copilot—especially Microsoft 365 Copilot in knowledge work—is that we have learned a lot from coding, but focusing on Microsoft 365 Copilot, the first thing is the form factor and the shape of the product and how it has evolved. There is chat—chat now with reasoning over WorkIQ. Then there are all the agents like Researcher and Analyst that you use within chat, or even custom agents that our customers are building. On top of that, you now have edit mode. A typical trajectory or session in Copilot starts with chat: you ask questions, get insights, ask it to generate an artifact, open that artifact in Word, Excel, or PowerPoint, and further refine it—in other words, you continue the conversation. Then we now have a complete new form factor where you delegate the task—you are not even interactively working but delegating the task with CoWorkers. These are the various form factors. One of the most important things to keep in mind is the usage. It is at the same level as Outlook—this is a daily habit of intense usage. What makes these form factors useful is intelligence, which is a function of two things: multiple models coupled to context. That is meetings, emails, Teams, SharePoint data—all of that rich, constantly updated data. This is not a static database; it is the most important database in any company that is constantly changing every second. The context and the models are brought together with a harness that is multimodal. We do this in GitHub, Microsoft 365, and security. Our core goal is to decouple the harness from the models and then have the context richness show through, because customers are going to use multiple models. Critique or Counsel is a great example, or Rubber Duck in GitHub Copilot. Even in Excel, I might generate using one model and check with another. That is what you want users to have access to. Coupled with the business model of user pricing plus usage, that is what is happening, and we are seeing it play out. Amy Hood: Thank you very much, Gabriela. Jonathan Neilson: Operator, next question, please. Operator: The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Kirk Materne: Yes, thanks very much, and thanks for taking the question. Amy, I was wondering, could you talk a little bit about the change in the OpenAI agreement—if there is anything we should be aware of from a modeling perspective or financial perspective that would change today versus where we were a couple of weeks ago? And then, Satya, it seems like an opportunity for you to continue to diversify from a model perspective. Any other takeaways we should be thinking about in terms of where you landed with OpenAI in this new framework? Thanks. Satya Nadella: Maybe I will start. Overall, we feel good about our partnership with OpenAI. I am always very focused on any partnership and ensuring that there is a win-win construct at all times—that is how you can remain good partners. In this case, it starts with IP. Amy referenced this. We have a frontier model royalty-free with all the IP rights that we will have access to all the way to '32, and we fully plan to exploit it. There are examples I talked about in my remarks earlier, and we are thankful for that—that is one part of the agreement. The second part, of course, is them as a customer of ours. They are a large customer of ours, not just on the AI accelerator side, but also on all the other compute side, and we want to serve them well. And then, of course, we have our equity. Overall, I think the construct—as they have grown and we have grown, and our customers also have different expectations in terms of their model diversity—has evolved, but I feel very good about where we are. Amy Hood: The only two things to keep in mind are having the revenue share exist through 2030—the predictability of that is a real positive for us—and, as Satya pointed out, the IP being royalty-free with the elimination of our rev share to them. Kirk Materne: Thank you all. Satya Nadella: Thanks, Kirk. Operator, we have time for one last question. Operator: And the last question will come from the line of Rishi Jaluria with RBC Capital Markets. Please proceed. Rishi Jaluria: Oh, wonderful. Hi, Satya. Hi, Amy. Thanks so much for squeezing me in. I wanted to go back to the discussion we have been having today on models and consumption, and the philosophy for how this changes over time. We are in complete agreement with what you are seeing out there, and it totally makes sense. I want to drill into E7, which will come out and is predominantly seat-based with some consumption components. You are doubling down on that seat element, and it seems customers still want the predictability of seat-based models, as we have seen with usage issues companies are running into as AI has gone out of control. How do you bring these pieces together—how to maintain predictability within the customer base while increasingly growing consumption? And if we were to fast forward three to five years, how should we think about the mix of consumption versus traditional seat-based? Thanks so much. Satya Nadella: At a high level, you said it—customers want predictability for budgets and procurement, and the seat-based pricing is just entitlement to some consumption. That is the way to think about it: there are some base usage rights that get bundled in or packaged into seats. It is a convenient way for people to buy consumption packs that happen to be assigned to seats or agents. Beyond a certain level, there are overages that go into pure consumption. Even there, if you have long-term commitments to consumption, you get appropriate discounting. That is the direction of travel. From a customer perspective, they are going to evaluate it by eval—where they are seeing the value of tokens, as simple as that. Where they see the outcome—the eval on the token—whether it is improving revenue or efficiency. That will refine budgets. IT budgets will be reshaped by a combination of business outcomes making their way into IT budgets and reallocation from other line items on the income statement like OpEx. Operator: Thanks, Rishi. Jonathan Neilson: That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Amy Hood: Thank you. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, April 29, 2026. Playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. Playback reservation number is 13759551. I would now like to turn the call over to Brett Simpson, Senior Vice President of Investor Relations. Mr. Simpson, please go ahead. Brett Simpson: Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm's President and Chief Executive Officer, Cristiano Amon. Cristiano Amon: Thank you, Brett, and good afternoon, everyone. Thanks for joining us today. In fiscal Q2, we delivered revenues of $10.6 billion and non-GAAP earnings per share of $2.65, with EPS coming in at the high end of our guidance. QCT revenues were $9.1 billion, with another quarter of record automotive revenues as well as growth in IoT. Licensing business revenues were $1.4 billion. Before I share key highlights from the business, I would like to provide some perspective on Qualcomm's current customer design cycles and the opportunities ahead. We are in a period of profound change, and it may not yet seem obvious to the financial community. The emergence of agentic AI workload with [indiscernible] as an early example are fundamentally changing user experiences across connected edge devices and reshaping our roadmap in every platform we develop. For agents to work efficiently, they must run continuously in the background, fuel sensor data into context, orchestrate multistep tasks reliably and deliver strong security. Today's installed base of devices were not built for this new capabilities, and it represents a significant upgrade opportunity and expansion of our addressable market in the coming years. Agent orchestration is predominantly CPU bound and Qualcomm has the world's best-performing CPU across smartphones, PCs, auto and soon the data center. Qualcomm's unparalleled connectivity solutions empower efficient NPU for local models will also be key assets to delivering agentic AI experiences. No other semiconductor company matches the breadth and scale of our technology and product portfolio, which powers devices spanning milliwatts to kilowatts from smart wearables to data centers. As a result, we're seeing a step function increase in strategic customer engagement and is changing how we think about the broad AI opportunity as well as the speed of our diversification efforts. Beginning with automotive, in Q2, we exceeded $5 billion in annualized revenues for the first time, and we expect to exit fiscal '26 at a run rate above $6 billion. This growth is driven by our fourth generation Snapdragon Digital Chassis platform, which comprises connectivity, telematics, infotainment as well as advanced driver assistance and automated driving. Notably, we have now enabled more than 1 million cars operating ADAS and autonomy on our Snapdragon Ride processors. By the end of the fiscal year, we will begin commercial shipments of our fifth-generation Snapdragon digital chassis platform. This represents the largest generation-to-generation content increase in Qualcomm's history, delivering 3x higher CPU throughput, a threefold increase in GPU capability and 12x higher NPU performance while supporting in-vehicle agents and processing for Level 3 and Level 4 autonomous driving. Looking ahead to fiscal '27, we expect continued share gains and increased content, particularly in ADAS. We're pleased with the performance of our automated driving stack with BMW, and we're seeing broad customer engagement from other leading automakers. Our recent announcement with Bosch and Wave are good examples of what's to come as we build on our proven platforms and self-driving stack and scale ADAS. In IoT, agentic workloads and edge AI are driving major product renewal design cycles. Overall, our pipeline is healthy, and there is clear momentum for Qualcomm solutions. In personal AI, we expect a significant increase in the choice of new smart glasses starting in the second half of the year. We believe these launches, combined with the rapid progress in agentic AI will catalyze an inflection point in customer demand across this category. Our 2026 Snapdragon X2 PC platforms are currently in production and our world-class Orion CPU unlocks powerful always on agentic experiences, making it a true competitive differentiator. Agentic orchestrators such as Open Claw, Claude desktop, Claude Code, OpenAI Codex desktop, Perplexity Computer, Crew AI, Armes agent, Landgraf and Humane 1 running on Snapdragon X2 are early proof points. A recent PC MAG review of the ASUS ZenBook A16, notes the Qualcomm is now a serious challenger in the PC space and states, "the generational leap from the original Snapdragon X Elite to the X2 series is particularly striking. Qualcomm hasn't just caught up to the industry. In some cases, is now helping to set the pace." In addition, our [indiscernible] NPU is the world's fastest for laptops delivering up to 85 tops together with our industry-leading CPU, which has the best on-device token generation rate. Snapdragon X2 delivers the full agent experience end-to-end and outperforms Intel's [indiscernible] Lake by nearly 30%. In physical and industrial AI. Our Dragonwing IQ10 platform has generated substantial customer interest since our launch at CES. This is a significant upgrade compared to IQ9, feature an NPU with up to 700 [indiscernible] of on-device AI performance an 18 core Orion CPU over 20 camera sensors in an integrated safety [indiscernible]. Building on our design win with Figure AI, we announced an exciting multiyear agreement with Nora reinforcing our confidence that we can become a significant player in the broad robotics market. Also during the quarter, we introduced [indiscernible] at Embedded World. This is the second Arduino platform built on Qualcomm silicon and we view it as a world-class prototyping engine for both robotics and industrial AI developers as we expand our ecosystem across key verticals. [indiscernible] is purpose built to bring AI into the physical world, enabling fully autonomous AI agents in a wide range of Edge AI applications, including voice assistance and vision systems. Several new industrial AI products are also moving from design win to deployment across retail, utilities, oil and gas, agriculture and other verticals. In data center, the Alphawave integration is off to a great start, and we're pursuing multiple opportunities with large hyperscalers, cloud service providers, sovereign AI projects and other global partners. Building on that momentum, we're also entering the custom silicon space beginning our ramp with a leading hyperscaler and we expect initial shipments in the December quarter. In addition, development of our leading data center CPU and high-performance AI inference accelerators is progressing well. We look forward to sharing more details and customer wins at Investor Day in June. Regarding handsets, I would like to underscore 2 key points: First, the quarter played out as we expected. Sell-through held up in our chip business materially undershipped consumer demand. We believe our China Android revenue is bottoming out in fiscal Q3, and Akash will provide more specifics in his financial update. Second, we think agentic smartphone will soon begin to influence the premium tier and we expect this [ theme ] will only get stronger into fiscal '27 with examples like the [indiscernible] powered, agentic AI phone from ZTE Nubia. Xiaomi's recent announcement of [indiscernible] agent framework and other agentic [indiscernible] systems now in development across the Android ecosystem, we have a clear line of sight into how the AI upgrade cycle will unfold, and this is going to be an important tailwind for premium demand over time. Next, I want to highlight a major strategic initiative and long-term growth driver for Qualcomm, 6G, the next generation of wireless. Design for the age of AI will believe 6G will present one of the most significant transitions for the wireless industry. From a connectivity perspective, 6G will enable new classes of mobile and personal devices such as smart glasses with enhanced uplink capabilities to support agentic use cases like see what I see. Beyond connectivity, 6G will be an AI-native network where AI reasoning, learning and autonomous action are core functions. It is intended to act as distributed intelligent infrastructure that integrates communication in wide area real-time sensing. With these new capabilities, the network becomes critical infrastructure and provides the telecom industry an opportunity to develop completely new business and economic models. He will make possible new AI-enabled services, ranging from context relevant data data insights and analytics low altitude like aerial, terrestrial and autonomous traffic management, drone detection and tracking and 3D mapping with telemetry to build dynamic digital wins at scale. QUALCOMM's leadership in connectivity, AI processing and high-performance, low-power computing position us to be one of the key architects and beneficiaries of the 6G transition. In addition to the development of foundational technologies and standards, we're building end-to-end solutions for devices and the network from a genetic modems and compute platforms that power phones, PC, intelligent wearables and cars all the way to the network, including power-efficient next-generation radio units, wide area network sensing platforms and high-performance compute and AI accelerators for the RAN network edge, core and data center. To help shape and accelerate the 6G road map at MWC, we launched a 60 company coalition spinning carriers, cloud infrastructure, AI native partners and auto OEMs. The engagement and feedback on our 6G vision and plans from our partners, customers and governments across the globe has been very positive and we look forward to working across the industry to deliver on this generational opportunity. Before I turn the call over to Akash, I want to note that we will provide a broader update at our Investor Day to include our data center plans and our progress in other areas, including advanced robotics, next-generation ADAS, industrial edge AI, personal AI devices in 6G. We hope you can join us as we will be highlighting meaningful new avenues of growth to support our long-term diversification story. I will now turn the call to Akash. Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. Let me begin with our results for the second fiscal quarter. We delivered revenues of $10.6 billion and non-GAAP EPS of $2.65, with EPS at the high end of our guidance. QTL revenues of $1.4 billion and EBT margin of 72% came in at the high end of our guidance, driven by favorable mix with global handset units approximately flat on a year-over-year basis. QCT revenues of $9.1 billion and EBT margin of 27% were in line with our expectations. QCT handset revenues of $6 billion came in as anticipated as OEMs remain cautious on handset bills due to the impact of challenging memory industry dynamics. QCT IoT revenues of $1.7 billion were up 9% on a year-over-year basis, driven by growth across consumer and industrial products. In QCT Automotive, we delivered another record quarter with revenues of $1.3 billion, representing 38% year-over-year growth driven by accelerating demand and increasing content per vehicle due to the transition of new digital cockpit and ADAS launches to our fourth-generation chipsets. On a combined basis, QCT automotive and IoT revenues grew 20% year-over-year, underscoring the continued diversification of our business, consistent with our long-term revenue targets. We also returned $3.7 billion to stockholders during the quarter, including $2.8 billion in share repurchases and $945 million in dividends, reflecting acceleration of our capital return program. Lastly, we released a previously recorded tax valuation allowance, resulting in a $5.7 million noncash GAAP tax benefit in the second fiscal quarter. This benefit is excluded from non-GAAP results. This reversal reflects new guidance on corporate alternative minimum tax issued in February by Treasury and IRS permitting taxpayers to deduct previously capitalized domestic R&D expenses. Before turning to guidance, I'd like to provide an update on the continued impact of memory industry dynamics on our business. Last quarter, we highlighted that the increasing demand for memory and AI data centers was driving uncertainty in memory supply and price increases to handset OEMs. And as a result, the handset OEMs, particularly in China, were taking a cautious approach by reducing build plans and drawing down channel inventory. These dynamics played out as expected in the second fiscal quarter and are also reflected in our third quarter guidance. As a result, in both quarters, our China QCT Android shipments are meaningfully below the scale of end consumer handset demand. We now estimate that QCT handset revenues from Chinese customers will reach a bottom in the third quarter and return to sequential growth in the following quarter. Now turning to guidance. In the third fiscal quarter, we are forecasting revenues of $9.2 billion to $10 billion and non-GAAP EPS of $2.10 to $2.30. In QTL, we estimate revenues of $1.15 billion to $1.35 billion and EBT margins of 67% to 71% with sequential decline primarily due to the operating assumption of weaker low-tier handset units. In QCT, we expect revenues of $7.9 billion to $8.5 billion and EBT margins of 25% to 27%. We are forecasting QCT handset revenues to be approximately $4.9 billion as a result of the impact of the industry-wide memory dynamics I just outlined. We anticipate QCT IoT revenues to grow by high single digits versus the year ago period, driven by industrial and consumer products. In QCT Automotive, following another record quarter, we expect year-over-year revenue growth to further accelerate to approximately 50% in the third fiscal quarter. Lastly, we forecast non-GAAP operating expenses to be approximately $2.6 billion in the quarter. In closing, while our near-term revenues are impacted by memory industry cyclical dynamics, we're confident in the underlying fundamentals around Snapdragon product leadership and content growth opportunities, including the adoption of agentic AI technologies. We continue to execute on our secular growth opportunities in automotive and IoT and remain confident in achieving our long-term revenue targets. In addition, we are very excited about the progress in our data center products and customer traction. We now expect initial shipments for our custom silicon engagement at a leading hyperscaler later this calendar year. We look forward to providing an update on our growth initiatives, including opportunities in data center and physical AI at our Investor Day on June 24. This concludes our prepared remarks. Back to you, Brett. Brett Simpson: Thank you, Akash. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: Obviously, I'm not sure you're going to be able to front-run the AI day you plan to host in June. But any details you're able to share or context on what the custom silicon engagement, what the scope is, what the magnitude is? Is this a CPU? Is it an accelerator? Is it a networking chip? Just any help you can give us beyond the press release and prepared remarks, I think would be helpful as that's where investors certainly want to dig in today. Cristiano Amon: Josh, this is Cristiano. Thank for the question. Look, I can't provide a lot of details, as you said, we don't want to front run, I think, June 24. But here's a couple of things I can tell you, which is alongside what we said in the script. I think we have spent the time, I think, building assets and we've been building our CPU. We have accelerator. We have a different solution for memory in the accelerator. We have added a lot of capabilities for custom ASIC with the acquisition of Alphawave and Connectivity, we have been pursuing customer ASIC. We talk about have an engagement with a number of companies and pleased with the engagement several quarters ago. And I think given the capabilities that we're developing and what's happening in the market, that's accelerating. So we're very excited. The only thing I can tell, it is a large hyperscaler and we're really thinking about a multi-generation engagement. But I think that's what we can say at this point. Joshua Buchalter: Okay. I guess we'll stay tuned. For my follow-up, can you maybe walk through why you're confident that -- I assume it's fiscal third quarter that you were referring to with the third quarter, but why you're confident fiscal third quarter can be the bottom for Android sales -- Android QCT sales into China. I mean that's typically -- September quarter is usually a typically down seasonal quarter. And just given how low visibility is right now overall in the handset market, I'd be curious just what inputs you're seeing that gives you the confidence it's going to bottom in the June quarter. Akash Palkhiwala: Sure, Josh. It's Akash. So if you think about the impact to from Chinese handset OEMs as a result of the memory dynamics. It's really 2 parts. The first part is the scale of the handset market. And there, we have seen some small decline in it, especially in the mid, low tiers. But by far, the larger impact have been the OEMs making a decision to slow down their bills and draw down on channel inventory. So both of these factors have been in our March quarter results and they're also represented in our June quarter guidance. And so what we end up doing in both quarters is really significantly under-shipping the end consumer demand for handsets as a result of the channel inventory drawdown factor. So as we look forward, we feel confident that the third quarter is now the bottom. And so as we go forward, the revenue is going to be much closer to the scale of the handset business versus the inventory drawdown factor continuing into our forecast. Cristiano Amon: And Josh, this is Cristiano. I just want to add one thing because -- there's another way to look into this. As you know, because of our licensing business, we do have visibility of what happens in the market. So we know [indiscernible] true. We know how the [indiscernible] market is behaving even with increased price on the handsets. So it gave us a real good idea on activations and customer demand versus what we're shipping. So that dynamic outlined by Akash, is kind of very clear to us that Q3 becomes the bottom. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Cristiano, maybe just going back to the data center opportunity and just trying to think about if you can sort of help us think about the competitive landscape here. I mean you've had, which is the IP provider now announced they want to vertically integrate and make chips. You had NVIDIA announce that they are going to focus on the [ inferencing ] market as well. How are you thinking about the competitive dynamics where they are related to maybe 3 months ago or 6 months ago that you're now sort of going and trying to deliver these wins? And I have a quick follow-up after that. Cristiano Amon: Great question. Look, I'll give our perspective. And I think we have now, I think, more clarity than we ever have about where kind of we are in the AI space. So a little bit of maybe at a very high level, right? In the beginning, it was all about training. It was all about creation of AI, a lot of GPU, very GPU-centric deployment. Infra started gain scale and then the conversation changed to -- I'm going to use my GPU from training on the cluster that I build and when I'm not training, I'm going to use that for inference. As inference starts to gain scale, we started to see dedicated solutions. The data center becomes more disaggregated. You have separate computing solution, some for compute bounds, some from memory bound. And now we're entering the, I will say, the next phase, which how AI is really going from infant generating tokens how do you generate demand for tokens, which all those agentic experience and those orchestrators, they run into a lot of the devices. So when you think at that landscape and you look at our IP, in the places that we could be very differentiated, I will start by our CPU. I think when you think about agents, CPU becomes very important. And I will argue, we were one of the companies that have a pretty good CPU asset. We've proven that CPU performance with leading performance on the markets that we are right now, such as PC, smartphone and Auto. And we have built and we'll provide details on Investor Day a dedicated CPU for agentic experiences in the data center. We're going to show the metrics, we're going to show how it performs. People will be able to compare. As you know, we have an architecture license, and we have a very, very high-performance CPU. So that's one of the assets. The other asset is how you think about the scale of a semiconductor company like Qualcomm. We're not small. And the ability to combine the IP with the ability to do custom silicon, make sure that, that yields make sure it's delivered with quality and combine a lot of the connectivity IP, which I believe Alphawave because it was a licensing IP company has a leading IP, the more you license, the better your IP becomes. The number three is how we think about the accelerator. You're going to need high compute density, low TCO. And we think that we have something unique, which is focused on a cluster that is disaggregating very specific function especially like [indiscernible]. I think the activity you've seen with companies like Grok and [indiscernible] just prove that you have opportunity for a dedicated inference accelerator. And the last point is, I would not discount the position that we have on the edge. If you actually track what's happening with Open Claw in all of the different desktop and co-work solutions, you rely a lot on a high-performance CPU device, which is also causing an upgrade cycle for us. So we look at this whole landscape, and that's how we feel so good about the agentic transition of AI, what it means to Qualcomm. And hopefully, on June 24, we'll show the details on the road map and an investor will be able to see where we stand, and please reserve a seat. Samik Chatterjee: Yes. No, please look forward to talking about that more at the Investor Day. Maybe for my follow-up, just going back to the handset business. Can you just remind us of the multiyear agreement framework that you have with your primary premium smartphone customer, Samsung. You did have some sort of changes in the market -- in the share with them this year. I think there are some more indications for the step-down in share and more use of the in-house SoC sort of next year? Or can you just remind us sort of how you're thinking about that engagement long term? And what does the multiyear agreement sort of capture at this point? Cristiano Amon: No, absolutely. I love answering the question. So this is a very, very stable, I think, a relationship with Qualcomm. I want to remind you all that we have reset the framework of this relationship. Historically, we always had a business with [indiscernible] that was in the 50% share between us and their own in-house silicon. That has changed to greater than 70%, as you know, and that has been the framework. And sometimes we get more than that, but we plan our business in greater than 70% share, which is exactly what we have said. You should expect that that is the framework of this year, and that is also the framework for next year. I would say that, that's probably one of the most stable relationship that we have, and we have visibility of what that entails. And we feel good about the position of Snapdragon. And I'll argue, I think given what's happened with agents, we have an opportunity to actually have a positive bias on that share. Operator: Our next question is from the line of Chris Caso with Wolfe Research. Christopher Caso: I guess the first question is just returning to the data center briefly. And to clarify what you mentioned in terms of the hyperscale engagement for the December quarter. Is that an engagement for an accelerator or a CPU? I understand your targeting both, it sounds like, but what's the particular engagement for December? Cristiano Amon: This particular engagement, which we're going to have shipments in December is a custom product. We're working with a hyperscaler. Christopher Caso: Okay. So no other specificity past that okay. Just with regard to QTL, and it looks like that's modestly down and likely due to what you've been talking about with regard to what's going on in the handset market. What's the right way to think about the QTL business as we go forward into the second half of the year? Do you think that we kind of maintain these levels and adjust for seasonality as you get to the end of the year? Or do you expect the impact on QTL to be more significant as you go in the second half? Akash Palkhiwala: Yes, Chris, it's Akash. So as you saw in our results for the second quarter, year-over-year handset units were flat for the global units. And this was really kind of impacting our guidance as well, our actuals as well. As we look at third quarter, what we're guiding is some weakness in the mid, low tiers in the market. I mean this is obviously something that we are projecting forward, and we're going to track closely. But what we're seeing is the premium high tier of the market is continuing to hold and weakness in the lower tiers. And that's what's reflected in our guidance. That's a reasonable way of thinking about the market going forward as well. Operator: The next question is from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon: So if the China handsets bottom in Q3 and then they grow in Q4, that September quarter, September quarter, I think, is when we're supposed to get the Apple step down, which may be an offset. So I guess just how are you thinking about handset seasonality in the September quarter, given those kind of competing dynamics? How should we be thinking about that? Akash Palkhiwala: Yes. Stacy, it's Akash. You're right. I think in terms of kind of handset revenues for QCT from Chinese OEMs, we do expect that the June quarter is the bottom, and you will see sequential growth from there. And Apple, you're right as well that typically, it's a growth quarter for Apple product revenue, and we do not see that at this point given the share assumption change. So those are the 2 factors you would use to forecast September quarter. Stacy Rasgon: I mean do you think handsets growing sequentially in September or not given those two factors? Akash Palkhiwala: Stacy, we are not specifically guiding it at that point -- at this point, but I think those 2 factors would be the input into the forecast. Stacy Rasgon: Okay. And for my follow-up, you talked about like agentic devices and agentic smartphones like driving a shift and things, I guess, into '27. Do you think the memory issues are going to be done by -- like how much memory does an agentic smartphone need? And is that something that's going to continue to be a headwind do you think on this as we go into 2027? How do we think about the broader dynamics around memory as we go forward? Cristiano Amon: Thank you for the question, Stacy. Look, it's a little early to talk about '27. I think 1 thing to see is I think the pace of change of AI is getting scale. When I think about the framework that I talked about it before, which you go from inference to now, you know how you generate demand for tokens with a lot of agents. And I think what we see is 2 things. One is the devices are changing the requirements in the design and the players. We see interesting associations now starting to form between smartphones and AI companies. We're starting to see some very interesting dynamics there which is changing the nature of designs. We see designs moving towards products they have much more capable CPU to run those type of products. And there's a lot of noise in the memory environment right now. I wish I could make a prediction on '27 is a little early, but we see a combination of some of the same companies that want a lot of demand for data centers and also getting involved with some of the devices at the edge as well. And we see new memory players coming and building capacity. So we're going to have to monitor the situation and see what happens in '27. Operator: The next question is from the line of Timothy Arcuri with UBS. Timothy Arcuri: Thanks a lot. I wanted to ask also about this custom that is going to ship in the fourth quarter of this year. I know you brought a team in from Alphawave. It seems a little fast to get something to market that includes your IP by the end of this year, given cycle time. So I think they had some chiplet stuff and maybe some custom DSP stuff. Is that the sort of thing you're talking about? Or is this truly something that includes a big portion of your IP that you've been able to turn around since the deal closed? Cristiano Amon: Look, I think 2 answers. So we have -- I'm pretty positive for the past several quarters, we've been talking about engaging with customers in the data center. So I think when we start engaging and talking about some of the Qualcomm capabilities, it's probably, I think, even before the acquisition of Alphawave. I think the acquisition of Alphawave increase our execution capabilities in the portfolio of IP. I think you should expect that we're going to have a longer multi-generation agreement with those companies that brings a lot of Qualcomm capabilities to the table. I wish I could provide more details, but like I said, I don't want to front run what we're going to do on June 24. But I think we will provide a detail of everything we're doing. Our customers win in our roadmap and our IP. Timothy Arcuri: And then I guess just as a follow-up, is the assumption still the same that like around your share in Apple. I know there are some signs that there's going to be a little more aggressive displacement. Is the assumption still that it's going to be 20% for the new launch? Akash Palkhiwala: Yes. No change, Tim, to our assumption there. We've set of the 20% of the -- 20% share of the phones that will launch in fall this year and no product relationship beyond that. And this is -- this assumption has been consistent for the last couple of years. In terms of Apple product revenue for fiscal '27, we've seen sell-side models in the range of a little over $2 billion in terms of QCT product revenue in the year, and we think that's a reasonable place to model the business. Operator: Next question is from the line of Joe Moore with Morgan Stanley. Joseph Moore: You alluded to the weakness being more in the medium tier and the premium tier as being stronger. Is that something you can see where you're sort of taking limited memory allocation and that sort of drives just to sort of limit that puts it in the heart here. Just what are you seeing in terms of what that's doing to your mix going forward? Akash Palkhiwala: Yes. I think the actions from the OEMs are obviously very logical. If you had to choose between which devices you put your memory allocation to, you would pick the premium and the high tier, that's where the profitability sits, and that's what you're seeing happen in the market. Joseph Moore: Okay. And you talked about 6G in 2029. I mean is that -- what does that time frame represent? Is that sort of introduction of technology? Is there a shipments then? Just anything you can tell us about when 6G starts to become relevant? Cristiano Amon: Yes. And look, thank you for the question. The reason I brought it up is because 6G is going to feel, I think, very different than the other Gs for Qualcomm. I also believe that 6G creates some very interesting, I think sovereign AI and data center opportunities, I think, for Qualcomm as well. You should be thinking about our time line, and we've been consistent with it. We will have prototype base, I think, demonstrations in 2028. Likely, we're going to have first silicon in '28, and we want early launches in 2029, and then we expect that to get scale by 2030. Operator: Our next question is from the line of Ross Seymore with Deutsche Bank. Ross Seymore: I want to go back to the handset side. And if you could just level set us to whether it's the fiscal second quarter or fiscal third quarter, what percentage of handsets is China. And you mentioned that a lot of the dynamics is how far you're under-shipping versus true demand, are you believing that true demand, whether it's China or elsewhere, is truly weakening still? Or is that side of the equation stabilizing despite the memory fairs? Akash Palkhiwala: Yes, Ross, when you think about the total handset market, and this is more of a QTL comment, right, that's where we are seeing that the -- there's a slight decline in mid-low tiers, but the overall scale of the handset market has not changed much, at least in the March quarter, and we're going to obviously closely monitor that going forward. In terms of QCT shipments to Chinese customers, it's a factor, as I said earlier, of 2 things. It's not just the scale of the handset market, but the OEM decision to drawdown on channel inventory. And so my comments earlier were about the drawdown of channel inventory will end soon, and that's us calling the bottom on the quarter. And then really, our shipments will reconcile to the size of the handset market. Ross Seymore: Okay. And I guess for my follow-up question, shifting gears to the automotive side of things. You mentioned about the ADAS side starting to ramp and growing 50% this year, so -- or at least in the next quarter, so doing very, very well. As you go from more of a cockpit business to the ADAS mix increasing, how does that change the revenue trajectory and perhaps the gross margin trajectory in your automotive business? Cristiano Amon: Yes. So this is Cristiano. I think what you see is it accelerates revenue dramatically because it's a lot more silicon content. If you -- and that is true actually on both sides. I think what you saw is when we went from generation 3 to generation 4 in digital cockpit. We -- I think we keep mentioning the car, it's really becoming a computing surface. We saw a step function increase in the capability [ silicon content ]. You expect another 1 when we go from fourth generation to fifth generation. And as we add processors and you started to see more and more development of L2++ in direction towards Level 3, you're starting to see the amount of computing power going up. So for us, it's basically a significant revenue accelerator within automotive. Akash Palkhiwala: And specifically on your question on gross margin, I'd highlight maybe 2 additional factors to what Cristiano said. I think we have the we're transitioning from a chip sale to a [indiscernible] sale. And so as we go to a module, it increases the revenue opportunity for us as well. And then in addition, we have software opportunity on top of the the chipset, which also helps our margin profile. So net debt, we still model the business in line with our corporate average, but it really is a business that has several vectors of growth as both of us outlined. Operator: Our last question is from the line of Vivek Arya with Bank of America Securities. Vivek Arya: For the first one, Akash, you mentioned Apple product sales, I think, $2 billion plus for fiscal '27. What about the royalty contribution? How does that evolve as you approach the date for kind of renegotiation negotiating that business? Akash Palkhiwala: Yes. So pending the renegotiation, the royalty, we don't expect it to change, right? It should be in the same scale that it's at, and it's an independent business separate from the chip business. Vivek Arya: And for my follow-up, Cristiano, back to the hyperscaler discussion, I realize you'll give more details at Analyst Day. But was -- is Qualcomm's intention to approach this from an ASIC perspective, I thought you plan to enter the data center from a merchant perspective. But are you saying that now the goal is to approach it from an ASIC perspective? And if that is the case, what impact does it have on margins? Like are you really going to compete head on with the other ASIC suppliers that are out there. So this is going to be more kind of a one-on-one right type approach to the market as opposed to approaching the market in a broader merchant. So just what is kind of the broader strategy, go-to-market strategy that Qualcomm has in this business? Cristiano Amon: Very good -- great question. I think the answer is all of the above. Look, we -- first of all, as a new entrant, I think we we're very flexible. But we also look at the reality of what's happening in the hyperscalers. You can see that the majority of the revenue for semiconductor companies is heavily concentrated in a few number of very large companies. And those companies have now had indicated very clearly, they have different -- as the data center gets disaggregated, you have different approach to compute to connectivity. And you should assume that Qualcomm will play on merchant, on custom and it's going to be a combination of how we're going to configure our IP and different IP blocks for different solutions is going to be a bespoke business. Akash Palkhiwala: And specifically on your question on this custom engagement we talked about, we do expect that to be accretive at the operating margin level. Operator: Thank you. That concludes today's question-and-answer session. Mr. Amon, do you have anything further to a before adjourning the call? Cristiano Amon: I think the obvious thing I want to say is please ask everyone to attend our June 24 [indiscernible] Investor Day. We intend at the Investor Day to really highlight not only, I think, everything that is happening with the new Qualcomm, but also I think the details of the products and technology we have been developing for the data center space, provide an update in how physical AI is transforming our business and provide the clarity that we have today, how really agents and agentic experience exactly has a broad implication in our entire business. And I'm looking forward to speak to all of you, and I'd like to our partners, our employees for a great quarter as we continue to transform Qualcomm. Thank you very much. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Waystar First Quarter 2026 Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Edward Parker, Head of Investor Relations. Please go ahead. Unknown Executive: Thank you, operator. Good afternoon, everyone, and thank you for joining Waystar's First Quarter 2026 Earnings Call. Joining me today are Matt Hawkins, Waystar's Chief Executive Officer; and Steve Oreskovich, Waystar's Chief Financial Officer. This afternoon, we issued a press release announcing our financial results and published an accompanying presentation deck. You can find these materials at investors.waystar.com. Before we begin, I would like to remind you that this call contains forward-looking statements, which are predictions or beliefs about future events or performance. Examples of these statements include expectations of future financial results, growth and margins. These statements involve a number of risks and uncertainties that may cause actual results to differ materially from those expressed in these statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this afternoon's press release and the reports we filed with the SEC all of which are available on the Investor Relations page of our website. Any forward-looking statements made on this call are as of today and will not be updated unless required by law. We will also discuss certain non-GAAP financial measures. These measures are intended to provide additional insight into our performance and should not be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. We have provided reconciliations of the non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck and our earnings release. With that, let me turn the call over to Matt. Matthew Hawkins: Thank you, Edward, and good afternoon, everyone. Thank you for joining our Q1 2026 Earnings Call. Waystar delivered a solid start to the year reflecting strong execution across the business and our innovation road map as we continue to position ourselves as the market leader in delivering an end-to-end health care revenue cycle platform. We drove strong performance across the core business, built on our innovation momentum, including our recent innovation showcase and introduced a new AI-powered recruitment solution. What differentiates Waystar is the tangible value we deliver. Our platform is purpose-built and integrates powerful LMs into our core workflows to drive meaningful ROI for health care providers, improving accuracy, reducing friction and lowering the total cost of operating the revenue cycle. As requirements expand across payers, policies and workflows, providers increasingly choose embedded solutions they trust that deliver consistent financial outcomes. Importantly, the AI era is expanding Waystar's total addressable market opportunity meaningfully. Historically, revenue cycle technology addressed a roughly $20 billion software market. As we embed Agentic AI directly into mission-critical workflows, we're building toward what we believe is the future of this industry, the autonomous revenue cycle platform. That shift unlocks a much larger opportunity, the approximately $100 billion in annual revenue cycle labor services performed across the industry today. We believe we are well positioned to automate a meaningful portion of this labor pool through new AI-powered capability launches like denials, prior authorization and recoupment. In Health Care, where regulation and risk defines success. This shift is critical, and Waystar is built to win. Our AI advantage is anchored in billions of proprietary longitudinal, financial and clinical data points, deeply integrated workflows with significant switching and disruption risk. Hard one domain expertise that positions us as the trusted AI partner and proven ability to operate at scale in an environment with little tolerance for hallucinations. Our first quarter results reinforce our conviction. Revenue of $314 million, representing 22% year-over-year growth. Strong retention supported that performance with net revenue retention of approximately 111% alongside continued adoption of our AI platform and approximately 99% first pass acceptance rates across the platform. With that context, let me highlight a few key points from the quarter. First, our core growth drivers are durable. Continued expansion across the platform and solid core execution drove our results. We expanded within our installed base and demand signals are strong. Second, AI traction is accelerating. AI-powered capabilities drove roughly 40% of new bookings in Q1 and our clients leaned into the platform for prevention, automation and visibility rather than downstream rework. That shift reflects the value of embedded intelligence across the revenue cycle. Third, we maintained discipline through near-term headwinds. A few factors pressured patient payment volumes during the quarter, reflecting broader macro and weather-related dynamics, but we held financial discipline while continuing to invest in innovation. Steve will expand on these dynamics shortly. Let me discuss the quarter in more detail. We continue to expand our client base in Q1, adding 42 new clients with more than $100,000 in trailing 12-month revenue. Win rates exceeded our historical averages across segments, and we continue to see RFP activity shift toward platform evaluations over point solutions, favoring Waystar's unified mission-critical platform. We also delivered strong bookings ahead of internal expectations and building on a record Q4. Demand was broad-based, driven by both new logo wins and expansions within our installed base. We continue to build momentum with larger complex provider organizations as they consolidate vendors and standardize on a single platform. Our implementation backlog is elevated across segments. We carry what we believe is the largest qualified sales pipeline in our history, reflecting deep multiyear platform commitments from providers and supporting visibility into 2027. Waystar delivered adjusted EBITDA of $135 million in Q1, representing an adjusted EBITDA margin of 43%. Revenue mix elevated the margin slightly above expectations, which Steve will discuss. We continue to balance profitability with targeted investment in innovation and AI. Turning to iodine. Integration is running ahead of plan and continues to validate the strategic rationale of the acquisition. Iodine extends Waystar into the mid-cycle where clinical intelligence plays a critical role in preventing denials and ensuring compliant reimbursement. The convergence of financial and clinical data represents 1 of the largest unmet needs in the revenue cycle and new third-party research confirms it. A recent study of 50 mid-cycle leaders found that 86% of organizations have financial and clinical systems that are completely siloed or are reliant on manual data transfers resulting in a lack of visibility into payer payment and denial outcomes, 100% expressed interest in a single AI-powered platform to bridge the gap from mid-cycle to the final claim. We'll publish the full study in the coming weeks, but these findings reinforce why we acquired Iodine and the demand signal we're seeing in the market. Iodine's AI talent is now fully integrated into Waystar, accelerating AI initiatives across the combined platform. We're generating early cross-sell traction in both directions and go-to-market demand is exceeding our expectations. Last quarter, we outlined the 4 interconnected pillars that position Waystar to lead in the AI-powered revenue cycle. Now I'll focus on how those pillars translate into outcomes for providers. First, Waystar is the mission-critical infrastructure providers depend on to get paid, operating at scale in 1 of the most highly regulated payment environments, directly inside live revenue cycle workflows, eligibility, authorization, claims, denials, appeals and payments. This results in very sticky long-term customer relationships. Second is our proprietary data at scale. We process over 7.5 billion transactions each year and with Iodine, our models now learn from clinical data on approximately 1/3 of U.S. hospital discharges annually, giving us visibility into the financial and clinical dimensions of reimbursement, not just what happened, but why? Our models learn across hospitals, physician practices and ambulatory settings. Every claim, denial and payment improves performance. Clients benefit from patterns across tens of thousands of similar organizations. Third, Waystar operates a deeply deployed multisided network and proprietary data rails between payers and providers. We connect over 1 million providers to every major payer through 100,000-plus live integrations across electronic health records, practice management systems, clearing houses and clinical platforms. We touch roughly 60% of the U.S. patient population each year, yet we only penetrate a small portion of the total transactions those patients generate. As volume increases, our platform delivers better outcomes. Fourth, Waystar combines scale distribution with deep domain expertise. We serve providers across all care settings with low client concentration, creating both resilience and broad reach. Our forward deployed teams, product, clinical, revenue integrity and client success work directly inside real workflows. We develop and refine many of our AI capabilities in close partnership with clients, ensuring what we deliver works in production. With that foundation in place, let me turn briefly to how AI is operating and evolving across the platform today. At Waystar, AI is embedded directly inside workflows and where decisions are made and dollars move. The platform identifies issues upstream, resolves them inside live workflows and learns continuously from outcomes. This quarter, we accelerated the shift from task level automation toward Agentic workflows. Each step moves us closer to the autonomous revenue cycle where the platform absorbs the administrative burden, so teams can focus on exceptions, strategy and patient care. Today, approximately 50% of our solutions leverage AI and nearly 40% of revenue is generated by AI embedded workflows. At last week's spring innovation showcase, we introduced several net new capabilities that expand AI embedded workflows across the revenue cycle including deeper convergence of financial and clinical intelligence to prevent issues before billing and expanded Agentic intelligence that assesses documentation, prioritizes opportunities and guide next steps directly within live workflows. Early deployments are delivering strong outcomes. Our new prebill anomaly detection solution delivers an estimated $3 million in net revenue per 10,000 patient discharges and a 5x return in recovered revenue over 3 years. New Waystar altitude AI-powered capabilities within our patient financial experience are expected to drive a 50% increase in collections meaningful in a market where patients account for more than $556 billion in out-of-pocket spending. Some of the most damaging revenue loss in health care happens after providers have already been paid through payer recoupments. Payers regularly take back funds from previously paid claims, often months or years later by offsetting them against future payments with little transparency into which claims are involved, why the funds were recouped or whether the action is even valid. Based on our industry remittance data analysis, we estimate payers take back over $40 billion from providers each year through these offsets, and recruitments are growing at more than 2x the rate of overall claim volume creating significant accelerating cash flow volatility. Waystar's new recruitment solution built on Altitude AI brings transparency to this process. Providers can now detect previously hidden recruitments, understand the root causes and take action efficiently, all using remittance data at scale. Early results are compelling. Providers are reducing recruitment reconciliation time by over 80% and 1 early adopter health system matched $32 million in revenue risk, work equivalent to approximately 13 full-time employees. This new SKU integrates quickly for existing clients and demonstrates how we convert administrative complexity into financial outcomes through AI. Looking ahead, our priorities are clear: execute against our product road map with AI embedded deeper into every workflow, drive cross-sell and platform adoption across our installed base and maintain operational discipline while investing in the capabilities that widen our competitive advantage. Q1 reinforces that our role in the health care ecosystem is deepening. We're operating at the intersection of complexity, scale and outcomes, and our platform is engineered for exactly this environment. Before I turn the call over to Steve, I'm pleased to share that will be hosting our first Analyst Day on Tuesday, August 25, alongside our annual Waystar True North Client Conference. You'll hear directly from our customers partners and leadership team, we hope that many of you can join us. With that, let me turn it over to Steve. Steven Oreskovich: Thanks, Matt. Revenue increased 22% year-over-year in the first quarter to $314 million. Organic revenue grew 11% year-over-year. Performance in the quarter reflects strong execution across the business and expansion within the customer base. Bookings exceeded internal expectations and include a double-digit count of $1 million-plus annual value contracts, which is above our historical quarterly performance. These contracts have both longer lead time to revenue and attractive profitability. Clients generating more than $100,000 of revenue in the last 12 months increased by 42% in the first quarter to 1,433 at quarter end, an increase of 15% year-over-year. Our net revenue retention rate also viewed on a last 12-month basis was 111% at the end of Q1, slightly above the historical range of 108% to 110%. Subscription revenue of $172 million for the first quarter increased 38% year-over-year, 3% sequentially and was 55% of total revenue. On an organic basis, subscription revenue grew 14% year-over-year. The growth and revenue composition are in line with our expectations. Volume-based revenue of $139 million for the first quarter increased 7% year-over-year and 4% sequentially. As we moved through the quarter, we saw some modest offsets within our volume trends that were most evident in patient interactions with health care providers and taken together, affected volume-based revenues. These headwinds were primarily concentrated in patient payment solutions, which represent approximately 25% of revenue and include a combination of external and client-driven dynamics. Specifically, we saw accelerated conversion from print to digital patient statements as clients continue to focus on efficient ways to engage with patients. While we've been advocating for the shift to digital for some time, adoption in Q1 was ahead of historical rates, and we have updated expectations for the remainder of the year accordingly. We also saw 2 factors affecting patient utilization of the health care system during the quarter, changes in health care coverage and weather-related impacts. Importantly, none of these factors were competitive or product-driven as evidenced by our strong bookings performance over the past 3 quarters and a record qualified sales pipeline at the outset of Q2. Adjusted EBITDA of $135 million for the first quarter increased 26% year-over-year. The adjusted EBITDA margin of 43% was primarily driven by a shift to higher-margin solutions, specifically, provider solutions, which have higher margins and comprised approximately 75% of revenue organically grew year-over-year at double the rate of lower-margin patient payment solutions. Please see our latest investor presentation for more details on historic growth rates of these 2 solution sets. Our capital position is strong with healthy cash flows as we ended the quarter with $159 million in cash, equivalents and short-term investments and $1.5 billion in gross debt. Unlevered free cash flow was $90 million in the first quarter and we converted 67% of adjusted EBITDA to unlevered free cash flow. As of March 31, net leverage was 2.7x compared to 3x at the end of 2025, which aligns with our historical ability to delever 1 turn annually. As a reminder, we expect to run the business at or below a 3x leverage ratio. We are also pleased with the recognition of our efforts managing our capital structure as noted by both Moody's and S&P upgrading the ratings of our debt facility in the past couple of months. Based on the first quarter performance and our current visibility for the rest of the year, we reaffirm our revenue guidance range of $1.274 billion to $1.294 billion, with the midpoint of $1.284 billion, representing 17% year-over-year growth and adjusted EBITDA range of $530 million to $540 million, with the midpoint of $535 million. Our full year guidance at the midpoint continues to assume normalized organic revenue growth of approximately 10% consistent with our low double-digit long-term growth target. We expect the strong demand in booking activity we saw in the first quarter, along with similar results in the second half of 2025 to provide upside opportunity for growth in late 2026 and beyond. We are balancing that expectation with the near-term impact of the previously discussed offset, which we expect adjust the typical first half, second half of the year seasonality curve associated with patient payments to have much less variability in 2026 relative to the past couple of years. Thus, while we previously communicated that we expect 1% to 3% sequential quarterly growth throughout 2026, with Q3 at the low end -- we now anticipate Q2 sequential growth to be flat to 1% in Q3 to be 1% to 3%. This concludes our opening remarks. With that, we are ready for your questions. Operator, please open the call. Operator: [Operator Instructions] Our first question will be coming from the line of Adam Hotchkiss of Goldman Sachs. Adam Hotchkiss: I guess, Matt, you spoke about 40% of revenue being associated with work flows related to AI. I think that speaks to the defensibility of the platform as you work AI into the existing solutions. But how should we think about the degree to which AI can be additive to your TAM and show up as rating revenue growth. I guess I'm just trying to marry the stability of the current organic growth rate with some of the AI strength you're calling out in numbers and how we may see AI SKUs impact revenue growth in the future? Matthew Hawkins: I appreciate your thoughtful question about AI. One of the things that you heard us just speak to, I believe we've provided a slide or 2 this quarter and in the past is a much larger total addressable market that we're able to go after by deploying AI capabilities that replace manual services. We note that a recent McKinsey report stated that that this ongoing shift in value pools from services to technology and software platforms will expand its incredible addressable market opportunity. And so I think what you see with our recent spring innovation showcase launch where we are consistently pointing people towards the autonomous revenue cycle platform and then delivering new AI-powered capabilities, whether it's the new recruitment SKU that we highlighted or it's things that show up in our innovation showcase like the prebill anomaly detection solution that replaces manual work from needing to take place. It's going to allow Waystar to pursue a much larger addressable market opportunity. We're very excited about that. We view AI as a tailwind and as the biggest opportunity in our lifetime. Operator: Our next question will be coming from the line of Charles Rhyee of TD Cohen. Charles Rhyee: I want to ask about the comments you made about volume-based revenue is, obviously, it looks like patient revenue was up about 4% in the quarter. It's been going up more about 8% the last 2 quarters prior. You made some comment about accelerated move from print to digital building. Just curious, why would that necessarily have an impact in you did call out weather, but are you able to sort of isolate how much maybe weather might have had impact on that? Just trying to understand a little bit what's happening there and how we should think about patient payments to look as we think about the guidance, particularly as the 2Q commentary on flat revenue. Any help there would be helpful. Matthew Hawkins: Thanks, Charles. Let me start and then I'll turn it to Steve. We certainly work to be transparent with what we observed taking place in the business. And we did highlight couple of the offsets in the transaction volume. Most of that was a function of this dynamic of the acceleration of conversion from print statements to digital statements. We've talked about this for quite some time. We know that there's this tremendous digital transformation opportunity that exists in health care, where we reduce paper and postage and take cost out of the system while we actually increase the patient experience and ensure that we get providers paid accurately and successfully. So we view this digital transformation as ultimately being good for providers, good for patients, quite frankly, good for the earth and good for Waystar. And Waystar has digital integrated patient payment solutions that improve transparency, improve the patient payment plan adherence and really are also helpful to providers. So I guess I'd say 1 other thing and then we can comment on some of the quarterly commentary, and I'll ask Steve to help us there. I'd say it's important to note that while we see this trend -- and we're kind of factoring that into how we think about 2026, we view this as an opportunity. We view this transformation as something that's good, as you've heard me describe, and this offset, if you will, has 0 to do with AI competition and more to do with doing what's right for health care. And so with that, Waystar can be an enabler of that. And I'll turn it to Steve for added commentary. Steven Oreskovich: Yes. And hopefully, Charles, when you get a chance, I guide you to look at Slide 8 of our IR deck. We expanded it to include the split of provider and patient payment solutions revenue by quarter and the historical trends since the first quarter of transparently, most people could have picked it up from our filings, but you felt that it just made more sense to illustrate it here so you can actually see the same things that we're seeing going on in the business into. To Matt's point, right, you continue to see the strength of the business and growing in Provider Solutions, which are 75% of the total revenue. And we talked about in the past, very high margins when we look at it from a very low direct third-party costs associated with it. Over the past 6 quarters, that's continued to grow nicely on an organic basis, which we also called out on the slide, anywhere between, on average, 13% to 14% year-over-year. The offsets we talk about are in, and as you mentioned, inpatient payments that 25% of the revenue stream where we're helping providers connect with and interact with and get paid by patients. And that's where we're seeing that conversion of -- from print to digital statements. Transparently, that does impact the top line revenue number on a unit economic basis. But when you look at it from a margin dollars or a cash flow, that conversion is neutral. So we see positivity long term in the business there, because it's going to allow us to see margin accretion in the business overall. A little bit of that, what you see in the first quarter here as well, and we called out based on the revenue composition for the order. So hopefully, that's helpful commentary, and it's a good spot to go look and really dive into the details on that impact. Operator: And our next question will be coming from Jailendra Singh of Truist Securities. Jailendra Singh: I wanted to follow up on your comments that about bookings coming in ahead of internal expectations. I think you talked about 40% new bookings driven by AI solutions, and I petite all the color there. Can you elaborate on the remaining 60% bookings? Are there any particular areas that are seeing outperformance -- and considering the rates we are seeing between payers and providers, are you seeing an increased genes from providers, which might result in a faster conversion than what we have seen in the past? Matthew Hawkins: Thank you, Jailendra. Yes, we note that we've just seen nice momentum and I feel like our business is getting better and better every quarter. the bookings momentum is across both new prospects as well as cross-sell and upsell. We are growing across every segment of our business with high-quality opportunities. And as we -- it's interesting, we look at the size of the bookings, just a little color commentary here, we called out in the last 2 quarters of 2025 that the number of million dollar bookings were more than 2x the quarterly average of the past 3 years. That trend is continuing. We're seeing more large bookings. To us, that validates our platform approach as these these bookings are often multi-solution or platform sales often involving AI that hopefully can be turned on faster. Generally, cross-sell and upsell bookings, we're able to build in an implementation plan for existing clients. But given the larger nature, whether it's new or existing, if these bookings are larger in size, they're still taking 6 to 18 months to show up in our revenue model. And we've noted in the past how larger deals typically take this type of time for full revenue realization. But certainly, we have internal teams focused on compressing that time. It's just a balancing act. Sometimes it's what the actual provider organization. Overall, we're pleased with the progress that we're making. We start Q2 with the largest qualified pipeline of new and cross-sell upsell opportunities in our history. So that gives us a sense of momentum and conviction about the work that we're doing. And we also start -- as you might anticipate, at the start of Q2, a large implementation backlog. So hopefully, that commentary is helpful, Jailendra, I appreciate your question. Operator: And our next question will be coming from the line of Ryan Daniels of William Blair. Ryan Daniels: Matt, maybe 1 for you. You talked about early adopters of the payment recruitment solutions, seeing some very good ROI -- and I heard in your prepared comments, you stated that was a new SKU. So it sounds like a new AI-enabled revenue generation opportunity. So what I'm hoping you can dive into a bit more is how long does it take for solutions like this to kind of go broadly across your client base? And then also, are you doing any go-to-market changes given the potential increased value of solutions like this that are new and AI enabled that can really add value on a rapid basis. Thank you, Ryan. We're sure excited about this new EI powered recruitment solution. It does represent a new SKU. Matthew Hawkins: And as you've heard us speak to in the past, -- these AI-powered solutions have multiple ways to show up into our business model. First, certainly, longevity of clients and sustaining sticky relationships with clients Second, pricing, AI solutions, where we're strengthening in some cases, existing software with more LLM based AI capability. We price those to value for clients as we're delivering incremental capability. In the case of a new SKU like this, like this AI-powered recruitment and what will soon follow in the prebuild anomaly detection solution. If I were to pull back the curtain just a bit we go through an extensive amount of training for our teams. So certainly, the product and technology teams are stoked to build these kind of capabilities and to launch them. We do have a robust early adopter program. We're getting great feedback from some of the leading provider organizations in the United States. This is a robust kind of test and learn environment once we get ready to launch this, we also brought along our go-to-market teams, our product marketing teams. We do a little bit of outbound product marketing to build excitement and webinars and things that will educate provider organizations on the benefits of these types of solutions, while we're training our go-to-market teams. Just last week, we were at a growth summit. We had several hundred people engaged in hands-on training on making sure that we're able to talk about these solutions, get these solutions into the hands of provider organizations and do ROI calculators, things like that. And then along the way, we're training our operational teams as well to be able to implement these solutions. Depending on the -- and they do a fantastic job I might add. But depending on the SKU we're able to turn some of these things on rapidly. And to your question, we're always exploring ways for us to turn on new capability in a way that clients can absorb it into their -- into the platform and begin to use it and get the benefit of it. So that often involves training and some educational component. And the nice thing about our platform Ryan, is we're conditioning end users to consume AI in a construct that they understand. And as you know, we deliver hundreds and hundreds of capabilities onto our platform each and every quarter. We want people to understand the power that they have. And sometimes the technology is a little bit ahead of where the human factor is. And so -- it's not just about turning this capability on and on the platform. It's about making sure that providers can get the benefit that they want as they begin to consume this exciting new AI capability. Operator: And our next question will be coming from Craig Hettenbach of Morgan Stanley. Craig Hettenbach: Great. Matt, I just had a question. When I think about how fragmented the revenue cycle management space is your comments around kind of point solutions versus platforms -- what do you think is the tipping point in terms of driving a faster acceleration towards platforms? What are some of the things you're hearing from your customers and seeing in the market? Matthew Hawkins: Thank you, Craig. It's interesting. There's a lot of excitement right now. This is -- it's not necessarily a new phenomenon. Our health care and the revenue cycle space has had a long history of point solutions. And it was our vision from the very outset that Waystar could create an enterprise caliber end-to-end integrated platform. And that came -- that vision came from actually showing up and talking to provider organization decision-makers who are, quite frankly, fatigued at using point solutions. When you use -- I was -- the example that I've given recently was I was with a CFO -- excuse me, a CIO of a very large system not long ago, and very impressive lady. She said, Matt, can you help us, can your platform help us? I currently use more than 12-point solutions just to manage our revenue cycle process. And of course, that's where the platform approach really comes to play. What we hear providers want increasingly, they want a regulatory compliant, cyber secure, deeply integrated platform, and they want to be able to call 1 person, 1 organization to help them across the platform to be able to tackle their most persistent challenges. And I think that's where Waystar -- that's where you see the momentum and the size of the deals that we're signing the quality of our pipeline start to show up. The forward demand indicators to us mean that there's more excitement about our platform than perhaps ever before. This is what we were dreaming of 8 years ago from Waystar. So hopefully, that context is helpful. Operator: And our next question will be coming from the line of Sean Dodge of BMO Capital Markets. Sean Dodge: Yes. Maybe just kind of staying on this AI and how that likely changes the market. Matt, you talked a lot about embedding more AI and waste or offerings and that driving more value for clients. You also talked before about pricing to value, so adjusting the revenue model in a way that helps waster participate in some of that value creation. I guess what do you think the time lines are that, that likely happens over this kind of idea of pricing to value. How near term of an opportunity is that? And then like how big of a paradigm shift is that in your pricing approach? I guess you guys have always tried to price the value. So this is just kind of what you've always done. Matthew Hawkins: Yes, Sean, that's a great question. Let me speak to that. I'd say we've always priced to value that we deliver. As we deliver these AI capabilities and in a way that clients can absorb them, we're very excited about it. I think this is a long-term opportunity for us to truly price to the value that these are delivering. When we call out in our prepared remarks on the earnings call, the type of impact oftentimes will associate the reduction of manual work and the number of people involved in historically doing that manual work. And so we know that there's impact in the solutions that we have to offer. Now I would say we're already monetizing AI through our core business model. So part of this really isn't a science project by trying to tie it to modules or outcomes or operating discipline in a new way. We're already doing that. But also this does give us a chance to reflect on the continued effort to price to value. We know that the human labor factor in health care is the most expensive expense line in most health care organizations. And so if we can help then those people become even more productive and focus on higher order, higher value work. And we're doing our jobs, we're delivering AI in a way that can be very constructive to those organizations. And so while we don't want to disclose too much on our pricing philosophy on a public call, I think what I'd also say is that we're -- we've always been a consumption-based pricing model. We've always deployed amazing software and AI capability that ties to the actual business activity in an organization. We're not a per seat fee-based company were tied to consumption and successful outcomes for the organizations that we work with. Operator: Our next question will come from Stan Berenshteyn of Wells Fargo Securities. Stanislav Berenshteyn: I wanted to ask about the sales cycle. You obviously called out you have a lot more SKUs. You're generating much larger sales on a per client basis. And obviously, this requires your sales reps to do a bit more learning perhaps the clients have to do a bit more educating on what you're offering, how is that impacting the sales cycle? Any changes in the conversion rates as we think about this year and next year? Matthew Hawkins: Thanks, Stan. I wish I could have taken you with me to our Growth Summit that we hosted just last week. It felt like an NFL mini can because we take our growth account executives, and we feel like they're the finest best in the industry. We expect them to be very productive, very focused. These are very well-trained people. And our goal, if we do this right, is we want to consistently be delivering them new capability to introduce to clients and to prospects. First and foremost, we take a platform approach -- and so you can imagine that it becomes really additive to the platform every time we're talking about a new high-value AI-powered solution and our growth team loves that. So we have a methodology that we follow. We have great people in our training and development and strength and conditioning if I can use the NFL analogy and -- we have a really great team of people who want new product. And as we give it to them, it shows up in the type of demand statistics that we've talked about, elevated really nice bookings higher deal sizes, a great qualified pipeline that we work with great sales leaders to qualify that pipeline, and it allows us to get traction and create some longer-term vision towards what can we build towards. So I hope that commentary is helpful, Stan. But yes, they're always eager to get more solutions, and we take training very seriously, so we can empower great people to go help us grow. Stanislav Berenshteyn: And just to kind of reiterate, is that impacting the sales cycle at all given the shift towards more SKUs and larger sales? Matthew Hawkins: And let me say that it is not. We've highlighted that each of the segments that we sell to have different sales cycles. And along the lines of your thoughtful question, hospitals and health systems tend to be 12 to 24 months sales cycles. Certainly, depending on the size of a nonhospital or an ambulatory type organization, those sales cycles can be or shorter in length. But we're not noticing a compression of time or any elongation of time. We are also seeing elevated win rates. So as we're introducing new solutions, if anything, the validating point is that sales cycles are staying the same and we're seeing elevated win rates. Operator: Our next question will be coming from the line of Ryan MacDonald of Needham & Company. Ryan MacDonald: Matt, maybe we'll give you a little bit of a breather on this one. I got 1 for Steve on margins. Steve, I'm curious as how we should think about sort of the pacing and magnitude of incremental investment as we go throughout the year. Was there anything in Q1 in terms of investments where you sort of held back or pushed out to later in the year? The reason I ask is, obviously, has historically been sort of the low watermark from an adjusted EBITDA margin perspective. And sort of based on the implied guidance, even if you run rate out Q1 adjusted EBITDA throughout the remainder of the year, we're getting to that sort of $540 million sort of high end of the range. So just wondering if the -- what the puts and takes there that with the reaffirmation of the guidance. Steven Oreskovich: Yes. Certainly, Ryan. So our focus and where we're reinvesting back in the business hasn't changed to start with, right? It will continue to be an innovation in the client experience in cybersecurity. So no changes to areas of focus. To your question on the 43% margin -- adjusted EBITDA margin for the quarter versus 42% in overall guidance. And you are correct, typically, Q1 tends to be a little lower. That really truly is what we're seeing in the growth of the sort of the revenue breakdown that I had mentioned earlier with the provider solutions growing at a faster rate and having a much higher bottom line contribution than patient payments. Now the 1 thing just to be -- as we look out for the full year, with some of the offsets we talked about and some of what you're seeing in patient payments and the interaction in the first quarter of the year, we do expect that first half of the year, second half of the year variability that we tend to see, just seasonality that we tend to see in that business to be tighter to the normal or if I could say, a lighter beta than we've seen in prior years. So we would expect a little bit of that happening to the shaping it throughout the year, but there's nothing from an innovation or an investment perspective that we were light on from where we expected to be at in the first quarter. So good opportunity to continue to drive exceptional margins throughout the rest of the year. Operator: Now our next question comes from the line of George Hill of Deutsche Bank. George Hill: I'll say, Steve, I've got another 1 for you, which is can we unpack the slowdown a little bit more in the Q2 expectations for the volume-based revenue -- and I think a lot of this in services have seen a slowdown in utilization kind of in the first part of Q1 as it relates to flu and weather. Is this like a paper to electronic conversion process -- is this a claims lag issue, which is why you guys are seeing it in Q2? Is it you guys haven't seen the reacceleration or the uptick yet. I'd really like just to understand more of the mechanics of the accounting and what you guys are seeing -- recognizing it's 25% of the revenue. Matthew Hawkins: Yes. Certainly, George. So weather had an impact in the first quarter. We wouldn't expect knock on wood, wouldn't expect an impact going forward for the rest of the year. It is primarily the conversion of print to digital statements and then also a little bit of the utilization of the health care system by patients. Now typically, to your question specifically on the second quarter and the shaping, typically, the second quarter tends to be 1 of the stronger utilization quarters historically that we've seen -- right now, what we're seeing with the printed digital conversion and how we're seeing that play out from a rest of the year perspective. Do you think that largely offsets what we see in sort of the the patient visitation uptick. So that's really what we're looking at and how we're sort of giving the guidance for Q2 and then the rest of the year. Now the rest of the year is an impact of why we're seeing strength there. Some of those longer term -- the larger deals that we've seen and we've talked about in the Q3 and the Q4 time frame -- that we've previously said and still believe on the whole, they tend to take longer lead time to revenue more towards that 18-month side of the 6 to 18-month sort of full ramping period. We're also seeing some good opportunities, as Matt had mentioned, working with clients to move some of those clients and get them up and running and seeing that ROI faster, positively impacting the back half of the year. And I know you're familiar with it, George, on the seasonality aspect in patient payments, especially in the processing of collections tends to be with those -- that segment of patients that are on high deductible plans, which that generally causes that seasonality aspect. But for others on there, did want to mention that, and that's really why we see in that 25% of the revenue sort of that first half, second half of the year dynamic. Operator: Our next question will be coming from the line of Daniel Grosslight of Citi. Unknown Analyst: This is Louis on for Daniel. I just had a follow-up. You noted earlier in the call that AI drove 40% of your bookings, and I know that you offer a broad array of AI products and not just products like Dale, can you give more details if providers are more in just the new or more innovative solutions like altitude -- or is the demand just for AI broad across your portfolio? Matthew Hawkins: Thank you for the question. We know that providers are very interested in the use of AI to help them operate and run their businesses. And we know they want to use AI, but they're reticent to use point solutions, the vast majority of provider organizations aren't equipped to necessarily stand up their own technology teams, let alone teams that can support AI on a stand-alone basis in their organizations. And so they're looking for trusted partners like Waystar. I think as we engage, we know that there's certainly excitement around the new LLM or AI-powered solutions that Waystar offers. There's also broader-based interest in some of our AI-powered solutions. AI is a broad category. So it would include machine learning and some data science that produces intelligence or insight -- and as you've heard us talk about in our prepared remarks, our deeply deployed multisided network, there's just so much learning that takes place on that network. As a result of all these different forms of AI. That tends to be very interesting to provider decision makers. They're focused on outcomes. They want cybersecurity, they want efficiency they want industry compliance and to stay abreast with what's going on in the industry, and they want deep integration to the EHR systems that they may be using or the practice management systems. They may be using -- and they want the benefit of being able to do that at scale and get the learnings from thousands of other organizations like them and Waystar helps to deliver that to these providers. Operator: And our next question will be coming from the line of Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: Can you -- maybe to sort of macro-type questions. One, are you seeing any sort of change in anything as we're seeing hospitals have more difficulties on the financing side? And then two, are you hearing anything from your customers about like managed care companies and payers like back against some of these new solutions to do that? Any color on that would be super helpful. Matthew Hawkins: Thanks, Elizabeth. We're seeing our solution which tend to get prioritized, as you've heard me talk about, because we're mission critical in nature and because we help organizations get paid for the services that they're rendering. We tend to get prioritized in the decision-making of things. And I think our pipeline and our bookings results and our financial results are a testament to that. We continue to believe that, that will be the case. As we think about the -- you mentioned the payer provider tension, so to speak, and perhaps sometimes push back. I'm not sure exactly what you're referring to. But what I would say is we know that there are payers that are working to deploy AI capability to do the things that they're organized to do to make sure that payments are accurate to avoid broad waste and abuse. And -- and sometimes that means they've denied claims, but they're increasingly using AI to do that. I don't know how an individual provider who isn't as deeply resourced as the deep-pocketed payers are could stand up against these payers by themselves. So we're really grateful to have to put waste are in a position where we can represent over 1 million providers and we can develop AI capability that leads to more accuracy in coding, leads to a higher first pass claim acceptance rate where the payer is accepting the accurate claim -- and that's leading to accurate payment, faster payment, a more efficient payment. And so we'd like to think that Waystar's role can be that constructive referee that intermediary that brings fairness and transparency to the marketplace that really needs it. And honestly, we're also seeing outreach from a number of payer organizations directly who would like to talk about things like real-time claim adjudication for a portion of the claims that they're processing through Waystar. They're doing that -- and I think they're doing that as evidenced because they're seeing that we're bringing accurate plans. And so we'd like to think that we can help bring fairness and balance to this exchange between providers and payers. Operator: Our next question will come from the line of Constantine Davides of Citizens. Constantine Davides: Matt. I appreciate all the bookings color you provided. But I did want to just drill in a bit on momentum in the acute space, more specifically. And just wondering if you can describe how your execution and competitiveness are tracking there on the inpatient side of the market where you, I guess, historically had lower market share relative to what you've carried in ambulatory. Matthew Hawkins: Thank you, Constantine. We're seeing nice momentum on the acute side. It's right. It's fair to say that when we formed Waystar 8 years ago, we had a small handful of hospitals and health systems that we're working with us. But today, we've built a really nice presence where approximately now we work with 16 of the top 20 hospitals and health systems in the United States. We work with nearly hospitals in some form or another. And we're delivering them the message that we have a unified end-to-end revenue cycle platform that's marching towards an autonomous revenue cycle platform. And it tends -- that message is really taking hold. I'd also note that about 40% of our revenue today is hospital and health system or acute related. And we're excited about the progress that we're making in every segment of care, but certainly, the growth and continued momentum we see in the hospital health systems. Operator: And I would now like to turn the call back to Matt Hawkins for closing remarks. Matthew Hawkins: Well, thank you for joining our call today. We're very grateful for your interest and appreciate your thoughtful questions. As we wrap up today, I'd like to just reaffirm that our business is getting better and better every quarter. We're doing what we said we would do from the outset, and that is we're focused on disciplined execution. This is now 8 consecutive quarters of strong revenue growth, EBITDA performance and cash flow above the consensus has allowed us to continue to delever. We've seen recent upgrades in -- by standard and S&P, excuse me, and Moody's and we're really grateful for the momentum that we see in our business. And it's all possible because we have great people who buy into our mission of simplifying health care payments for providers so that they can spend more time caring for patients and less time trying to work through the administrative hassles that they do. So I'd like to just thank our team, thank our clients and thank our partners and we look forward to continuing to execute against our plan in 2026. Thank you. Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Amazon.com, Inc. First Quarter 2026 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Thank you, sir. Please go ahead. Dave Fildes: Hello, and welcome to our Q1 2026 financial results conference call. Joining us today to answer your questions are Andrew R. Jassy, our CEO, and Brian T. Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2025. Our comments and responses to your questions reflect management's views as of today, 04/29/2026 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financials is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-Ks and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we have seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates and energy prices, changes in global economic and geopolitical conditions, tariff and trade policies, resource and supply volatility, including for memory chips, and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we do not have any additional business acquisitions, restructurings, or legal settlements. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance. And now I will turn the call over to Andy. Andrew R. Jassy: Thanks, Dave. We are reporting $181.5 billion in revenue, up 17% year over year. Excluding the $2.9 billion favorable impact from foreign exchange, net sales increased 15%. Operating income was $23.9 billion. Q1 was a strong quarter for Amazon.com, Inc. Starting with AWS, growth continued to accelerate, up 28% year over year, the fastest growth rate in 15 quarters, up $2 billion quarter over quarter, the largest Q4 to Q1 AWS revenue increase ever. AWS is now a $150 billion annualized revenue run rate business. It is very unusual for a business to grow this fast on a base this large, and the last time we saw growth at this clip, AWS was roughly half the size. We have never seen a technology grow as rapidly as AI. Amazon is already a leader, and companies continue to choose AWS for AI. To put our growth in perspective, three years after AWS launched, it had a $58 million revenue run rate. In the first three years of this AI wave, AWS’s AI revenue run rate is over $15 billion—nearly 260 times larger. There are several reasons customers are choosing AWS for AI. First, we have built broader capabilities than others. That includes model building with SageMaker, which reduces training time by up to 40%, high-performance inference with the leading selection of frontier models, and Bedrock, which saw 170% growth in customer spend quarter over quarter and processed more tokens in Q1 than all prior years combined. We are excited to make OpenAI’s models available in Bedrock. Yesterday, we added OpenAI’s GPT-5.4 model, with 5.5 coming soon. Yesterday, we also started the preview of Amazon Bedrock managed agents powered by OpenAI. The stateful runtime environment enables any organization to build generative AI and agents at production scale. We believe that modern agentic applications will be stateful, and this new technology will rapidly accelerate agentic AI adoption. OpenAI has said they are already seeing unprecedented demand for this new product, and we are seeing heavy customer interest as well. Most of the value companies derive from AI will be through agents, and AWS customers can build agents with their proprietary data in Strands, which has been downloaded more than 25 million times and saw 3x more downloads quarter over quarter. Customers can deploy agents with enterprise-scale security and reliability with AgentCore, which is being used to deploy an agent as frequently as every 10 seconds. We also offer turnkey agents for coding, software migrations, business operations, and knowledge workers in Quro, Transform, Connect, and Qwik, and they continue to resonate with customers. The number of developers using Quro more than doubled quarter over quarter, and enterprise customer usage increased nearly 10x. Customers have used Transform to save over 1.56 million hours of manual effort when migrating and modernizing their workloads. The number of new customers using Qwik has grown more than 4x quarter over quarter, and we just announced v1 of our Qwik desktop app yesterday. It is very compelling as it can query your email, calendar, Slack, local files, and several other applications you use every day to flag important communications, retrieve and summarize information, make recommendations, compose and send communications to others, and create agents that highlight or automatically do work that you used to have to do yourself. You can easily keep refining your preferences, and Qwik’s advanced knowledge graph enables its AI agents to automatically learn from you to become more personalized over time. One of our enterprise customers just told us, “Qwik is not just improving how we work. It is letting us reimagine it.” Second, and another reason customers continue choosing AWS is that as they expand their use of AI, they want their inference to reside near their other applications and data, and much more of it resides in AWS than any place else. Third, as customers expand their AI usage, they also want to consume additional non-AI services, and they are choosing AWS because we have built the broadest and most capable core offerings by a wide margin. We offer thousands of features across compute, storage, databases, analytics, security, and more, and Gartner consistently recognizes AWS’s leadership across their major cloud evaluation areas. Fourth, AWS has the strongest security and operational performance of any AI and infrastructure provider, and startups, enterprises, and governments continue to choose AWS as the foundation for their most critical workloads. These are some of the reasons even more customers are choosing AWS, and just since last quarter’s call, we have announced new agreements with OpenAI, Anthropic, Meta, NVIDIA, Uber, U.S. Bank, Fox, Southwest Airlines, U.S. Army, Bloomberg, Cerebras, AT&T, Nokia, Fundamental, the National Geographic Society, PGA Tour, and many more. Our chips business continues to grow rapidly and is larger than what a lot of folks thought. We saw nearly 40% quarter over quarter growth in Q1, and our annual revenue run rate is now over $20 billion and growing triple-digit percentages year over year, but this somewhat masks the size. If our chips business was a standalone business and sold chips produced this year to AWS and other third parties as other leading chip companies do, our annual revenue run rate would be $50 billion. As best as we can tell, our custom silicon business is now one of the top three data center chip businesses in the world. The speed at which we have gotten here is extraordinary, and we have momentum. For our custom AI silicon, we have recently shared very large multiyear, multi-gigawatt training commitments from the two leading AI labs in the world, Anthropic and OpenAI, as well as an increasing number of companies like Uber betting on Trainium, and we now have over $225 billion in revenue commitments for Trainium. Our Trainium2 chip has about 30% better price performance than comparable GPUs and is largely sold out. Trainium3, which just started shipping in 2026 and is 30% to 40% more price performant than Trainium2, is nearly fully subscribed, and much of Trainium4, which is still about 18 months from broad availability, has already been reserved. Amazon Bedrock, which is used expansively by over 125,000 customers, runs most of its inference on Trainium. Almost 80% of the Fortune 100 companies are using Bedrock. We also just announced that Meta is committed to using tens of millions of cores. Graviton is our industry-leading CPU chip, which allows Meta to run the CPU-intensive workloads behind agentic AI with the performance and efficiency they need at their scale. AI is commonly seen as a GPU story, but the rise of agentic workloads, real-time reasoning, code generation, learning, and multi-step task orchestration is driving massive CPU demand as well. As AI systems shift from answering questions to taking actions, and as post-training and inference scale up, the compute required falls heavily on CPUs. That is why Meta chose Graviton, which delivers up to 40% better price performance than any other x86 processors, and is now used by 98% of the top 1,000 EC2 customers. Nobody has a better set of chips across AI and CPU workloads than AWS with Trainium and Graviton, and we are unusually well positioned for this AI inflection. We are in the early stages of the experience. While the largest number of AI chips we are bringing in are Trainium, we continue to have a deep partnership with NVIDIA. We have immense respect for them, continue to order substantial quantities, will be partners for as long as I can foresee, and we will always have customers who want to run NVIDIA on AWS. And we will also have a very large chips business ourselves. Customers always want choice. It has always been true and always will be true. Different companies will offer different benefits for customers, and the uniquely strong price performance that Trainium offers is compelling to our external and internal customers. For perspective, at scale, we expect Trainium will save us tens of billions of dollars of CapEx each year and provide several hundred basis points of operating margin advantage versus relying on other chips for inference. Finally, we continue to be confident in the long-term CapEx investments we are making. Of the AWS CapEx we intend to spend in 2026, much of which will be installed in future years, we have high confidence this will be monetized well, as we already have customer commitments for a substantial portion of it and that it will yield compelling operating margins and ROIC. As we have been sharing, the faster AWS grows, the more short-term CapEx we will spend. AWS is to lay out cash for land, power, buildings, chips, servers, and networking gear in advance of when we can monetize it, typically six to 24 months before we start billing customers depending on the component. However, these CapEx investments fund assets with many-year useful lives—30-plus years for data centers, five to six years for chips, servers, and networking gear. The free cash flow and ROIC for these investments are cumulatively quite attractive a couple of years after being in service. However, in times of very high growth like now, where the CapEx growth meaningfully outpaces the revenue growth, the early years’ free cash flow is challenged until these initial tranches of capacity are being monetized and revenue growth outpaces CapEx growth. We have been through this cycle with the first big AWS growth wave, and we like the results. We expect to feel similarly about this next wave with much larger potential downstream revenue and free cash flow. I will now turn to Stores. Units grew 15% year over year, the highest we have seen since the tail end of COVID lockdowns. We continued expanding selection, including more than 600 new notable brands. Our grocery business continues to grow quickly across both perishables and nonperishables, and with more than $150 billion in gross sales in 2025, we are now the second-largest grocer in the U.S. We offer perishables delivered same day alongside millions of other items in more than 2,300 cities and towns across the U.S., with more to come. Prime members are loving the convenience of getting fresh groceries alongside other products they are buying in Amazon, and perishable sales have grown over 40x year over year and make up nine of the top 10 most ordered items for same-day delivery where the service is available. Customers shopping same-day perishables build larger baskets, adding nearly 3x as many items to their order and spending over 80% more than customers who do not. Whole Foods Market also continues to accelerate with over 550 stores today and 100 more coming in the next few years. We remain committed to meeting or beating other retailers on price. In Q1, the average prices of products offered on Amazon.com, Inc. decreased compared to the same period last year. Prime Day will take place in most countries in June, which will bring Prime members even more savings across every category. We continue to find new ways to speed up delivery for customers in both cities and rural areas. We offer millions of items available for same-day delivery with Prime—up to 40x the selection of a typical big-box retail store—and we have delivered more than 1 billion items same day or overnight so far this year. We are also making delivery even faster, recently announcing one- and three-hour delivery options on over 90,000 items, with one-hour delivery available in hundreds of cities and towns, three-hour delivery in 2,000-plus cities and towns, more on the way. And we continue to expand our ultrafast delivery service, Amazon Now, which offers delivery in 30 minutes or less on thousands of items. It started last year in India, where orders are increasing 25% month over month, with Prime members tripling their shopping frequency once they start using it. The service is now available to tens of millions of customers across nine countries, with more to come as well. The Stores team also continues to innovate and deliver for customers with AI. We launched Health AI, a 24x7 AI-powered personal health agent backed by One Medical clinicians that gives U.S. customers instant clinical guidance and takes action with their permission—from booking appointments to managing prescriptions to facilitating medical treatment with a real One Medical provider. Rufus, our agentic AI shopping assistant, continues to resonate with customers. Rufus can research products, track prices, and auto-buy products in our store when they reach a set price. Monthly active users are up over 115% and engagement is up nearly 400% year over year. And we recently introduced a new AI experience for sellers in Seller Central that dynamically generates a custom, personalized visualization of data, key insights, and scenarios tailored to the seller’s goals. It is early, but the initial response and feedback are very strong. Moving on to Amazon Ads. We continue working to be the best place for brands of all sizes to grow their businesses, and we are pleased with the continued strong growth across our full-funnel offerings, generating $17.2 billion of revenue in the quarter and up 22% year over year. Forrester recently recognized Amazon as a leader in omnichannel advertising platforms, with unmatched supply and insights for connected TV and commerce media. We deepened our Netflix partnership with Amazon Audiences, which enables advertisers to apply Amazon’s exclusive signals from shopping, browsing, and streaming to Netflix’s highly engaged viewers to reach the right audiences and drive even stronger performance. We also partner with Comcast to expand local advertising to thousands of brands, and expanded interactive video ad capabilities to partners starting with Samsung TVs. Our Ads team also continues to invent and deliver for advertisers with AI. For example, we expanded CreativeAgent—an agentic partner that plans and executes the entire ad creative process—to Canada, France, Germany, India, Italy, Spain, and the UK. And we recently introduced sponsored product and brand prompts in Rufus to help brands showcase products and customers make more informed buying decisions. It is early, but we are seeing nearly 20% of shoppers who interact with a brand prompt in Rufus continue the conversation about that brand. We are also continuing to invent and see momentum in several other areas; I will mention a few. Starting with Entertainment, moviegoers have flocked to Project Hail Mary, with nearly $615 million in global box office to date. Its opening weekend was the second biggest for any non-sequel, non-franchise film in the last decade. We also surpassed 100 million viewers globally for The Culprits movie trilogy, with all three films reaching number one in more than 170 countries at launch. In live sports, we offered exclusive coverage of the NBA SoFi Play-In Tournament, with total viewership up 18% compared to last year on cable. Alexa Plus early access expanded to millions more Prime members in Mexico, the UK, Italy, and Spain. Customers are loving Alexa Plus, talking to Alexa twice as much and for longer durations across a wider breadth of topics, completing purchases on devices 3x more, streaming music 25% more, and using smart home functionality 50% more than Alexa Classic. Zoox has now driven nearly 2 million miles and carried more than 350,000 riders, is available to the public in Las Vegas and San Francisco, and is testing in eight other cities. We recently announced that Zoox will be available through the Uber app in Las Vegas and in Los Angeles in the future. And finally, Amazon LEO continues gaining momentum, with commercial service on track to launch in a few months. We already have meaningful revenue commitments from enterprises and governments including Delta Air Lines, JetBlue, AT&T, Vodafone, DIRECTV Latin America, Australia’s National Broadband Network, DP World Tour, NASA, and others. We also announced that we plan to acquire Globalstar, which will expand LEO’s satellite network with direct-to-device capabilities, and we entered an agreement with Apple for Amazon LEO to power satellite services for iPhones and Apple Watches. We are in the middle of some of the biggest inflections of our lifetime, and Amazon.com, Inc. has the culture, the know-how, and the resources to make so many customers’ lives better and easier, and to build multiple new long-term businesses with substantial return on invested capital and free cash flow. We will continue investing and inventing to make it so. With that, I will turn it over to Brian. Brian T. Olsavsky: Thanks, Andy. Let us start with our top line financial results. Worldwide revenue was $181.5 billion, a 15% increase year over year excluding the 180 basis point favorable impact of foreign exchange. Worldwide operating income was $23.9 billion, with an operating margin of 13.1%, our highest operating margin ever. Across all segments, we continue to innovate for customers while operating more efficiently. In the North America segment, first quarter revenue was $104.1 billion, an increase of 12% year over year. International segment revenue was $39.8 billion, an increase of 11% year over year excluding the impact of foreign exchange. Our seasonal shopping events performed well in Q1, including our Big Spring Sale. We also saw particularly strong performance with third-party sellers, who are important contributors to our broad selection and competitive pricing. Our sellers saw strong sales growth in Q1, particularly in the U.S., as well as in Europe and Brazil where we have recently lowered seller fees. We are seeing our investments in the seller experience resonate and, in turn, grow our business. Prime continues to fuel our growth and reflects the value members receive from the program. Prime Video is a key pillar of the Prime value proposition and an important driver of new member acquisition. Our investments in original and exclusive content and live sports combined with our third-party partner titles offer the best selection of premium video content. In addition to delivering compelling value to Prime members, advertisers, and partners, Prime Video is now a large and profitable business in its own right. Now let us shift to segment profitability. North America segment operating income was $8.3 billion, with an operating margin of 7.9%. International segment operating income was $1.4 billion, with an operating margin of 3.6%. We are pleased with the fulfillment network performance in Q1. The team has worked hard to optimize our network. Overall unit growth of 15% continues to outpace our cost to operate the fulfillment network, as outbound shipping costs grew 12% year over year and fulfillment expense grew 9% year over year, both on an FX-neutral basis. As our network efficiency improves, we are able to deliver items faster and improve the customer experience while at the same time lowering our cost to serve. Looking ahead, we see meaningful opportunities to further enhance productivity across our global fulfillment network, all while continuing to raise the bar in delivery speed. We will keep optimizing inventory placement to shorten distance traveled, reduce touches per package, and improve consolidation rates. Alongside these efforts, we deploy robotics and automation, which have been integral to our operations for decades. Our latest generation technologies offer a step change in efficiency, which we are deploying in both new and existing facilities. All of our U.S. large-format fulfillment center launches in 2026 will have this latest generation technology. We are seeing early positive results with improved site safety, higher productivity, and lower cost to serve. Moving to our AWS segment, revenue was $37.6 billion and growth accelerated 480 basis points to 28% year over year, driven by both core and AI services. We continue to see customers increase cloud migrations and scale their use of AWS core services. Customers seeking the full benefit of AI are accelerating their transition to the cloud. We also see a strong correlation between AI spend and core growth. As customers spend more on AI, we see a corresponding demand increase in core. We expect this to increase over time as customers move more AI workloads into production, strengthening demand for our core services. Our AI revenue is growing triple digits year over year. We are bringing more capacity online to meet high customer demand while also driving meaningful efficiency gains across our installed base. Our AI offerings continue to gain traction with customers, and Bedrock has been a significant growth driver. In 2025, we delivered 4x improvements in Trainium2’s token throughput. A consistent majority of Bedrock’s workloads run on Trainium. These efficiency gains directly translate into more capacity to serve customers. AWS operating income was $14.2 billion and reflects our strong growth coupled with our focus on driving efficiencies across the business. Now turning to total company capital expenditures. Our cash CapEx is $43.2 billion in Q1. This primarily relates to AWS and generative AI, as we invest to support strong customer demand. We will continue to make significant investments, especially in AI, as we believe it to be a massive opportunity with the potential to drive long-term revenue and free cash flow. I will finish with our financial guidance for Q2. The following guidance assumes that Prime Day occurs in the second quarter in most of our largest geographies, including the U.S., and that Prime Day occurs in the third quarter in Australia, Brazil, India, and Japan. Note that in 2025, Prime Day was in Q3 for all countries. Q2 net sales are expected to be between $194 billion and $199 billion. We estimate the year-over-year impact of changes in foreign exchange rates based on current rates, which we expect to be a headwind of approximately 10 basis points in the quarter. Q2 operating income is expected to be between $20 billion and $24 billion. We continue to see strong sales trends carrying into Q2, and I will mention a few items on the operating income guidance. First, this assessment includes the impact of our seasonal step-up in stock-based compensation expense in Q2, driven by the timing of our annual compensation cycle. Second, within the North America segment, we do expect a year-over-year cost increase of approximately $1 billion related to Amazon LEO, as we manufacture and launch more satellites in preparation for our service offering, and we expect to begin capitalizing certain costs in Q4. Amazon LEO’s commercial service is on track to launch in Q3, including production and launch costs. Third, our guidance anticipates higher transportation costs related to fuel inflation, which is partially offset by the recently implemented fuel- and logistics-related FBA surcharge. I am thankful to our teams across the company for their hard work and dedication to customers. We remain focused on driving an even better customer experience, which is the only reliable way to create lasting value for our shareholders. With that, let us move on to your questions. Thank you. Operator: At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question. Thank you. If you would like to ask a question, please press star 1 on your keypad. We ask that when you pose your question, you pick up your handsets to provide optimum sound quality. Once again, to initiate a question, please press star then 1 on your touch-tone telephone at this time. Please hold while we poll for questions. The first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Eric Sheridan: Andy, across an array of announcements you have made recently with AWS and reflecting upon what you wrote in the shareholder letter, can you talk a little bit about the needed levels of investment over the next couple of years to scale compute and capacity to meet your current state of revenue backlog, and how we should be thinking about your unique approach to custom silicon and AI infrastructure that maybe positions you competitively to build that scale? Thanks so much. Andrew R. Jassy: Yeah. Well, to your point, Eric, we have made a lot over the last several months, and we are really pleased with the growth that we are seeing in AWS right now. You know, 28% year over year, fastest growth rate in 15 quarters for us, we have not grown at this pace since we were about half the size, and growing 28% on a $150 billion annual run rate basis is not simple to do. And I think there are a few things around it. First is we continue to see people choosing AWS for AI, in part because of our really broad full-stack functionality, in part because people want their inference as they scale it to be close to their data and their applications—so much more of it lives in AWS than elsewhere—and in part because we have the strongest security and operational performance, and that is just what you can see in our numbers. It is leading to very substantial AI growth. And then, at the same time, we are seeing very significant growth in our core business. Some of that is the migrations that have picked up from enterprises from on-premises to the cloud, but a lot of that is also as AI growth is exploding, it turns out that it leads to a lot of core growth as well—all the post-training, all the reinforcement learning, all the agentic actions and tool usage that these agents are using. And it fits with what you are asking about on the chip side, which is because we have an unusual collection of chips—we have the leading CPU chip in Graviton, and we have the leading price-performance AI silicon chip in Trainium—it means that we are unusually well positioned for the inflection that we are seeing and the type of growth that we are experiencing. So I do not have a new update on capital. Our plan is largely the same, but we do view this as truly a once-in-a-lifetime opportunity where every application that we know of is going to be reinvented, and there are so many new applications that none of us have ever imagined or dreamed we could build that are starting to be built and will be built, and all of that is going to be built on top of AI with a lot of consumption of CPUs and core as well. So I expect that we will invest a significant amount of capital over coming years to pursue that opportunity, and that our customers, our shareholders, and Amazon.com, Inc. in general are going to be much better off down the road because we did so. Operator: And the next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question. Brian Nowak: Great. Thanks for taking my questions. I have two. One is on the accounting side—I will probably get it in the queue—but can you just give us an update on what the AWS backlog looks like and any visibility on the breadth of that backlog beyond the big labs? That is the first one. And then the second one, as you think about milestones for Rufus and agentic commerce for you in 2026, what are you most focused on making sure you accomplish on the agentic side this year just to make sure you stay at the knife’s edge of the agentic commerce offerings? Thanks. Andrew R. Jassy: Yeah. On the backlog, the backlog for Q1 is $364 billion. That does not include the recent deal that we announced with Anthropic for over $100 billion. There is reasonable breadth in that as well—it is not just one customer or two customers. On the agent commerce milestone question, we are very bullish on what agentic commerce will look like. I think it is going to be very good for customers in the long term. I think it will be good for us too. And you can see some of that focus from us in what we are building with Rufus. If you have not checked out Rufus in a while, it has really substantially improved over the last year, and we have a lot of customers using it. As I mentioned earlier, you see the monthly active users up over 115% and engagement up 400% year over year. While I think we will do a lot of work with third-party horizontal agents to try and make that customer experience better—and by the way, I do think today it reminds me in some ways of what we saw in the early days of search engines and their trying to refer business to e-commerce—it has never been a giant part of the referrals to our e-commerce business. But over the years, the experience got better. And what you see with agentic commerce is it is a small fraction of what we see with the search engine referrals, but the experience just has not gotten great with these third-party horizontal agents yet. They are not often able to get the pricing right or the product information right. They do not have any personalization data or any shopping history. So we do want to see that get better with third-party horizontal agents. We are having conversations with all those folks to try and make that better and find something that works for customers and all the companies. It will be interesting over time which agents customers choose to use. I happen to think that if you are going to a particular retailer that you would like to do business with, you would like to shop from, if they have a great agentic shopping assistant, you are going to often start there because it is where you are doing your shopping. It is easier—they have better product information, they have better information about what others like you are buying, and you can make all sorts of changes to how your account and your shipping information is working there. That is what we are aiming to make Rufus be—we are aiming to have it be the best shopping assistant anywhere, and I think we are on that path. Operator: Thank you. The next question comes from the line of Justin Post with Bank of America. Please proceed with your question. Justin Post: Thank you. I would like to ask two, one on models and then one on premium chips. So on models, it looks like you might have access to the full suite of OpenAI models on Bedrock. Just wondering how big of an unlock that is and how focused you are on your own Novo model. And then second, the shareholder letter mentioned you might be able to sell racks of Trainium. Just wondering, with your capacity constraints, how are you thinking about timing of that and how big of an opportunity? Thank you. Andrew R. Jassy: Yeah. On the models question, I think the fact that we are going to have all the OpenAI models available in Bedrock is a big deal. It is a big deal for customers. We obviously have a very large amount of AI being done in Bedrock today on the models we have—this is Anthropic, Llama, Mistral, and a host of others. But the one thing you learn over and over again with every technology—it was true in databases, it was true in analytics, it is true in models, it is true in chips too, by the way—is that customers want choice. There is not one tool to rule the world, and they want choice. Each of the models are better at some things than other models. People for a long time have wanted to consume OpenAI models in Bedrock. We just enabled yesterday the stateless model, the 5.4 model, and we will enable the most recent 5.5 model in the next couple of weeks. Most of the model work and most of the AI has been done in these stateless models—tokens in and tokens out. While I think there will continue to be a lot of work done that way, I think the future of using these models is a stateful model, a stateful API. That is because when you are building agents, you are building AI applications, you do not want to start anew every time you interact with the model. You want to store state. You want to store identity. You want to store what the conversation or the actions have been. You want to reach out and do a little bit of compute here. You want to have the models reach out to different tools to accomplish different tasks. That only happens if you are able to store state. The Bedrock managed agents that we collaborated with and invented with OpenAI that we just announced the preview of yesterday is also—I think that is the future of how these agents are going to be built. It is something that nobody else has, and I think it is very exciting to our customers. Of course, we will have other models like Codex and things like that as well. So I think it is a big deal for customers, and I think it is going to be good for our business as well. On the question about Trainium and the notion of our selling racks over time, I do think that is very much a possibility. Always, we have to balance—we have such demand right now for Trainium, and we have such demand from various companies who will consume as much as we make—that we have to decide how much we are going to allocate to the existing demand and customers, how much we are going to save to sell as racks, and for our existing customers that we sell Trainium to, how many will be Trainium plus running on our cloud infrastructure versus just the chips themselves. But I expect over time there is a good chance we are going to sell racks in the next couple of years. Operator: And the next question comes from the line of Rob Sanderson with Loop Capital Markets. Please proceed with your question. Rob Sanderson: Yes, thank you. Good afternoon, and thanks for taking the question. I wanted to ask a little bit about Amazon LEO. Can you maybe help dimensionalize some of the revenue opportunity in the consumer and in the enterprise space over the next few years? What are the governors on the ramp? Could you talk about types of new services that you will be able to develop with the Globalstar infrastructure and the spectrum that maybe you could not address before or would take you—maybe you can get to more quickly now? And then, how expansive is the longer-term vision? I know you are just beginning to launch commercial services, but over the long term, do you expect to include non-communication services like orbital data centers or things like that as this becomes feasible in the decade ahead? Andrew R. Jassy: Yeah. I will try and address as many of those questions as I can. I am very bullish about Amazon LEO and the opportunity there. There are billions of people around the world who do not have access to broadband connectivity, and there are many thousands of businesses and government assets that people do not have visibility to because they do not have the right connectivity. It means those entities cannot do a lot of the things that we all take for granted today, including education online, business online, shopping or entertainment online, having constant visibility and digital twins. There are all these things that they cannot do today. We think that Amazon LEO is going to help solve that problem. When we launch our service commercially—we just had another launch this week, so we have over 250 satellites in space—when we launch that service commercially, it will be one of two offerings that are on the current technology edge, and I think that we will have meaningful advantage in performance. I think we will be about 2x better on the downlink than existing alternatives and about 6x better on the uplink performance than existing alternatives. I think we will have a cost advantage for customers. For the governments and the enterprises—and we talk to a lot of them, and we have already signed agreements with many of them even though we have not launched the service commercially, the latest of which was with Delta Air Lines committing at least half of their fleet starting in 2028—when you talk to them, another really big part of what matters to them is they are going to want to take data off of the satellite constellation, they are going to want to store it in the cloud, they are going to want to do analytics on it, and they are going to want to do AI on it. Just the combination of LEO with the leading cloud in the world in AWS is very compelling to enterprises and to government. Today, if you ask what stops us from growing the business, we have to get the constellation into space. We have over 20 launches planned this year. We have over 30 launches planned in 2027. I think the business has a chance to be a very large, many-billion-dollar revenue business, and it has some characteristics that are reminiscent of AWS in that it is capital intensive upfront, where you are committing a lot of capital and cash in the early years for assets that you get to leverage over a long period of time. I like the free cash flow and return on invested capital characteristics of that business in the medium to long term. On your question about Globalstar, increasingly what we are finding with consumers, enterprises, and governments is that they do not like to have any periods where they do not have connectivity—it just upsets whatever customer experience they are going through. Even in metropolitan areas, we all hit certain parts of the highway or certain roads where you cannot get connectivity, or you are hiking, you are skiing. Increasingly, we see very large demand for consumers to have direct-to-device, and that was really the impetus for our acquisition of Globalstar. They have unusual and scarce global spectrum that is required to provide direct-to-device. We also really like the satellite know-how that we will get as part of that merger with Globalstar, and it also afforded us the opportunity to build a deep relationship with Apple, who is going to use our direct-to-device for their iPhones and for their Watches. So very optimistic about the business. Operator: And the next question comes from the line of Shweta Khajuria with Wolfe Research. Please proceed with your question. Shweta Khajuria: Thanks a lot for taking my questions. I wonder, Andy, if you could please talk about how you are thinking about the increase in price for memory and storage and just the supply chain inflation we are seeing and the impact it could have on CapEx this year and potentially next year as well. And then on agentic commerce, if you could talk about how you view the opportunity with advertising. I have no doubt that Rufus could be the best shopping assistant available over time, but for the advertising opportunity, do you view that if agents would be the ones taking action to shop? Andrew R. Jassy: On memory and storage and the supply chain, I think everybody knows that the cost of components, particularly memory, has skyrocketed. We are in a stage where there is just not enough capacity for the amount of demand. We have worked very closely with our strategic partners. We saw this trend happening early, in the middle to latter part of last year, and we have worked with our strategic suppliers to get a significant amount of supply. We are working very closely with them. I think the team has been very scrappy. I think we have done a good job in making sure that we are not capacity constrained there, but we will watch that very closely. One of the interesting things that we see right now with the change in price and supply on things like memory is that it is a further impetus pushing companies who have on-premises infrastructure into the cloud. A meaningful part of these suppliers are prioritizing their very largest customers, which cloud providers are. We have seen a number of conversations we have been having with enterprises for many months—where it has just been slower in getting the transformation plan to move to the cloud—accelerate rapidly just because we have a lot more supply than what others have. It will be interesting to see how that evolves over time. We are doing our best to have the supply we need and keep the cost in the right spot, but we will see how that continues to evolve. On agentic commerce and how that impacts advertising, I actually believe that we are going to like this for advertising. I think it is going to be good for customers and good for our business. First, the way that our Ads team has built tools and agents themselves is making it so much easier to do advertising. If you look at small and medium-sized businesses that had to take weeks and months to do creative and to pick the right audience, all that is so much faster and so much easier because of our advertising agentic tools, and you no longer have to take as much time or spend as much money building the creative. I think there are going to be a lot more advertisers with the rise of what is happening in AI. If you look at the agentic commerce experience, these agentic experiences tend to be multi-turn conversations where you are not interacting with one search and getting an answer—you tend to find that you are asking questions, you are narrowing questions, and it is asking you questions on what you want. In that process of having multi-turns, there are multiple opportunities to surface relevant products to customers, many of which will be organic and some of which will be sponsored. It also gives rise to opportunities like sponsored prompts. One of the interesting things that has been very successful for customers in our store has been when they ask certain questions, we give them a number of suggestions that are all created through AI, and we have gotten pretty good at also having sponsored prompts in that mix of questions and prompts that make it easy for people to keep digging deeper into what they are interested in. I believe that advertising will do well in a world of agentic commerce. Operator: Thank you. And our final question comes from the line of Colin Sebastian with Baird. Please proceed with your question. Colin Sebastian: Thanks very much. Good afternoon. Maybe a two-parter, if I could. Andy, first off, just wondering what you are seeing in terms of the trend between incremental AI demand from earlier adopters and larger AWS customers versus how the demand curve is shaping up across the broader enterprise base. And then at a high level, if you think about the use of AI internally across Amazon’s businesses—presumably the business overall looks very different in three or four years—maybe, Andy, if you could contextualize where you see the most opportunity for the technology internally, both in terms of product as well as driving more operating efficiency, I think that would be helpful. Thank you. Andrew R. Jassy: Yeah. On what we see in the incremental AI demand from early adopters versus the broader enterprise base, I think it is no secret that the AI labs are spending an incredible amount of money on compute at this point, and compute both on the AI side as well as on the core side. The models that they are building and the companies that have successful generative AI applications are certainly spending a lot. There are several of those labs, but we also see quite a bit of enterprise adoption and usage of AI. As I have said before, the largest absolute place that we see enterprises having success is in projects that are around cost avoidance and productivity—things like business process automation or fraud or things of that sort. But the number of projects that we are working with across enterprises, and that we are now starting to see come to production around brand-new experiences, trying to figure out how to reinvent their current experiences using inference and AI to be smarter, is also very significant. We are seeing the adoption in both of those segments. On the use of AI internally for our current businesses, the shortest summary I could give you, Colin, is that I do not see a place in any of our businesses or any of the ways that we do work where we are not going to have giant impact from what we do. I have long had this belief that while you can add incrementally to a lot of your existing customer experiences with different agentic and AI experiences, in the fullness of time—and I do not know if that is three years from now or five years from now, or it could be sooner too—all these customer experiences we know are going to be completely reinvented. They are going to have different interfaces. They are going to have different ways that people interact with them. People are going to want to have dialogue with them. It means that if you have an existing business that is doing well, you still have to look at every single one of your customer experiences and be able to carve off resource for that team to think anew about what the future customer experience would look like if you started from scratch today and if you had all the technologies like AI available to you when you start. That is what we are doing in every single one of our experiences. I have a chance to be involved in some of those, and it is really exciting. There are experiences that may take a while for customers to get used to and to use over time. You might find different segments like those AI-forward experiences more than others early on, but if you are not actually working on inventing those right now, I think it is going to be very hard to have the business and the experience leadership that we want over a long period of time. So every single one of our consumer businesses, every single one of our businesses in general, is working on that. Internally, I also think that it is going to radically change how we work—it already is. Just look at how agentic coding is changing how we are all building products. I think it is going to have a comparable impact on how we do DevOps, how we do customer service, how we do research, how we do analytics, how sales is conducted. I think every single one of these functions that we all do at work are going to very significantly change. That is another area of real focus for us. We have this experience I mentioned in my letter. If you look at one of our services, we swapped out the engine of the service while we were also running the service full tilt. Normally, that would have taken 40 or 50 people about a year to do. We took five really smart, AI-forward-thinking people building on agentic coding tools, and those five people rebuilt it in 65 days. That is a very different world of operating. That is the world I think we are heading to over the next few years. Dave Fildes: Thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon.com, Inc. and look forward to talking with you again next quarter.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jen Kettnich, Vice President and Head of Investor Relations for Mattel. Jen, please go ahead. Unknown Executive: Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer. This afternoon, we reported Mattel's First Quarter 2026 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which, we will provide some time for questions. Please note that during the question-and-answer session, we respectfully ask that you limit to 1 question and 1 follow-up so that we can get to as many analysts and questions as possible today. Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com. And the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents. The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-Q may differ as a result of the completion of the company's financial closing procedures, final adjustments completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results. Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements related to the future performance of our business, brands, categories and product lines. Any statements we make about the future are, by their nature, uncertain. These statements are based on currently available information and assumptions, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward-looking statements. We describe some of these uncertainties and in the Risk Factors section of our latest Form 10-K annual report, our Form 10-Q quarterly reports, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law. Now I'd like to turn the call over to Ynon. Ynon Kreiz: Thanks, Jen. Good afternoon, and thank you for joining Mattel's First Quarter 2026 Earnings Call. We are off to a good start to the year with growth in net sales and positive consumer demand for our products in the first quarter. We continue to make progress on our strategy to grow our IP-driven play and family entertainment business and are seeing top line acceleration in the second quarter to date. Key financial highlights for the quarter as compared to the prior year. Gross billings grew 2% in constant currency with increase in vehicles and challenging categories overall, partly offset by a decrease in dollars and [indiscernible] and preschool. Net sales grew 4% as reported and 1% in constant currency and adjusted earnings per share declined $0.18. Per circana, Mattel was #1 globally in our later categories dolls, vehicles and infant partner and preschool and gained share in vehicles and action figures. We also executed on our capital allocation priorities including closing the acquisition of full ownership of Mattel 163 mobile game studio and repurchasing $200 million of shares in the quarter while maintaining a strong balance sheet. The toy industry grew in the first quarter, and we continue to expect it to grow in 2026 with the benefit of a toetheatrical slate and further expansion of adult consumers. As it relates to current geopolitical events, including the war in the Middle East, there has been minimal impact on our business to date, but we continue to monitor the situation and hope for a swift resolution and peaceful days ahead. Turning back to our portfolio performance in the quarter. Several standout brands grew double digits or higher across own brands, including Hot Wheels, Uno and Monster High partner brands such as toy story and WWE relaunch franchises like Masters of the Universe and innovative new product lines like Mattel Brick shop. We are making strong progress on our digital strategy, including the integration of Mattel 163 as well as the upcoming launch of our first 2 self-published mobile games, acquiring full control of Mattel 163 meaningfully strengthens our digital games business and adds significant development, publishing and digital customer acquisition expertise. As it relates to self-published mobile games, our first game is based on masters of the universe and currently in soft launch ahead of the theatrical movie premiere on June 5. The second game is in advanced development and targeted for release later this year. We plan to share more details soon. We are also expanding our presence on creative platforms. On branded digital game experiences were launched on roadblocks and Fortnite with strong reach and engagement in our Barbie Dreamhouse Tycoon roadblocks game continues to rank in the top 10 among hundreds of branded games on the platform. Our digital game licensing business contributed to overall growth in the quarter and benefited from partnerships, including Pictionary with Netflix and scramble with scope. The upcoming Masters of the Universe movie will be released with wide distribution in thousands of tiers globally. A robust multi-platform marketing campaign spanning digital out-of-home and strategic brand partnerships is underway, led by Amazon MGM and Mattel. A full cross-category product line across stores, adult collectibles, apparel, publishing and more began rolling out this past weekend. We are very excited to bring this classic methology to life on the big screen and reimagine the franchise for original fans and a whole new generation. We are also gearing up for the Matchbox movie in October and have a robust slate of films in development, including Hot Wheels, Poly Pocket, Barney and Rock Soken Roberts, among others. As we've shared, we're making strategic investments totaling approximately $150 million in 2026 and to drive accelerated growth and profitability consistent with our capital allocation priorities. These investments are designed to allow us to capture even more value from our IP faster such as in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. We believe these investments in aggregate will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. Before I turn it over to Paul, I would like to touch on the recent leadership announcement that Steve Totzke, President and Chief Commercial Officer, will step down from his role effective May 1, and Sanjay Luthra, Managing Director of EMEA and Global D2C will succeed Steve as Chief Commercial Officer, overseeing Mattel's global sales and commercial operations. We thank Steve for his many contributions, and I'm personally grateful for his years of partnership. Sanjay is a 23-year Mattel veteran. In his most recent role, he has steered the emails transformation to achieve record sales and growth and expanded Mattel's leadership across the region in key categories. We look forward to his impact on driving our strategy to grow our IP-driven play and family entertainment business. Over to you, Paul. Paul Ruh: Thanks, Ynon. As you just heard, we're off to a good start to the year. Looking at key financial metrics as compared to the prior year quarter, net sales grew 4% as reported and 1% in constant currency to $862 million ahead of expectations. Adjusted gross margin declined 450 basis points to 45.1%, primarily due to the gross cost impact of tariffs that we previously mentioned as part of our guidance as well as unfavorable foreign exchange and inflation and adjusted earnings per share declined by $0.18 to a loss of $0.20. Turning to gross billings in constant currency. Total gross billings grew 2% with Mattel's global POS up mid-single digits. Vehicles momentum continued with a 13% increase. Hot Wheels and Disney and Pixar cars each grew double digits. Total declined 11% due to Barbie, partially offset by growth in Monster High. American Ger was comparable. Infant dollar and playschool declined 18%, primarily due to Fisher price. Within Fisher price, little people grew double digits. Challenger categories collectively increased 17%, and Games grew led by Uno, including the benefit of the partial quarter contribution of Mattel 163. Action Figures growth was driven by a robust slate of owned and partner properties. Mattel Brief shop also performed exceptionally well as it continues to expand following a successful launch. As it relates to gross billings by region, international was up 8% and with growth in each of EMEA, Latin America and Asia Pacific. North America declined 4%, including the impact of the shift in U.S. retailer ordering parents from direct import to domestic shipping. Based on what we are seeing today, we believe U.S. retailer ordering patents are stabilizing and expect our North America region to grow in Q2. Moving down the P&L. Adjusted gross margin in the first quarter was 45.1%. The decline was due to the impact of 240 basis points from the gross incremental cost of tariffs, 140 basis points from unfavorable foreign exchange and 90 basis points from inflation. Going the other way, tariff mitigation actions and OPG savings, partially offset by several factors contributed a benefit of 30 basis points. Advertising expenses increased $23 million to $93 million, reflecting the timing of Easter this quarter and the inclusion of Mattel163 expenses. Adjusted SG&A expenses increased $19 million to $366 million, primarily due to the strategic investments previously discussed. As mentioned in our earnings press release, beginning in fiscal 2026, we are excluding the impact of amortization of acquired intangible assets from non-GAAP measures to facilitate period-over-period comparisons of underlying business performance and have also recast these non-GAAP financial measures for prior periods. Adjusted operating income was a loss of $70 million as compared to a loss of $8 million in the prior year period. primarily due to higher advertising expenses, lower adjusted gross profit and higher adjusted SG&A. Adjusted EBITDA was a loss of $12 million as compared to a gain of $57 million and adjusted earnings per share was a loss of $0.20 as compared to a loss of $0.02, both primarily due to the same factors that impacted adjusted operating income. Free cash flow generation on a trailing 12-month basis was $335 million as compared to $582 million in the prior year period. The decline was primarily due to the lower net income, excluding the impact of noncash items. We repurchased $200 million of shares in the quarter, bringing the total to $1.4 billion since resuming the share repurchases in 2023, representing a reduction in shares outstanding of approximately 21%. We continue to expect to buy back a total of $400 million of shares this year as part of our $1.5 billion share repurchase authorization, which we expect to complete by the end of 2028. Turning to the balance sheet. Cash at quarter end was $866 million compared to $1.24 billion a year ago. The decrease was primarily due to $640 million of share repurchases over the last 12 months and $75 million of cash used for the acquisition of the remaining 50% interest in Mattel163, net of cash acquired, partially offset by free cash flow generation. Total debt was consistent with prior year. Owned inventory at quarter end was $677 million, a modest increase versus prior year, primarily reflecting tariff-related costs. Our gross leverage ratio was 2.7x and we continue to manage our balance sheet in line with our capital allocation priorities. Retailer inventories declined low digits compared to the prior year and we believe we are well positioned overall for Q2. As part of the optimizing for profitable growth program, we achieved savings of $16 million in the quarter bringing the community total savings for the program to date to $189 million. We continue to target approximately $50 million of efficiencies this year for a program total of $225 million between 2024 and 2026. 2026 guidance is unchanged with the exception of recasting adjusted operating income and adjusted EPS to exclude the impact of amortization of acquired intangible assets. Our net sales guidance is unchanged, and we still expect growth in the range of 3% to 6% in constant currency. At current spot rates, FX would be a tailwind of 1 to 2 percentage points on full year reported net sales. We also continue to expect adjusted gross margin of approximately 50% for the full year. The recast guidance includes expectations for adjusted operating income of $580 million to $630 million, reflecting a $30 million adjustment attributable to non-Mattel-163 amortization of acquired intangible assets from prior acquisitions. For clarity, Mattel163 amortization of acquired intangiable assets was not included in prior 2026 guidance. This results in adjusted EPS guidance in the range of $1.27 and to $1.39. In terms of 2026 gross billings performance by category, we continue to expect vehicles as well as challenger categories combined to grow strongly. Those to be comparable and ITPS to decline. This includes the following growth drivers: continued strong performance in key brands, including Hot Wheels, Mattel Brick shop, Uno and Little People further amplified by masters of the universe, global theatrical release and product line, the Matchbox film product for major theatrical releases, including Disney and Pixar's significant new toy partnerships, including KapopDiemon Hunters and DC, upcoming self-published digital game releases and the consolidation of Mattel163. The guide for 2026 full year adjusted gross margin of approximately 50% includes an expectation of sequential improvement in the second quarter, although we expect it will remain below 50% in Q2 and then also improved in the second half. Looking to 2027, we continue to expect mid- to high single-digit revenue growth in constant currency and strong double-digit growth in adjusted operating income, benefiting from our brand-centric strategy, innovation in toys, major partnerships and the anticipated returns of strategic investment, including digital games. We are monitoring developments related to the current events in the Middle East as well as possible changes related to tariffs, and our guidance includes a range of assumptions and scenarios. Conditions remain fluid and current guidance is subject to market volatility, unexpected disruptions as well as other macroeconomic risks and uncertainties, including further developments in the Middle East and regulatory actions impacting global trade. With that, I will turn it back to Ynon. Ynon Kreiz: Thanks, Paul. In summary, we are off to a good start to 2026. We are seeing momentum in the business and continue to execute our strategy to grow our IP-driven play and family entertainment business. We are seeing top line acceleration in the second quarter to date and expect to achieve our full year 2026 guidance. With that, I'll now hand the call off to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to start maybe, Paul, you left off, you said you're monitoring what's going on in the Middle East. Obviously, things are fluid and the guidance assumes a range of assumptions and scenarios. You said, I think, Ynon, you mentioned there's minimal impact to date as well. I guess as we think about the cost side of things, resin and freight have both moved significantly higher, just obviously, as oil has -- and so can you maybe just remind us of your exposure to those 2 cost buckets and maybe walk us through your hedging and contracting and what you're kind of embedding in the guide at this point? I understand there's some inventory timing as well. So maybe the potential headwind is pushed out. But just trying to kind of understand and frame the degree of potential cost pressure we could see? And how are you thinking about managing it? . Paul Ruh: Of course, and thank you for the question. As we said in the prepared remarks, we see minimal impact on our business year-to-date. But of course, we continue to monitor closely. -- we did reiterate our guidance, and that includes a range of assumptions and several scenarios. We are not immune, but it's too early to speculate. And it depends, particularly on how long the disruption last and also how long the oil prices remain elevated. We are experienced. We have a team on the ground that's managing this situation. And we are, at this point, reiterating our full year guidance both in gross margin of approximately 50%, with all these puts and takes. Megan Christine Alexander: Okay. And then maybe just on the top line, the 4% reported growth in the quarter and 1% in constant currency was better than what you had laid out when we talked a couple of months ago, I think you're expecting down low single digits in the first quarter. So maybe you can just talk through the drivers of what came in better than expected? Was there any sort of Easter timing benefit we should be aware of as we think about the second quarter? And yes, that would just be helpful. Ynon Kreiz: Yes, Megan. As we said on the call, we had a strong start of the year. The growth came from several sound out brands that grew double digit, including in our own brands, Hot Wheels, Uno, Monster High masses of the universe. -- ahead of the movie release and Mattel Brick shop, which is becoming a proper hit for Mattel as well as partner brands like Toy Story and WWE. The consumer demand POS was positive, and this is in the context of strong growth in the industry. So what we are seeing is consumers are buying toys -- the toy industry is in a healthy position. And for Mattel, we are continuing to see demand. And as we said, we saw acceleration of shipping quarter-to-date, second quarter to date. So we're well positioned to grow in the second quarter, consumer demand is positive, and we continue to execute our strategy. Operator: Your next question comes from the line of Arpine Kocharyan with UBS Investment. Arpine Kocharyan: To follow up on Megan's margin question, actually, I was hoping you could go through what EPA tariff rollback means for you for the year? And then how much of wiggle room that gives you to basically offset some of the impacts you might see through 2027, as I understand most of your raw materials are locked in for the year. But we are hearing of fuel surcharges for freight. Just if you could kind of give a little bit more on those puts and takes? And then I have a quick follow-up. Paul Ruh: Yes. Thanks, Megan. So our guidance related to tariffs includes a range of assumptions and scenarios. And specifically, what we have included in the guidance is the expectations of the actions that we're taking back in 2025 will fully offset the annualized dollar cost impact of 2026. We said that, and we are, at this point, reiterating that point. But you know that the tariff situation is fluid. We started the process of refunds. We're actively working through the systems. And more broadly, the overall framework is still evolving including potential appeals. So the time and ultimately, the outcomes are not clear. So that's why I say that our guidance includes a range of assumptions and tariff rates for the year. But it's important to say that our guidance does not factor in a refund given the uncertainty at this point in time. Arpine Kocharyan: And then maybe for you, you talk about digital strategy integration of the JV going well ahead of the releases to digital games. Anything else you would like to share kind of on your investment cadence as we progress through the year, anything that has changed in your outlook maybe for 2027 and what kind of returns you could be looking at? Anything else you feel like you should share sort of as you think about 3 months that have passed through to us gave an update. Ynon Kreiz: Thanks, Arpine, Yes. So we did close the acquisition, as we've said on March 2. The integration is tracking according to plan. We have a cross-functional team that is focused on all the relevant activities. And as we've said, acquiring full control of the JV meaningfully advances our digital games business, and it will add significant development publishing and digital customer acquisition expertise to the company. So this is a good development. The deal is done, and we are in full integration mode. When it comes to our strategic investments, as we've shared, these investments are meant to drive accelerated growth and profitability, which is consistent with our first capital allocation priority to invest in organic growth. It's in line with our strategy to grow our IP-driven play and family entertainment business. The investments, as we've said before, are in areas that are designed to allow us to capture even more value from our IP and do that even faster. And the examples we gave were in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. When it comes to self-published mobile games, this is also progressing very well. As we've said in the prepared remarks, we are ready to launch the first game, which is based on the site of the universe firm. The game is now in soft launch, and all the metrics are where we want to see them. And the second game is in advanced development, also would be a soft launch soon and will be released later this year. We'll be able to share more down the road, but I can say that it's tracking well. all of the testing and metrics that we are monitoring or where we want to see them. And it's exciting to be in a position where we would launch our first published games that can have asymmetric impact on the company. All of that is part of our investment in areas that can accelerate top line growth and profitability. Operator: Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Company. James Chartier: Last quarter, you said infant/Toddler/preschool would be a 2% to 3% headwind to the business this year. That implies like a mid- to high-teens decline in that business. Can you just give us some more color on what's driving that and when you think that business could stabilize? . Ynon Kreiz: Yes, Jim, it's exactly what we said. It will be a 2% to 3% headwind this year, and this is still where we see things tracking. But as we also said that the drag is becoming smaller, especially from baby gear and power wheels. We do expect to see growth in key segments within Fisher-Price, including specifically Little People, which is growing double digit. And this is driven by new partnerships that we have with important players like Nintendo, with Disney across Toy Story and making friends and other brands. And overall, this is a fast-growing high-margin business that is growing within Fisher price, and it's great to see that. We're also getting ready to relaunch Thomas in the second half of the year. There'll be animated content, premium content that we are producing. It will be on all the major leading kid platforms with new product line, new branding and more engagement. And we continue to assess the business, the category as a whole because the category is an important part of the toy industry overall. Fisher Price is the market leader. It's a brand that has been around for more than 90 years, globally recognized and cherished by generations of parents and families and the significant vested value in that brand. And then, of course, we're looking at the numbers and want to make sure that the business is in the best position to grow and achieve its full potential. And we'll come back with more information down the road. Operator: Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: First, Ynon, maybe away from the digital gaming strategy. I was curious if you could maybe talk a bit more about the strategic initiatives you laid out last quarter and some of the changes the organization and organizational structure that has taken place over the last couple of months, really where are you investing in the business today? And how should investors expect to see some of these initiatives and some of these changes playing out over the balance of the year as you work towards that goal of capturing more value from your IP faster? Ynon Kreiz: Yes. Thanks, Stephen. This goes back to our strategy that to -- that is oriented around being more brand-centric where this is no longer about toys versus non-toys or toys or entertainment. This is about growing our brands holistically. And the strategy, a new operating model that we are deploying right now is designed to accelerate the value that we will capture out of our brands. Toys remains a key pillar part of this strategy. Toys is a foundational part of our business and we believe there is significant upside in the toy industry, and we're seeing it playing out this quarter as well as last year, and we expect that will continue for the full year in 2026. That said, we would like to leverage the success we have in toys and the strength of our brands outside of the toy aisle. And in order to do that, we believe that a holistic management of the business with our plans with the brand -- a brand-centric strategy would allow us to do that in the most optimal way and also be very effective in how we create demand. In the past, the orientation was more about promoting certain toy lines or other lines of the business. We are shifting more towards brand marketing, not specifically just on certain lines or certain products, but more holistic marketing and are looking to leverage the significant resources that we spend in demand creation across the business overall. The other thing that it does, it allows us to manage the business holistically where success in toys, great success in entertainment and success in entertainment will reflect and inflect back on the pop business. So if you think about digital games or mobile games. When we are now developing titles or game titles based on our brands, we do it with a holistic strategy to promote both the games as well as stories, content, location-based entertainment and other executions holistically. And we believe if we do that right as we are now deploying the strategy that we're now deploying, it will accelerate our business significantly and drive also a higher margin and stronger performance overall. Operator: Your next question comes from the line of Eric Handler with ROTH Capital. Eric Handler: Ynon, I wonder if you can talk a little bit about Mattel Brick shop. I mean, reviews have been really strong for the product line. And just wondering how fast can this ramp so that it's a meaningful contributor to the business? And where -- how -- at what point will we start seeing full shelves at retail? And just talk about some of the dynamics going on there, please? Ynon Kreiz: Thanks, Eric. The Building Sets category is 1 of the fastest-growing parts of the toy industry wall. This is obviously driven by LEGO. But it is an and fast-growing category. And within the category, within the building site category, building search for cars specifically is 1 of the fastest-growing segments. When it comes to vehicles, we are by far the global leader. We understand culture better than anyone. And what we did around material Breakshop is bring our expertise in cars together with the incredible capabilities and innovation we have within Mega that is our footprint within the building sits category, and created an incredible product. And what is unique about Mattel brick shop is that these are not just cars that you construct and put together. These are cars that by the time you finish building them, look like cars. And we infused metal parts, rubber wheels, and just great packaging, branding, an incredible manual itself is a book that you would put in your library. The quality is that high. And we're very excited to see the initial reaction. The consumer demand is stronger than we can accommodate. We are chasing demand. It's growing double digits. And we believe there's significant runway ahead of us, not just in '26 or 2027. This can be a runner for years to come and really leveraging the Mattel playbook beyond cars and beyond building search in infusing innovation, brand purpose, cultural relevance, great partnerships and a franchise mindset that extends the play pattern and create multiple touch points across multiple entertainment verticals and other opportunities to engage fans. Eric Handler: Okay. And then as a follow-up question, when you look at the mobile gaming industry, it is the largest segment within the video games business, but has become very mature, really flat lining for the last several years, growing maybe low single digits. Very competitive cost a lot to scale a game. So I'm wondering why is -- why do you view that this is a business that you want Mattel to be in? And sort of how are you going to measure success in the genre. Ynon Kreiz: Yes. The -- you're right in the premise that it is competitive and it's a relatively competitive -- well, competitive place to be with other players that are in it. But a few things changed over the years in terms of the dynamics within the industry. It is now not very costly to develop a game. You don't need to own a studio to develop a game and you don't need to own the game engine. And so for a cost of under $10 million, we see it as single-digit million dollars, you can fund the development of a game. What is more capital intensive, and you said that as well is that it's more capital -- it's more -- you need more capital to drive demand, to acquire users, although what is also unique in our days now is that the user acquisition is all driven by performance marketing, where you know the ROI of your spend you know exactly what to expect when you spend the money and it's almost scientific in terms of how much money you spend and what do you get in return. So while you do spend capital, you only do that to the extent you know that the marketing and the consumer acquisition will yield the return that you expect. What is unique to Mattel and where we stand out is with the strength and appeal of our brands. Our economics are different, different to a radial player because people are proactively looking for opportunities to engage with our brands. People are searching for opportunities to engage with our brands. When we put out a Barbie branded game on roadblocks, it was the #1 branded game for more than a year with 0 marketing. When we put out an UNO experience on Fortnite, on the first day, it became 1 of the top 10 most active or engaged experiences on the entire platform against more than 100,000 different islands and experiences in the platform. So we know that our brands percolate to the top and people are proactively searching for them. Because of that, our economic equation is different in terms of demand creation and user acquisition. And we expect that with good execution and it's not enough to have strong games, you still need to deliver on the execution. So we believe that strong -- with our capabilities and with the partners we work that develop the games for us, we'll be able to drive successful experiences that will deliver have the potential to deliver asymmetric return for Mattel. And we're excited to participate in this large important part of the ecosystem. Operator: Your next question comes from the line of Anthony Bonadio with Wells Fargo. Anthony Bonadio: So just to start on masters of the universe. It seems like some of the forecasting services have is doing pretty well at the box office. Can you just talk a little bit about how we should think about the lift to earnings, if that's the case? And just maybe walk us through what's embedded in guidance around this. Ynon Kreiz: Yes. You're right, things are tracking well. There's a lot of excitement around the trailers and the initial marketing campaign and the actual company is about to kick off. So you will see a lot more activity around masters of the universe. At the same time, we know it's hard to predict box office, this is Hollywood. But what we can say already that Masters of the Universe movie is already a big win for Mattel. They are -- even the buildup towards the movie is driving awareness, strengthening relationship with fans. We have dozens of partners around the world. We're seeing product sales ramping, growing double digits, and it's only going to get stronger and better from here. What's unique about this movie specifically is that it's bringing to life and it reimagines this classic methology it's going to engage classic, the fans, the fans of the generation that used to watch it when there were kids, but also appeal to young kids and be very contemporary and timely and culturally relevant. So it is an important addition to our portfolio. It will drive sales, toy sales, the movie is toyetic. The movie is very toyetic. We just rolled out our product offering this past weekend, a combination of mainline as well as collectors, and it's just great. So we're very positive about it. We said it will be a driver. We expect double-digit growth, and we expect it will give a whole new generation of fans and opportunity to engage with this great franchise. Anthony Bonadio: That's helpful. And then maybe framing Megan's question another way. If commodity and freight prices remain where they are today, does that mean guidance remains intact for '26? Or does that become more of a challenge as the year progresses? Paul Ruh: I'll take that one. As we said before, we're not immune, but at this point, it depends how long the disruption lasts and how long the oil prices remain celebrated. So at this point, the guidance remains intact with those assumptions in mind. . Operator: Your next question comes from the line of Kylie Cohu with Jefferies. Kylie Cohu: I apologize if you've already kind of addressed this. but I just want to dig a little bit into the expected sales cadence for the year. Obviously, Q1 turned out better than you expected. Do you still expect kind of a large step-up in sales growth in Q2? And really just any changes in how retail like inventory posture has changed over the quarter would be helpful. Paul Ruh: Yes, Kyle, I'll take that one. So we had a good first quarter overall from a performance perspective, but we still have 3 quarters to go and Q1 is a small quarter. Now what we see into Q2. We have certainly acceleration in the early times of the quarter in POS, and we then continues to -- we will then continue to see acceleration in gross billings. So actually, POS, let me clarify that. POS, given the seasonality in Easter is not -- is flat. I would say it's flat to slightly down. But we're encouraged by what we're seeing from an acceleration in shipping in Q2 year-to-date, that is the point. And our full year guidance remains unchanged. So a strong start of the year, acceleration in Q2 and then we continue to see the strength in the second half of the year. Kylie Cohu: Great. And then just any update on the strategic review of infant, toddler, and preschool. Ynon Kreiz: Can you repeat the question? I heard strategic review. I didn't hear the first part. Kylie Cohu: Just any update on the strategic review of infant, toddle, and preschool? Ynon Kreiz: So yes. Thanks, Kyle. No update. We continue to assess the business. We talked about the importance of the category in the industry. We talked about the importance of fisher price within the industry and within the category specifically, and we'll come back with more detail about our review of best positioning this business for -- to maximize its potential. Operator: Your next question comes from the line of Gerrick Johnson with Seaport Research Partners. Gerrick Johnson: So on the investment spending, the $150 million, I should actually say the $110 million, let's exclude the $40 million in user acquisition, $110 million. Is that still the target, $110 million for the year? And how much has been incurred so far? Ynon Kreiz: Yes, that is still the target. We are not breaking out the spend by quarter, but we are tracking on plan full execution mode, all the initiatives we mentioned, it's still early in the year, but we're happy with the progress and very confident that these investments in aggregate will have high ROI with net positive contribution to the bottom line in 2027 and beyond. We talked about the different parts of the different areas where we invest -- this is all about our own brands, our own organic business and designed to accelerate and improve the performance of the business overall. . Gerrick Johnson: Okay. And perhaps related, maybe not. CapEx for the quarter looked like it was $65 million the highest first quarter CapEx since 2017. So what's your CapEx guidance for the year? And why was it so high in the first quarter? Paul Ruh: Yes. We don't necessarily guide CapEx specifically, but what we are doing is we are investing in our infrastructure and this is in line with our guidance in terms of cash flow in general. So we are tracking to our expectations. And overall, this is pretty much in line with the 3% to 4% net sales that we have executed on over the last few years. And we are doing the normal upgrades that we increase our productivity, our efficiency and pretty much in line with our expectations. Ynon Kreiz: And Gerrick, just to emphasize what Paul said, still within the framework of 3% to 4% of net sales, which is -- we believe is still very healthy and very much controlled in line with our capital-light orientation and capital allocation priorities. Operator: Your next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers: I wanted to follow up on the tariff question. As you think about -- not take refunds off the table, in the back half of the year, you'll be shipping product presumably at a lower tariff rate. If that happens, how do you think about how the retailers behave in terms of do you get the gross margin rate back? Or do you think that the retail partners will look for you to bring prices actually lower given how important the category is to driving traffic to the stores? Paul Ruh: Yes, Chris, I wouldn't necessarily speculate on what the future tariff rates will look like. It's early days, but what we are doing is constant conversations with our retail partners. It's early days, and we want to see how the refund process works out. But also keep in mind that we do not set the prices the retailers do. So what we do is we work closely with them on a variety of issues, and this is actually one of them. Christopher Horvers: Got it. And then I wanted to clarify the POS comment. So quarter-to-date, it's flat to slightly down, and that includes an Easter headwind. How do you think about it on a year-to-date basis, and then as you think about the shipping strength that you're seeing right now, you're also lapping some deferred retail orders from last year. You've got masters in the universe. You've got Toy Story coming as you try to disaggregate sort of the improvement in the second quarter, is there a way to give us some insights around how much of it is comparison driven versus some sort of more organic uptick in the business. Paul Ruh: Yes. I don't want to get deep into POS. We do not guide on POS and -- but what I can tell you is that our gross billings are coming in strong for the second quarter. Remember, last year, it started -- we started to see the disruption that was as a result of the uncertainty around tariffs. But it's a combination of both what we are comping from last year, but also our strong portfolio and our strong innovation, and we are adding this year on top of what we had last year. So it's a combination of both. Ynon Kreiz: And Chris, I would add the comment that we said in the prepared remarks that the shipping -- the ordering parents in the U.S. is stabilizing. And this is an important comment. What we've seen in the last 4 quarters, if you remember, the shift in ordering panel was a big headwind for us. We believe U.S. retailers ordering patterns are stabilizing. And in line with that, we also expect our North America region to grow in the second quarter. And so this is something we said in the prepared remarks. I just want to make sure you -- I mean it's captured. . Operator: Your final question for today comes from the line of James Hardiman with Citi. James Hardiman: So I just want to make sure I understand. Obviously, revenues were better than you guys were anticipating in the first quarter. If I think about gross margins and the magnitude of the compression there, at least versus where we were modeling that was worse than expected. Maybe the bridge on Slide 12 is certainly helpful. Maybe walk us through some of those buckets and how those performed relative to your expectations? And then any color you can give us on how those trend as we move through the year. FX looks like it was a headwind, I think you're expecting that to flip to a tailwind. Any thoughts on the timing there? And then obviously, the inflation piece doesn't sound like that has anything to do with the fuel cost in the Middle East stuff. But as we think about 2Q and beyond, any help on what those buckets look like from a gross margin perspective? Paul Ruh: Yes, James, remember, we previously said that we expected in Q1 gross margin to be down. So the decline was due to the expected gross margin incremental cost of tariffs, as you see in the bridge, unfavorable or an exchange and also inflation -- that inflation, by the way, is unrelated to the Middle East because it hasn't hit our P&L. And going the other way, we had tariff mitigation actions, including our optimizing for profitable growth savings, and those were partially offset by several other factors. And all these elements were expected. So keep in mind also, that's an important consideration that Q1 is a small quarter. So small dollar shifts can cause big swings in margin percent. So when it comes to the outlook for the year, with all of that, we are on track to achieve our full year adjusted gross margin guidance of approximately 50%, and this includes an expectation of sequential improvement in the second quarter, and although we expect it to remain below the 50%, specifically in Q2, but then also to improve in the second half to get to an average of the guidance that we talked about of approximately [indiscernible]. So those are the puts and takes on the trajectory that we expect. James Hardiman: Okay. And then a similar question on the OpEx side, the SG&A side. I guess, in particular, the advertising and promotional expense was up, call it, 32%. It sounds like maybe there was some timing that affected that number. But maybe any thoughts about how to think about how that trends over the course of the year. and sort of the incremental investment spend, how to think about the timing of that? What do we see in the first quarter and how we sprinkle that into our models for the remainder of the year? Paul Ruh: Sure. So for SG&A, let me start with that one. SG&A increased $19 million, primarily due to the investments that we talked about to the strategic investments. And of course, we do not guide to these lines for the year. But keep in mind that this includes incremental investments that we talked about since last quarter. There's also a little bit of timing when it comes to the A&P, and that is also associated with the shift in the Easter holiday. But we are tracking to what we said overall since in the beginning of the year, and that is associated, of course, with the pacing of our investments. Ynon Kreiz: Okay. We don't have another question. Thank you. Thank you, everyone. Thank you for joining us today and for all your questions. Just to say in closing, we are closely monitoring macroeconomic developments. Clearly, a lot of things are going on, and we are watching how things pan out. Yet we have a lot to look forward to this year. Our outlook reflects the momentum of our strategy to grow our IP-driven play and family entertainment business and are excited to continue to execute the strategy for the rest of the year. We appreciate the time. Thanks again for joining the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to C.H. Robinson Worldwide, Inc.'s First Quarter 2026 Conference Call. At this time, participants are in a listen-only mode. Following the company's prepared remarks, we will open the line for a live question and answer session. As a reminder, this conference is being recorded Wednesday, April 29, 2026. I would now like to turn the conference over to Charles S. Ives, Senior Director of Investor Relations. Charles S. Ives: Thank you, operator, and good afternoon, everyone. On the call with me today is David P. Bozeman, our President and Chief Executive Officer, Michael D. Castagnetto, our President of North American Surface Transportation, Arun D. Rajan, our Chief Strategy and Innovation Officer, and Damon J. Lee, our Chief Financial Officer. I would like to remind you that our remarks today contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. Earnings presentation slides are supplemental to our earnings release and can be found in the Investors section of our website at investor.chrobinson.com. Today's remarks also contain certain non-GAAP measures, and reconciliations of those measures to GAAP measures are included in the presentation. With that, I will turn the call over to David. David P. Bozeman: Thank you, Charles. Good afternoon, everyone, and thank you for joining us today. As has been widely discussed in recent months, the North American trucking market has entered a period of supply-driven tightening. If that has occurred, we have heard old tapes being replaced regarding which transportation providers benefit most during certain parts of the truckload cycle. But those storylines do not fully appreciate the secular earnings growth that has consistently been generated at the new C.H. Robinson Worldwide, Inc., regardless of market conditions. 2026 was another example of this. Our adjusted earnings per share increased 15% year over year despite a significant increase in truckload spot market costs. We continue to outperform by opportunistically capturing transactional volumes at higher margins as the industry's tender rejection rates increase, by continuing to exercise our disciplined revenue management practices, by repricing some of our contractual business in a very targeted fashion, and by continuing to widen our cost-of-hire advantage, all of which have improved as we implemented our new lean operating model. This enabled us to optimize our adjusted gross profit per truckload shipment and maintain our NAST gross margin percentage despite having to absorb the elevated cost of capacity. Additionally, we gained market share in our NAS business for the twelfth consecutive quarter, and we continue to deliver evergreen productivity improvements across our business. Over the past year, we have consistently said we are not immune to macroeconomic conditions or an inflection in spot cost, but that we are managing those conditions better than we have in the past and better than our competitors. Our first quarter performance puts another check mark on our say-do scorecard. Our ability to consistently outperform over the last two-plus years is a result of focusing on controlling what we can control and the strength of our Lean AI strategy. Lean AI is our unique, disciplined approach to AI innovation that is transforming supply chains. It combines the principles of our Robinson operating model rooted in lean methodology, the power of custom-built AI, and the expertise of our people to maximize value, minimize waste, and drive better outcomes for customers and carriers. As we continue to purposely engineer our work to drive higher automation and industry-leading cost to serve and improve customer outcomes, all of this is aimed at building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. I am proud of our employees for navigating ever-changing market conditions with discipline and ingenuity and for embracing the culture shift that has fundamentally changed this company. Our Global Forwarding team continues to help our customers navigate disruptions such as conflict-driven rerouting and reduced flexibility across global shipping networks. The international freight market has been tumultuous and impacted by global trade policies, geopolitical conflicts, and route restrictions. Similar to 2025, excess vessel capacity has caused ocean rates to decline versus the elevated rates from a year ago. As the team helped customers comply with changing customs regulations and continued to implement the same revenue management disciplines that have been deployed in NAST, the team expanded gross margins in Q1 by 60 basis points year over year. We also continue to evolve our Global Forwarding business to a more cohesive centralized model with standardized and Lean AI-enabled processes. We will continue to focus on providing differentiated service and solutions to our customers and carriers, executing with discipline, and improving our business model and our cost to serve. We are highly confident in our ability to continue executing on all of our strategic initiatives, and the strategies that our team is executing are built to be effective in any market condition. We are excited about the prospects for a possible return to a healthier demand environment, but with our strong balance sheet and cash flow generation, we are also comfortable if the freight market ends up being lower for longer. In either scenario, we are ready to serve our two-sided marketplace and to deliver higher highs and higher lows across the market cycle. Our model, with an industry-leading cost to serve, is highly scalable, and we expect it will continue to improve further as we continue to harness the evolving power of AI to drive automation across the quote-to-cash life cycle of a load. As the pacesetter for innovation in our industry, we will continue to fail fast and use our domain expertise to build technology that delivers on our customer promise and drives higher value for all of our stakeholders. We are the trusted provider customers look to for cutting-edge innovation, differentiated solutions, and best-in-class service. And while we are pleased with the results we have delivered in the last two years, we are still in the early stages of our transformation. Significant runway exists as we continue to deepen the lean mindset and scale custom-built AI agents across the enterprise. I will turn it over to Michael now to provide more details on our NAST results. Michael D. Castagnetto: Thank you, David, and good afternoon, everyone. I am extremely proud of the team's disciplined execution in Q1 that showcased the secular earnings growth underway in NAST and our improved ability to offset pressure on our contractual truckload margin as the cost of capacity increased significantly. As a result of standing by our customers in Q1 with an industry-leading tender acceptance rate, our contractual truckload volume grew year over year. It also increased due to a win rate that has improved over the past year with a particular focus on growth in certain verticals that we have targeted with improved horizontal capabilities and solutions. As a result, our mix of contractual truckload volume increased from approximately 65% in Q1 last year to approximately 70% this year. At the same time, Q1 truckload spot market costs, excluding fuel, increased approximately 19% year over year according to DAT. This was a result of several supply-driven constraints, including CDL and other enforcement actions and multiple winter storms that disrupted the typical seasonal rate softening across several impacted regions and prevented spot rates from following their normal downward trajectory in Q1. As a result, tender rejection rates rose across the industry. Contractual route guides began to fail and route guide depth increased throughout Q1. This created opportunities for transactional volumes at higher margins, and armed with better disciplines and tools than in the past, our team of freight experts did a great job of capturing the right transactional volume. Combined with targeted repricing of some of our contractual business, widening our cost-of-hire advantage, and strong performance within our LTL business, we were able to offset the pressure of our contractual margins and maintain our NASS gross margin at 14.6% in Q1. This also included absorbing the higher cost of fuel. While it has very minimal impact on our gross profit dollars due to being a pass-through cost in our brokerage model, a rising fuel surcharge reduces our gross margin percentage. For example, the increase in fuel surcharges from February to March reduced our truckload gross margin in March by over 50 basis points sequentially. Again, there is no impact on gross profit dollars, but it does impact the margin percentage, and this could continue into Q2 given the still elevated fuel costs. The team also outgrew the CAS Freight Shipment Index while maintaining our overall NASS gross margin in Q1 for the twelfth consecutive quarter. Our Q1 total NASS volume was flat year over year, compared to a 6.2% decline in the index. Our LTL volume increased approximately 2% year over year while our truckload volume declined approximately 3.5% year over year, reflecting market share gains in both modes. It is important to understand that we could have grown our truckload volume by considerably more, but our focus on optimizing our gross profit and earnings outweighed further market share gains in Q1. As a result, our year-over-year and sequential growth in adjusted gross profit outperformed the market again in Q1. We will continue to appropriately exercise our optionality on a monthly, weekly, and daily basis to pivot toward volume or margins as market dynamics evolve, making disciplined, data-driven adjustments to optimize for the most effective combination that drives earnings growth and long-term value creation. One of the keys to our consistent market share gains has been volume growth in some key verticals that we have specifically targeted. During Q1, we continued to deliver year-over-year truckload volume growth in both the retail and automotive verticals. These results reflect the execution of our strategic focus and our expanded capabilities that directly support these segments and evolving customer needs, such as our leading drop trailer, cross-border, and short-haul capabilities. In our greater-than-$3 billion LTL business, where we move more LTL freight than any other 3PL in North America, we delivered year-over-year volume growth for the ninth consecutive quarter, reflecting consistent outperformance versus the broader LTL market. Our deep, long-standing relationships with LTL carriers and our proven ability to manage service variability across the carriers enable us to consistently deliver a high level of service to our customers. They continue to turn to us to simplify the complexities of LTL freight and to reduce their costs. Across our NAST business, we are also making smarter use of our proprietary digital capabilities and getting actionable data and AI-powered tools into the hands of our freight experts faster, enabling them to make better decisions and to capture the optimal freight for us. These digital capabilities also enabled us to continue delivering double-digit productivity increases in NASS in Q1. Since 2022, we have delivered a more than 50% increase in shipments per person per day, and this is measured across the entirety of our NAST organization. This enhanced efficiency is not only lowering our industry-leading cost to serve, but it is also elevating the customer experience by enabling faster, more reliable service. Beginning with produce season and continuing with stronger food and beverage demand, looking ahead to Q2, it is typically a seasonally stronger quarter compared to Q1 as the weather gets warmer across the country. Due to these seasonal trends, the ten-year average of the CAS Freight Shipment Index, excluding the pandemic-impacted year of 2020, reflects a 4.5% sequential volume increase in Q2. Truckload spot rates are expected to remain elevated, and we are now expecting a 17% year-over-year increase in dry van spot rates for the full year, up from 8% only three months ago. There is less elasticity in the supply of capacity and carriers' operating costs continue to rise, and this is leading to higher spot and contract rates. None of this changes our expectation to continue outperforming in any market condition, and we are excited about our strong results from ongoing contractual bids and further opportunities to win in the spot or transactional market. As David said in his opening comments, we remain focused on what we can control regardless of market conditions, and we will continue to deliver industry-leading solutions and flexibility that only a scaled broker can provide to customers and carriers. Our people and their unmatched expertise enable us to deliver exceptional service and greater value, and they are relentlessly driving improved results. With much more runway for improvement in front of us, we are still in the early innings of our transformation journey. With that, I will turn it over to Arun to provide an update on the durable advantages of our technology scale and expertise. Arun D. Rajan: Thanks, Michael, and good afternoon, everyone. As David and Michael described, we continue to execute our disciplined strategy, delivering for our customers and carriers while scaling several innovations that better serve our customers and widen our competitive moat. At the center of these efforts is our Lean AI strategy, which combines our lean operating model with deep industry expertise and our proprietary custom-built AI agents embedded directly into the workflows within our quote-to-cash life cycle. This strategy enables us to automate, scale, and execute in a sustainable and repeatable way without letting external narratives blur the difference between perception and reality. We take a highly focused and disciplined approach to AI deployment, and there is no hobby AI at C.H. Robinson Worldwide, Inc. We deploy AI where it delivers real-world results and measurable outcomes that show up in our P&L. We prioritize our efforts based on ROI, leveraging extensive instrumentation to identify the most manual and high-friction work and then scale our AI capabilities with our existing technology spend. Access to AI itself is not a differentiator. Anyone can say they are using AI. But what matters is how AI is engineered, operationalized, and scaled. And AI is only as effective as the data and context that powers it. Part of our competitive advantage comes from the scale, scope, depth, and proprietary nature of our data and context, which I will explain shortly. We combine that with a disciplined operating model that allows our tech to be continuously operationalized and improved. Before going deeper, it is worth grounding in how AI works at a high level. In the AI ecosystem, there are broadly three layers. At the foundation is infrastructure, which provides compute and storage. Above that are AI models, which are increasingly accessible to everyone. Neither of these layers provide the durable competitive moat. The real differentiation and advantage exists at the third layer, which is the application layer. At C.H. Robinson Worldwide, Inc., we own our application layer. It is where the benefits of AI come to life when deployed correctly, and how we deploy AI agents is another source of our competitive advantage. C.H. Robinson Worldwide, Inc.'s builder culture produced our proprietary transportation management system and an extensive application stack, including advanced AI and machine learning capabilities that sit on top of that. That same culture now enables us to design, build, and deploy fit-for-purpose AI agents that drive value for the customer, carrier, and C.H. Robinson Worldwide, Inc. With more than 450 in-house engineers and data scientists who have domain expertise and deeply understand our business, we are able to deploy agents faster and with greater control than a buy-and-integrate model that relies on stitching together third-party solutions that are generic and lack the dataset and context that represent the scale, complexity, and nuance of our business and the industry. Our unmatched scale, proprietary systems, and deep logistics expertise provide the data, context, and human-in-the-loop oversight that makes our AI agents more effective, more reliable, and more difficult to replicate. Our data and context advantage spans multiple modes such as dry van, flatbed, temp control, ocean, and air. They also span multiple services such as short haul, drop trailer, cross-border, expedited, and customs as well as multiple geographies, customers, and lanes. This level of granular, disaggregated data cannot be purchased. And this depth of data, such as data on individual warehouses, enables us to understand price and cost dynamics better than anyone in the industry. Scale, scope, and depth of the context that we provide to our custom-built AI agents is also part of our moat and competitive advantage. Through our human review process and extensive instrumentation, we collect institutional knowledge from workflows and tribal knowledge from our freight experts into a context layer that enables our AI agents to execute and continuously improve alongside our expert logisticians. In effect, our people teach our AI agents in the same way they would train a new operations employee. Routine work can then be executed autonomously, allowing our teams to handle non-routine surges in volume and higher-value, more strategic activities for our customers. For example, think about appointment automation—the breadth of customers, freight dimensions, and dock management systems we deal with. Every one of these customers' dimensions and locations has policies and nuances that are known to the appointment agent by way of an engineered context layer. Economically, this model scales efficiently. After the initial build and implementation, our marginal costs are very low. The ongoing costs are primarily tied to AI token usage, rather than having to pay by transaction to a software-as-a-service provider. So owning the technology and engineering it in such a way that we have a scalable model is a critical component to widening our competitive moat. Our build model is also important for speed of implementation. If a company is using multiple third-party providers to create and implement AI agents, they are beholden to that external provider who does not know the business as well. With our builder culture, we are leveraging the vast domain expertise of our in-house team. Since we are building our own AI agents, we have more control over the implementation process and the speed of integrating those AI agents. That faster speed to ideate, build, operationalize, and scale our AI agents is a differentiator, and it is showing up in our outperformance. Our fleet of AI agents is growing quickly as we continue to pioneer new ways to automate manual tasks and supercharge our industry-leading freight experts to solve for complexity and deliver high-quality service and outcomes to our customers and carriers. We continue to leverage and scale the use of generative AI-powered new capabilities that are backed by our unmatched data, scale, and context, and we are continuing to disrupt from within. Agentic AI operates with a degree of autonomy and unpredictability, making its progress nonlinear and requiring ongoing human-in-the-loop oversight as it advances through cycles of progress and retrenchment. Our Lean AI process of discovering, learning, and building—where missteps and resulting learnings are milestones—is not only necessary, it is the best path to uncover what truly works. Continued improvements of our service-to-cost-efficient AI task agents that listen, learn, and act all day every day enable us to deliver fast, accurate, and personalized service at scale and in any market. We have a clear view of both what has been built and what remains ahead, and we are still in the early innings of our transformation. There is significant runway across our business to continue scaling AI agents, and we have automated only a fraction of the hundreds of processes and subprocesses that exist across the quote-to-cash life cycle of an order. As David said, our strategy is focused on building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. Our technology is unmatched, and we will continue to disrupt ourselves to stay at the forefront of the AI revolution and to further widen our competitive moats. With that, I will turn the call over to Damon for a review of our first quarter results. Damon J. Lee: Thanks, Arun, and good afternoon, everyone. Through another quarter of disciplined execution, we delivered secular earnings growth and continued to advance our strategic priorities aimed at market share growth, gross profit optimization, and increasing our operating leverage, all supported by our Lean AI strategy. With the CAS Index down 6.2% year over year, the macro environment continued to provide pressure in Q1 against easier comps. While we outperformed the index, our Q1 total revenue and AGP declined approximately 12% year over year, respectively. The AGP decline was primarily driven by a 12% year-over-year decline in Global Forwarding due to lower adjusted gross profit per transaction and lower volume in our ocean services. For the total company on a monthly basis, our AGP per business day compared to the prior year was down 4% in January, down 2% in February, and flat in March. Turning to expenses, Q1 personnel expenses were $352.7 million, including $18.8 million of restructuring charges related to workforce reductions. Excluding restructuring charges, our Q1 personnel expenses were $334 million, down $13.4 million, or 3.9%, primarily due to our continued productivity improvements and cost optimization efforts. Our average headcount was down 12.3% year over year in Q1 and was down 3.1% sequentially, illustrating how we continue to decouple headcount growth from volume growth and optimize our organizational structure. We continue to expect that our 2026 personnel expenses will be in the range of $1.25 billion to $1.35 billion. This includes an expectation that we will generate double-digit productivity improvements in both NAST and Global Forwarding in 2026 as we continue to implement agentic AI solutions across the quote-to-cash life cycle of an order. As we have stated previously, we expect these productivity improvements to be over-indexed to 2026, and the same can be said of the sequential declines that are expected in our personnel expenses. Our Q1 SG&A expenses totaled $132.1 million. Excluding $1.5 million of restructuring charges, SG&A expenses were down $9.6 million, or 6.9%, year over year due to cost optimization efforts. We still expect our 2026 SG&A expenses to be in the range of $540 million to $590 million, including depreciation and amortization of $95 million to $105 million for the year. Although most of our SG&A expenses are subject to inflation, we expect continued cost improvements to partially offset the inflationary impact. As a result of our efforts to grow market share, improve gross margins, and increase our productivity and operating leverage, we expanded our operating margin, excluding restructuring costs, by 210 basis points year over year, and despite the significant increase to spot market cost in the truckload market, NAST expanded its operating margin, excluding restructuring costs, by 310 basis points year over year. This is the Lean AI strategy at work, and we reaffirm our 2026 operating income target that we raised in October. Shifting to below operating income, our effective tax rate for the quarter was 11.7%. Historically, our tax rate has been lower in the first quarter of the year due to incremental tax benefits from stock-based compensation deliveries that occur in Q1. For the year, we continue to expect the full-year tax rate to be in the range of 18% to 20%. Our capital expenditures were $15 million for the quarter, and we still expect our 2026 capital expenditures to be $75 million to $85 million. Turning to cash and our balance sheet, we generated $68.6 million in cash from operations in Q1, and we ended Q1 with approximately $1.24 billion of liquidity. Our financial strength continues to be a key differentiator in our industry, giving us the ability to invest throughout the freight cycle to further enhance our capabilities and to return capital to our shareholders. Our net debt to EBITDA ratio at the end of Q1 was 1.32 times, up from 1.03 times at the end of Q4, as we opportunistically deployed capital for a higher amount of share repurchases. While our capital allocation strategy remains grounded in maintaining an investment-grade credit rating, our balance sheet strength enabled us to return approximately $360 million of cash to shareholders in Q1. This represents a more than twofold increase compared to Q1 of last year and includes $280.7 million of share repurchases and $79 million of dividends. We have strong conviction in the strategy we are executing and in the intrinsic value of the business. Our share repurchase activity reflects that conviction and our confidence in the long-term fundamentals of the company. There is tremendous runway for improvement ahead, and our operating model, our technology, and our people continue to differentiate C.H. Robinson Worldwide, Inc. and widen our competitive moats. With that, I will turn the call back to David for his final comments. David P. Bozeman: Thanks, Damon. As you have heard in our prepared remarks today, we have continued to deliver secular earnings growth from the disciplined execution of our strategy. I am proud of the progress we have made collectively to transform C.H. Robinson Worldwide, Inc. into the global leader in Lean AI supply chains. With our lean operating model, our commitment to continuous improvement, and our AI innovations at the core of our transformation, I continue to be even more excited about what we believe we can deliver in the coming years. Our differentiating Lean AI gives us a unique opportunity to create new ways to solve complex challenges at scale, helping our customers build supply chains that are smarter, faster, and more resilient in a world where disruption is constant and agility is essential. We will never stop with our push to discover, learn, innovate, and solve problems with speed, and that is where the lean operating model is so important to our success. As lean disciplines continue to be deployed more broadly across our organization, our teams are becoming increasingly equipped to identify root causes of problems, implement countermeasures, and drive meaningful improvements. That is how we deliver and how we have consistently delivered outperformance and further earnings growth in Q1 for the last two-plus years. It is also why we are positioned to continue doing so regardless of market conditions or cycle. The strength of our strategies, our technology, our people, and our operating model disciplines are differentiating and sustainable in any market environment, including an inflecting spot rate environment like we have seen recently or eventually an inflecting demand environment. And as we lead our industry and stay on offense with our Lean AI strategy, I want to thank our people for their relentless efforts to provide exceptional service to our customers and carriers, for embracing the Robinson operating model, and continuing to execute with discipline. We have been a leader in this industry for more than a century, and we will continue to be. Our scale, our technology, our people, and the Robinson Way enable the operational excellence that has defined us for decades. The Robinson Way means being authentic, persistent, accountable, curious, and united, and those values along with our long-standing commitment to safety guide how we operate every day. Anything suggesting otherwise is misinformed. We will continue to lead with purpose and move with urgency to disrupt ourselves and the industry, and we expect to drive sustainable outperformance, profitable growth, and long-term value for all our stakeholders. That concludes our prepared remarks. I will turn it back to the operator now for the Q&A portion of the call. Operator: Thank you. We will now open the call for questions. We ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 to remove yourself from the queue. One moment while we poll for questions. Our first question comes from the line of Thomas Richard Wadewitz with UBS. Please proceed with your question. Thomas Richard Wadewitz: Yes, great. Thank you, and it is good to see the strong results against a kind of evolving freight backdrop. I wanted to ask you how you would think about the impact to your business from the cycle improvement. I generally think stronger contract rates are good. The brokers can get squeezed for a bit—obviously you have managed that well—but is that potentially, if contract rates are up quite a bit—we are hearing kind of 10% to 15% contract increases for brokers and truckload—potentially a driver of upside to your $6 number for the year? Maybe that helps you in the second half. And then the other question is along the lines of the Montgomery case. I think that we are expecting a decision May or June. It seems like probably some, you know, over 50% chance, let us say, that you win. But how would you respond if you end up losing in the Montgomery case, just in terms of other things you can do on the safety side to do more? Or would you say you are fine because it hurts others more than it hurts you because you have scale and financial strength? Thank you. David P. Bozeman: Hey, Tom. This is David. Thanks for the question. I will start with the back half of your question on Montgomery and then Michael will address the first part. Let me be really clear about this. The Montgomery case is a case that we expect to win. We have argued a really good case going to the Supreme Court. It is important that you know the context here. This case is really not about immunity for brokers. This is about safety, and this is why we support this case. Not having 50 different state rules—and when it comes down to the ruling of it, which we are anxiously awaiting—if it comes in our favor or not, we obviously have a playbook for either. But this is really about driving safety for the industry. We think that if it is not in our favor, that certainly brings some headwinds to the industry because you will have to start dealing with various brokers, and this should be the FMCSA really being the ones driving safety of carriers. But we are expecting—because we won in the Seventh Circuit and we won in the Southern District of Illinois—we expect that we will win this in the Supreme Court as well. Either way, C.H. Robinson Worldwide, Inc. will be prepared to go, and we have a playbook for either. Michael D. Castagnetto: Yes, Tom. This is Michael. I will tackle the first part of your question around the overall rate environment and how that will move forward. First of all, I would say I am really proud of the team and how they managed what was a difficult Q1, which was really an extension of the back half of Q4 through the holiday and then into the multiple storm periods, as well as the impact of regulatory on the overall supply of capacity in the marketplace. The team did an incredible job of being very active in terms of our repricing efforts in the quarter—very rifled in our approach. We have talked about that, that we expected ourselves to be faster than we have in the past, but to do it with more accuracy, more specificity, and to really work with our customers to reprice the places where the market requires it to keep supply chains healthy—but to do it with them—and I think they have appreciated that through Q1. We saw that in our results and really have had some success with repricing. From our prepared comments, we are really pleased with our recent bid activity. Q4 and Q1 are large RFP periods for the industry as a whole. We feel really good about how we came out of those periods and feel good that we are going to be in a position to manage the ongoing higher-cost marketplace that we are in right now, but also feel good that our process to manage repricing with our customers that we did well in Q1 would continue into Q2 if needed. Operator: Our next question comes from the line of Ken Hoexter with Bank of America. Please proceed with your question. Ken Hoexter: Hey, great. Good afternoon. David, congrats on really impressive moves on the technology adoption. In dropping the 12% of employees, or a little bit less year over year, maybe walk through that process and where we are seeing that change—where it is coming out of. Is it adjusting sales at all? Maybe talk about that and how you can continue to accelerate that from this point forward. And then, Michael, is it normal for contract as a percent of the total book to go up this soon in the turn? Do you not want to play the spot and take advantage of that fluctuating rate to offset the negative impact of the contract? Or do you feel like you are catching up on the book of business fast enough? Thanks. David P. Bozeman: Yes, Ken. Thanks a lot. Let me start with a little bit of context. The way we look at this, and we have said this pretty consistently, is we look at workflows at C.H. Robinson Worldwide, Inc., and for us, it has been the order-to-cash process, which has been a very manual process, and it has worked. That is where we have really gone at it with our technology. Also in this industry, and with us, you have low double-digit turnover that happens, and that has really allowed us to drive efficiencies while not, in some cases, backfilling some of those roles that we have had in that entry-level order-to-cash process. We have also shifted—as we have said consistently—our focus on being more customer-focused, and that is where we have actually invested in some roles in our small and medium business, as well as customer-facing roles for solution solving with customers. But there was just a lot to go after when we started looking at that order-to-cash process. That is the context that we really have when it came to headcount. And as Damon and I have always said, we really do not have a KPI at C.H. Robinson Worldwide, Inc. when it comes to headcount because we have shifted to an input focus versus output focus. We really reengineer the work, and the output is the output. That is how we look at it here. Damon J. Lee: And, Ken, I will put a bow on what David said. This year, we have committed to double-digit productivity across the enterprise—both NAST and our Global Forwarding businesses. We have also commented that that will be over-indexed to the second half of the year. The way we think about productivity going forward, just to remind the audience, is we have committed to single-digit productivity every year regardless of circumstances. Our operating model will generate productivity in the single digits—mid-single digits—every single year. Then in years like 2025 and 2026, where we have waves of innovation—whether that be GenAI adoption, agentic AI adoption—then we are committing to double-digit productivity when you compound those waves of innovation with baseline continuous improvement. We are in the early innings of our productivity journey—early innings of lean adoption and early innings of our technology adoption—so there is a long runway to go as it relates to productivity at C.H. Robinson Worldwide, Inc. Michael D. Castagnetto: And, Ken, on your second question about the mix of business, I think you are right that in a longer time frame our goal, as the market shifts, would be to move that percentage to more equalization. But really in Q1, most of the activity in the marketplace was supply-event-driven—either storms or regulatory impacts on capacity. While we are optimistic that there is some life in the market, it was still dominated by supply-driven events. It was really important for us, as we come out of our RFP business, to make sure that we take care of our customers, that we select the right transactional business to win—which I think we did based on the combination of mix of business and our margin performance. Early in the quarter, a lot of the transactional pricing was not matching where the market was—or maybe I would say the transactional market did not match where the pricing and capacity market was—and we saw that improve throughout the quarter. I feel really good about how the team balanced that. It is important that we also make sure that we take care of the customers who have awarded us business through what was a successful RFP season. But we do look for that to equalize over time, especially if demand improves throughout the rest of the year. Damon J. Lee: And, Ken, just to put a bow on what Michael said, this has been a strong bid season. We expect to gain share through this bid season and price. As Michael said, just to summarize that, really strong bid season for C.H. Robinson Worldwide, Inc. Ken Hoexter: Damon, just a quick follow-up for Arun. How is Global Forwarding in terms of the AI deployment? Or is it still all brokerage? Is that balanced and catching up, or still mainly brokerage? Arun D. Rajan: Yes. We are actively deploying the same playbook that we use in NAST over in Global Forwarding. You will start to see more of that kick in the second half of this year. And just like NAST, as you have seen the journey the past few years, we have a lot of runway to move forward. Thanks for the time. Operator: Our next question comes from the line of Christian F. Wetherbee with Wells Fargo. Please proceed with your question. Christian F. Wetherbee: Hey. Thanks. Good afternoon, guys. I want to ask about your view on spot activity and demand as we went through the quarter. Obviously, AGP improved as we went month to month, but can you talk about spot activity and maybe in the context of the contract comments that you are talking about? What level of contract rate increases are we seeing so far through the bid season? Michael D. Castagnetto: Thank you for the question. Early in January there was still a bit of a decision process of whether the storm impact of early January flowing into early February were events or whether they were indicative of a continuous and ongoing cost-increasing market. What you saw from a lot of customers was pushing or rolling the loads beyond the storm without necessarily pushing the loads into the transactional marketplace. As it became clear throughout the rest of the quarter that the cost side of the marketplace was going to hold, the transactional marketplace started to pick up some steam. But in many cases, the overall demand ecosystem was loads being moved from the contract side of the business to the transactional side without a total increase in loads available. We are really pleased with how the team mixed the service to our customers and also took advantage of the transactional freight that delivered the margins that we required in that marketplace. To your second part, we look at repricing as an ongoing event in terms of how the market is performing, and so we do not have a preset goal of percentages. We know we are going to have to continue to manage the health of our customers’ supply chains. For some customers, that might mean little to no repricing; for others, it might be significant. It depends on the mix. Geography is a large component right now. There are areas that are impacted more than others by the regulatory changes. We feel really good about our process, about our revenue management process, and the tools we are putting into our people's hands, and we are very confident that we can continue to take share from an RFP perspective and then manage that business appropriately. Christian F. Wetherbee: Great. That is helpful. A quick follow-up for David. If there is an adverse outcome on Montgomery, how do you think about market share? It strikes us that a whole bunch of this industry is making essentially no money right now, and theoretically there should be some cost pressures from insurance coverage or other factors. What is the opportunity for C.H. Robinson Worldwide, Inc. in that scenario from a share standpoint? David P. Bozeman: Thanks, Chris. Let me address it this way. It is really important that we put on a strong argument and that we win this case. The Supreme Court has an opportunity to resolve the disagreement of the lower courts. We have to ensure consistency in the application of preemption on these claims, and it will reduce uncertainty for brokers, shippers, and carriers alike. The opposite is 50 different state rules, and we support one national safety standard. That is super important. When it comes to the impact to C.H. Robinson Worldwide, Inc., we do not look at it that way. This is a long-tail issue for a lot of brokers. We have to plan for both sides of it. You are right to call out that there are going to be some insurance implications if you are going to be in this business, and that is going to impact different people in different ways depending on their health and their size. We are prepared either way, but we really put up a strong case. It is important for the industry that we bring clarity to this, not just the positive or negative impact to C.H. Robinson Worldwide, Inc. Operator: Our next question comes from the line of Jonathan B. Chappell with Evercore ISI. Please proceed with your question. Jonathan B. Chappell: Thank you. Good evening. You gave a good example of the very active and rifled repricing approach to the spot rate backdrop. I think what people really want to understand more is the sustainability of what you have managed to do in the first two quarters of the upturn. In addition to the repricing approach and collaboration with your customers, can you give more tangible evidence of how you have managed these first two quarters differently than prior upcycles and how that translates into 2Q or 3Q if rates stabilize from here and stop the parabolic move higher? Michael D. Castagnetto: Thanks, Jonathan. I would start with our revenue management capabilities and getting tools into our people's hands faster. If you compare to the past, it would have taken us most of Q1 to figure out where our problems were and most of the quarter to understand what level of repricing we needed, where, and how. With our Lean AI disciplines now, our tech being in our people's hands faster, they are able to see where our customers’ supply chains are having breaking points—where the health of that supply chain is impacted. Then we are able to have conversations with customers where we can make disciplined decisions together, either in a one-time event if needed based on the change or as an ongoing event based on the volatility of that part of their supply chain. We have talked in the past about whether we would have noticed it weeks or months after; now we are noticing it that day. We are recognizing the trend, and we are able to talk to our people about how we are going to fix this and what time frames we think this adjusts to. I see our process continuing. Whether the market goes up or down, we are going to continue to have those conversations with our people and our customers. I feel really good that we have the tools available to handle a continued upswing in the manner it has for the last four months, the market stabilizing, or it potentially going back down depending on the overall conditions of the marketplace. I feel really confident that we are getting the team what they need to service customers regardless of market conditions. Damon J. Lee: And, Jonathan, I would add that with the frequency in which we are interrogating the market from a price and a volume perspective, we do not have to set a strategy and hope that strategy materializes within the quarter. We are changing strategies multiple times a day—hundreds of times a month. To Michael's point, we are working within the conditions the market has given us, we are outgrowing that market, and we are taking price at the same time, with our operating margin expansion. Whatever the market conditions bear, the frequency and the surgical nature of our revenue management gives us capability that we think few have in this marketplace. Operator: Our next question comes from the line of Jizong Chan with Stifel. Please proceed with your question. Jizong Chan: Thanks, and good afternoon, everyone. I wanted to get your thoughts on forwarding in terms of volume development and margin shaping. There is a lot going on with the Middle East and capacity and the fact that we are lapping the trade disruption this quarter. Any color there would be really helpful for our models. Michael D. Castagnetto: Thanks for the question, Bruce. What I would say is this: another solid quarter in a very difficult macro environment for our Global Forwarding team. There has been tremendous disruption in the Middle East. Our direct exposure to the Middle East is quite immaterial to our book, but the knock-on effect to global rates and global capacity has been the challenge that our team has helped our customers work through in the quarter. They did an exceptional job with that challenge. You can imagine capacity being staged in one area that is being relocated to another area for demand patterns and repositioning. The team has done a really good job there. In a quarter where disruption could have been impactful to our business due to the knock-on effect of the global impact of capacity and rates, the team managed that impact to a very immaterial number for C.H. Robinson Worldwide, Inc. Global Forwarding in the quarter. Your opening comment is right—there is a lot of disruption and global displacement because of the conflict in the Middle East—but as far as the impact to our business, we have been able to manage it quite well. The impact has been relatively immaterial to our results, and we continue to help our customers solve ongoing global conflicts and challenges in the forwarding space. Operator: Our next question comes from an Analyst with Barclays. Please proceed with your question. Analyst: Hi. Good evening, and thanks for taking the question. I think implied in your 2026 earnings outlook, you embedded quite a bit of expected efficiency gains, especially in the back half of the year. Given commentary around fundamentals mid-season maybe going a little bit better, how should we think about earnings progression into the back half of 2026? Thank you. Damon J. Lee: Thanks for the question. We feel very good about our Investor Day update—the $6 EPS with no market growth. As usual, the year starts out differently than you planned. There have been market headwinds in terms of spot rates being substantially higher than we—or anybody—forecasted for 2026, but the team has managed that exceptionally well. We continue to perform exceptionally well on our self-help initiatives around outgrowing the markets, revenue management capability, and productivity. We have a very high degree of confidence in our $6 EPS target. I would not say we are in a position to change that target or the profile of that target at this point in time. As we mentioned, the productivity improvements that we referenced in those commitments are over-indexed to the second half of the year. We think that profile still aligns to our deliverables. We feel very confident in delivering our $6 with no market growth assumed in 2026. Operator: Our next question comes from the line of Richa Harnane with Deutsche Bank. Please proceed with your question. Richa Harnane: Hey. Thanks. Good evening, gentlemen. Obviously very solid results in NAST. I want to better understand the flat volumes and down 3.5% TL volumes. Michael, I know you discussed this about a deliberate decision you were making about being disciplined around growth opportunities, but maybe dive deeper into that and what you are seeing in the market that prohibited you from profitably participating in more volume opportunities. Maybe it was just PT, but I want to better understand and see if volume growth could start to be more significant as we go through the year. Michael D. Castagnetto: Hey, Richa. Thanks for the question. I will speak to what we saw in the quarter. The impact on volume was, first of all, that we made very deliberate choices about the volume we wanted to win in the transactional space at the margins we thought the market required, as well as making sure we serviced our customers in the contractual space. It is also important to realize there were major storm events that impacted very large shipping areas and volumes. While much of that volume does end up getting shipped, you do not get all of it back, so there was a volume impact due to the events that we went through in the quarter. Looking at the balance of what freight was available to us and how our customers were impacted, we feel really good about the volume we produced in the quarter. As Damon mentioned, the market did not grow in the quarter—as you saw with CAS down 6.2%—so we saw market outgrowth in both modes, year-over-year growth in LTL. We continue to believe we are taking the right share at the right time. We expect ourselves to continue to do that whether the market starts to improve or not. We will continue to hold ourselves to that high bar, but we are going to continue to do it based on the right return for customers, carriers, employees, and shareholders. David P. Bozeman: And, Richa, I would just add that we have been pretty adamant about this for almost two years now. We take the volume we want in a given quarter. In Q1, we took the volume that we felt met our criteria. Make no mistake, Michael and team could have outgrown the market substantially more than what we did, but based on our own financial expectations and quality of earnings, we focused on the volume that mattered most to us. The bookends are important here. We had one competitor that had pretty high growth in the quarter—double-digit growth—but negative gross profit dollars and a significant contraction in rate. Another competitor had a significant volume reduction—almost 20% in the quarter—but maintained rates. We believe our model is superior. We had strong outgrowth in the quarter while maintaining our AGP margins in a quarter where spot rates were up 18% to 20%. As Michael said, we feel like we have the strategy that works. We take the share we want and deliver the margin we need. We believe we have the best cost-to-serve model in the industry, and Q1 was a perfect example of that. Operator: Thank you. This does conclude our question and answer session. I would now like to turn the floor back to Charles S. Ives for closing comments. Charles S. Ives: Thank you, everyone, for joining us today, and thank you for your questions. We look forward to talking to you throughout the quarter. Have a good evening. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful rest of your day.
Operator: Good day, everyone. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome you to the eBay Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time and have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to John Egbert, Vice President of Investor Relations. John Egbert: Good afternoon. Thank you all for joining us for eBay Inc.’s first quarter 2026 earnings conference call. Joining me today on the call are Jamie Iannone, our chief executive officer, and Peggy Alford, our chief financial officer. We are providing a slide presentation to accompany our commentary during the call, which is available through the Investor Relations section of the eBay Inc. website at investors.ebayinc.com. Before we begin, I will remind you that during this conference call, we will discuss certain non-GAAP measures related to our performance. You can find a reconciliation of these measures to the nearest comparable GAAP measures in our accompanying slide presentation. Additionally, all growth rates noted in our prepared remarks will reflect organic, FX-neutral year-over-year comparisons. All earnings per share amounts reflect earnings per diluted share unless indicated otherwise. All year-over-year growth rates versus 2025 are also based on recast financials, reflecting our adoption of the new internally developed software accounting guidance in 2026. During this conference call, management will make forward-looking statements, including, without limitation, statements regarding our future performance and expected financial results. These forward-looking statements involve known and unknown risks and uncertainties. Actual results may differ materially from our forecast for a variety of reasons. You can find more information about risks, uncertainties, and other factors that could affect our operating results in our most recent periodic reports on Form 10-K, Form 10-Q, and our earnings release from earlier today. You should not rely on any forward-looking statements. All information in this presentation is as of 04/29/2026. We do not intend and undertake no duty to update that information. With that, I will turn the call over to Jamie. Jamie Iannone: Thanks, John. Good afternoon, and thank you all for joining us today. I am pleased to report we are off to a very strong start in 2026. Our first quarter results exceeded our guidance and consensus estimates across the board, despite ongoing macroeconomic and geopolitical uncertainty across many of our major markets. During Q1, gross merchandise volume rose by 14% to over $22 billion, while revenue grew 17% to more than $3 billion. Strong flow-through of this top-line momentum led to 18% year-over-year growth in non-GAAP operating income, which reached over $900 million. And our non-GAAP earnings per share increased by 21% year over year to $1.66. These strong top- and bottom-line results were driven by a broad-based GMV acceleration across all of our major categories, alongside improved year-over-year trends across most of our key geographies. Our most established strategic priorities now make up approximately 70% of our total GMV. This includes focus categories, our consumer-to-consumer, or C2C, business, and recommerce, which is made up of pre-owned and refurbished items. These priority areas each individually grew faster than overall GMV in Q1, and collectively they grew in the high teens year over year, reflecting the impact of our strategic investments over the last several years. Our focus categories continue to build momentum in Q1, with GMV growth accelerating to 24%, reflecting the benefits of our continued investments in trust, product experience improvements, and full-funnel marketing. The collectibles category was the largest contributor to GMV growth in Q1, reflecting broad-based momentum across the category. The 30th anniversary of Pokémon in late February fueled significant enthusiasm that translated into strong demand on our platform, which we supported with coordinated activations across our core marketplace, eBay Live, TCGplayer, and Goldin. Sports trading card GMV growth accelerated notably in Q1 and was a larger contributor to GMV growth than Pokémon, as we benefited from strong late-season demand for the NFL and NBA, as well as 2026 releases for Major League Baseball. Outside of trading cards, we observed strong GMV growth across much of our broader collectibles offering, including in right-to-win areas like collectible coins, toys, action figures, and comic books. We also saw a transitory benefit to GMV growth from gold and silver bullion in response to precious metal prices, but this demand began to normalize in late Q1 as expected and should revert to historical levels in Q2. Our off-platform marketplaces, TCGplayer growth remains strong, and Goldin growth accelerated as it reached a new quarterly GMV record in Q1. Goldin facilitated several landmark sales during the quarter, including a Pokémon Pikachu Illustrator card that sold for over $16 million, officially becoming the most valuable trading card ever sold at auction. To further support our trading card enthusiasts, we continue to enhance our AI-powered card scanning feature, which recently surpassed 30 million cumulative scans. This tool allows users to scan a single photo and instantly identify a card, surfacing historical prices and population data to help enthusiasts trade with confidence. In Q1, we expanded the card scanning feature beyond sports to cover our top five collectible card game genres, including Pokémon, Magic: The Gathering, and One Piece. Overall, our continued investments in both on- and off-platform experiences are deepening engagement with collectibles enthusiasts. Through our innovation across multiple sports, genres, buying formats, and price points, we are further solidifying eBay Inc. as a premier global shopping destination for the hobbyist community. Importantly, the momentum we observed in Q1 extended well beyond collectibles, as the remainder of our U.S. business also delivered double-digit GMV growth and outpaced broader e-commerce benchmarks. Our Motors Parts & Accessories business, or P&A, delivered its strongest quarter of year-over-year GMV growth since 2021, contributing approximately two points of growth to our overall marketplace in Q1. Our Guaranteed Fit program has meaningfully increased conversion on fitment-enabled listings in the U.S., U.K., and German markets, helping fuel the strongest quarter of P&A GMV growth we have seen in several years. Given the success we have seen in our initial markets, we recently expanded Guaranteed Fit to Australia, helping further solidify our online P&A leadership in this market by giving motors enthusiasts confidence to tackle their most complex projects, knowing they will have the right part for the job every time or their money back. We also recently strengthened our P&A value proposition with the acquisition of Aladine Systems, a U.K.-based software provider for salvage yards. We expect this acquisition to bring more P&A inventory onto the eBay Inc. platform, which provides value for cost-conscious consumers and supports the circular economy. Our acquisition of Caramel a little over a year ago is helping us bring a more comprehensive eBay Inc. Motors offering by combining the strength of our scaled P&A business with our nascent but fast-growing vehicles business. We see meaningful opportunities for synergies between these businesses as they are highly complementary. Vehicles sold on eBay Inc. create a natural opportunity for future engagement in P&A as buyers return to the marketplace to maintain, repair, and personalize their vehicles. In vehicles, our secure fully digital transaction capabilities are driving improvements across the purchase, and we are seeing encouraging traction as we expand from our initial focus on C2C transactions and begin serving small dealerships as well. While it is far earlier in its journey than P&A, vehicles continue to scale month over month and exited Q1 at an annualized GMV run rate in the hundreds of millions of dollars. In fashion, we are building on the momentum we initially created by enhancing trust across high-ASP categories like watches, handbags, jewelry, sneakers, and streetwear through Authenticity Guarantee. More recently, we have expanded Authenticity Guarantee eligibility to a wider selection of pre-loved and luxury apparel, shoes, and accessories for a more complete head-to-toe value proposition for fashion enthusiasts. After diversifying our brand and inventory coverage in the U.K. and Germany last year, we followed suit in the U.S. during Q1 by expanding Authenticity Guarantee to more than 70 shoe and fashion accessory brands. We have also improved our value proposition for fashion recommerce by streamlining and calibrating garment sizing across global standards. These changes have simplified the listing process for sellers, removed a major point of friction for buyers, and contributed to measurable increases in quality views, bought items, and conversion velocity in fashion. Our breadth and depth of selection in branded pre-loved fashion inventory is also key to our relevance in the category. Our AI tools, like the latest generation of Magical Listing experience, are making it dramatically simple for sellers to list pre-loved fashion items on eBay Inc., helping drive a mid-teens year-over-year increase in casual fashion listers in Q1. At the same time, we are strengthening our position in fashion by using community to drive greater awareness and consideration with enthusiasts. eBay Live is becoming a meaningful driver of GMV in certain fashion categories, and in March, we held our first direct-from-brand live shopping event with Marks & Spencer in the U.K. Our second annual Vogue Vintage market events in the U.S. and U.K. were another strong example of how curated events elevate eBay Inc.’s relevance in pre-loved fashion, consistently showing up at the cultural moments that matter most to fashion enthusiasts, including the Grammys, the Oscars, and Berlin Fashion Week during Q1. We have also driven engagement through our sponsorships of the new Saturday Night Live and Love Island All Stars programming in the U.K. Taken together, these efforts are making eBay Inc. a more compelling destination for enthusiasts and helped accelerate overall fashion GMV growth in Q1, including healthy double-digit growth across our fashion-focused categories in aggregate. Our C2C business remains one of the most important strategic priorities. C2C sellers bring the unique, hard-to-find inventory that differentiates eBay Inc. and strengthens our position in recommerce. Multiple years of investment have reduced friction and helped reinvigorate growth in a segment that makes up more than one quarter of our total GMV. We saw that momentum continue in Q1, as C2C delivered double-digit GMV growth across the U.S., U.K., and Germany, meaningfully outpacing B2C growth in those markets. We believe this momentum reflects the enhanced value proposition for consumer sellers in these markets, with reduced transactional friction driving a healthier sell-to-buy flywheel. In May, we plan to revamp our consumer selling experience in Australia, our fourth-largest market by demand. We will remove selling fees for consumer sellers in Australia and introduce a buyer-facing fee on C2C transactions, while also tailoring our seller segmentation and managed shipping service to cater to local market dynamics. Similar to our C2C initiatives in the U.K. and Germany, our goal is to reduce friction for casual sellers, increase our supply of differentiated inventory, and ultimately unlock a larger addressable market opportunity. Another area where we are seeing strong momentum is eBay Live. In categories where trust, storytelling, and community are central to the purchase experience, eBay Live gives sellers a powerful way to showcase unique inventory and engage buyers in real time, helping us bring more customers into high-value enthusiast experiences. Now operating in seven markets globally, eBay Live continues to scale rapidly, with an annual GMV run rate more than 8x higher year over year in recent weeks. We supported that momentum in Q1 through strong growth in programming across a diverse mix of categories and improved event discovery throughout the eBay Inc. mobile app, including the recent addition of an eBay Live button on the bottom navigation for U.S. users on iOS. In Q1, we hosted our first livestream shopping event outside of the holidays, as our 48 Hours of Drops event in the U.S. set a new daily record for eBay Live GMV, with each day outpacing our previous record on Black Friday by 60%. We also saw impressive results internationally, where local 24-hour events in the U.K. and Germany each reached seven-figure daily GMV milestones, proving that our live playbook is effectively capturing enthusiast demand across geographies. We continue to leverage our AI capabilities to reimagine core experiences across the marketplace. For sellers, the latest generation of our Magical Listing experience uses our proprietary models, product knowledge graph, and 30 years of marketplace data to do much of the hard work of creating a listing, from guiding sellers on which photos to take to generating key details like titles, categories, item specifics, and pricing. The U.S. rollout of this experience has been one of the most impactful launches we have had in years, as it has driven a greater than 50% increase in new listing creation rate, double-digit percentage increases in sold items and GMV per lister, stronger retention, and a material increase in estimated customer lifetime value for these sellers. Based on these compelling results in the U.S. market, we began expanding this experience to new and reactivated listers in Germany in April, where early A/B tests are showing directionally similar uplift on key seller KPIs as the U.S. launch, which gives us confidence to extend this experience to more countries and seller segments in the coming months. For buyers, our Authentic Search beta is creating a more intuitive and conversational way to shop by allowing customers to refine results in natural language and a multi-turn dialogue, much like working with a personal shopper that understands sizes, styles, and brand preferences. While still early, we have observed some encouraging learnings from this beta, as we are seeing approximately 50% more search engagement in sessions utilizing AI-powered refinements, which is ultimately translating into double-digit percentage increases in purchase behavior. These innovations are just two examples of our transition to an AI-native marketplace. By embedding these capabilities into the core of our platform, we are fundamentally changing the pace at which we can remove friction, unlock supply, and drive long-term value for our enthusiasts. We are also extending the reach of our marketplace through partnerships. Following a successful pilot of eBay Inc. inventory in Facebook Marketplace search results last quarter, this integration has transitioned to general availability. eBay Inc. inventory is now enabled in the search box for the majority of Facebook Marketplace users in the U.S., Germany, and France. This integration further enhances the visibility of our differentiated inventory to Facebook’s scaled audience, which could drive qualified incremental traffic to our sellers’ eBay Inc. listings. Our search integration complements our existing presence in the Marketplace feed for a subset of users, and we continue to iterate on the experience and gather valuable learnings. Now turning to shipping. Shipping solutions are a major focus for us this year as we leverage our scale and expertise to help sellers tap into demand across borders amid an increasingly complex trade policy landscape. In Q1, we continued to scale eBay International Shipping in Canada following its Q4 launch, and we expanded access to SpeedPAK for sellers in Germany and six other markets. Our SpeedPAK partnership continues to perform well in Greater China and Japan, as these capabilities are becoming increasingly important as cross-border trade grows more complex. Before concluding my prepared remarks, I am proud to share that eBay Inc. was once again recognized as one of Fortune’s Most Innovative Companies. In January, we also released eBay Inc.’s inaugural Climate Transition Plan, a company-wide roadmap to reach net zero greenhouse gas emissions by 2045. This plan reflects how we are well-positioned to drive sustainable commerce at scale, and as a result, create enduring value for our customers, communities, and the planet. In closing, we delivered a very strong start to 2026 with results that exceeded our expectations and reflected broad-based momentum across the marketplace. A few key themes stand out from the quarter. First, our strategic priorities are driving the majority of our GMV growth. Focus categories, C2C, and recommerce now represent approximately 70% of our total GMV and continue to gain share through our disciplined execution, which enhances our long-term resilience and strengthens the structural growth profile of our marketplace. Second, our GMV growth is broad-based and extends well beyond any single category. While collectibles continues to outperform, we saw improved trends across all of our major categories, including accelerating GMV growth across eBay Inc. Motors, electronics, and fashion. eBay Live continues to scale rapidly across a diverse group of categories, and we are in the early stages of realizing valuable synergies between P&A and vehicles. Third, we are progressing from AI-powered optimizations to building fully AI-native experiences on eBay Inc. We are increasingly embedding AI into foundational elements of our marketplace to remove friction and unlock supply at scale, and deliver more personalized and relevant products to our customers. While the macro environment remains dynamic, as I look toward the balance of 2026, I am confident in the sustainability of our underlying business trends and the durable foundation we have established to support long-term growth. With that, I will turn the call over to Peggy to provide more details on our financial performance. Peggy, over to you. Peggy Alford: Thank you, Jamie. I will begin with our financial highlights for the first quarter. GMV grew by 14% to $22.2 billion. Revenue grew 17% to $3.09 billion. Our non-GAAP operating income grew 18% year over year to $907 million. Non-GAAP earnings per share grew 21% year over year to $1.66, and we returned $639 million to shareholders through repurchases and cash dividends. Let us take a closer look at the key drivers of our strong Q1 performance. GMV grew over 14% to $22.2 billion on an organic FX-neutral basis. Foreign exchange provided a tailwind of approximately 400 basis points to spot GMV growth. We saw broad-based strength this quarter, with year-over-year growth improving sequentially across all our major categories, with most contributing positively to GMV growth, led by collectibles, eBay Inc. Motors, electronics, and fashion. Focus category GMV grew 24% in the quarter and outpaced the remainder of our marketplace by 15 percentage points. Shifting to our major geographies, U.S. GMV growth was particularly strong in Q1, up nearly 27%, driven by a broad-based acceleration across categories. Strength extended beyond collectibles, while the remainder of our U.S. business also delivered double-digit GMV growth and outpaced broader e-commerce benchmarks. Several of our strategic initiatives contributed more meaningfully to growth than prior quarters. eBay Live and C2C were each larger contributors, and exports from the U.S. to our international markets also accelerated, supported by improvements to our eBay International Shipping program and a weaker U.S. dollar. International GMV grew over 2% on an organic, FX-neutral basis, and growth also accelerated in Q1, with foreign exchange providing a tailwind of 770 basis points to spot GMV growth. While macroeconomic conditions remain challenging in our largest international markets, we are investing effectively in areas where we have a right to win. Focus categories, C2C, and eBay Live each contributed to improved trends in the U.K. and Germany. We also saw cross-border growth recover across key regions like Greater China and Japan, reinforcing the benefits of our investments in shipping solutions, which are making it easier for buyers and sellers to transact globally amid a more complex trade environment. Next, let us look at our buyer metrics. Our trailing twelve-month active buyers grew 1% to nearly 136 million in Q1, including buyers from recently acquired entities. On an organic basis, active buyers were over 135 million, also up 1% year over year. Buyer growth was especially strong in the U.S., accelerating to nearly 6% in the quarter. Enthusiast buyers remained at roughly 16 million but grew by nearly 2% year over year, and spend per enthusiast buyer exceeded $3,400 on a trailing twelve-month basis. In the U.S. market, enthusiast buyers grew even faster at 8% year over year. Now turning to our income statement. We generated revenue of $3.09 billion, up 17% on an organic FX-neutral basis, with foreign exchange providing a tailwind of 260 basis points to spot growth. Our take rate was 13.9% in Q1, up modestly year over year. Tailwinds from advertising, shipping initiatives, and lapping of our U.K. C2C buyer fee rollout in the prior year were partially offset by rapid growth in eBay Live and ongoing category and ASP mix changes. Additionally, foreign exchange was a headwind of approximately 20 basis points to our reported take rate year over year. Total advertising revenue was $581 million, representing GMV penetration of over 2.6%. First-party ads grew 28% to $555 million. Promoted Listings comprised over 1.2 billion of the over 2 billion total listings on eBay Inc., and 5.2 million sellers adopted at least one Promoted Listings product during the quarter. In addition, off-platform ads grew 29%, while third-party display ads declined as expected due to our continued deprecation of these legacy ad units. Revenue from our shipping programs grew in the double digits during Q1 and is becoming a more significant contributor to our take rate. Our shipping solutions are also strategically important as they leverage eBay Inc.’s scale and expertise to reduce cost and complexity, improve trust, and increase conversion and overall sales velocity. We intend to further scale our shipping initiatives, including managed shipping solutions for domestic C2C sales and cross-border solutions through EIS and our partnership with SpeedPAK. Moving to our profitability and earnings. Non-GAAP gross margin was 74.6% in the first quarter, up one point year over year, driven primarily by lower cost of payments and operational efficiencies. In addition, gross margin benefited from our U.K. managed shipping program switching from gross to net revenue recognition on January 1, as discussed last quarter. Our non-GAAP operating income grew 18% to $907 million in Q1, reflecting our ability to balance continued investment in our strategic priorities with strong flow-through to earnings. Sales and marketing expense increased in the quarter, primarily reflecting higher marketing investment behind strategic priorities like C2C and eBay Live, as well as incremental spending to capitalize on favorable returns in lower-funnel marketing. Transaction losses increased as expected in Q1, reflecting newer shipping programs and customer experience enhancements. We were encouraged to see loss trends improve toward the end of the quarter, and we continue to expect these shipping programs to follow a typical curve with higher losses initially that moderate over time as we learn and optimize. Non-GAAP earnings per share was $1.66, up 21%, and GAAP earnings per share was $1.12. Shifting to our balance sheet and capital allocation. We generated free cash flow of $898 million in the first quarter, and ended the period with cash and fixed income investments of $5.1 billion and gross debt of $6.7 billion on our balance sheet. Our equity investments and warrants were valued at roughly $770 million. In March, we received approximately $190 million from Adevinta’s shareholder distribution. This return of capital reduced the carrying value of our Adevinta investment to approximately $470 million at the end of Q1. We repurchased $500 million of eBay Inc. shares in Q1 at an average price of approximately $90 and paid a quarterly cash dividend of $139 million in March, or $0.31 per share. Our pending acquisition of Depop is now expected to close by the end of 2026. We have received regulatory clearances for the transaction in the U.S. and Germany, and reviews are in progress and on track in other markets, including the U.K. and Australia. Now turning to our outlook starting with the second quarter. We expect GMV between $21.3 billion and $21.7 billion, representing total FX-neutral growth between 8% and 10% year over year. Based on current exchange rates, we estimate FX would represent a roughly 100 basis point tailwind to spot GMV growth. Our Q2 guidance reflects continued broad-based GMV growth within our strategic priorities and incremental contributions from Live and vehicles. Our guidance also contemplates lapping dynamics from lower-funnel marketing efficiencies and our U.S. Klarna partnership, which became noticeable growth drivers during Q2 of last year. These factors, combined with gold and silver bullion volume reverting to historical levels in Q2, account for the majority of the implied year-over-year growth deceleration from Q1 to Q2. We forecast revenue to be between $2.97 billion and $3.03 billion in Q2, implying total FX-neutral growth of 8% to 10% year over year. Based on current exchange rates, we estimate FX would represent a 120 basis point tailwind to spot revenue growth. We expect non-GAAP operating income growth between 6% and 10% year over year in Q2, implying non-GAAP operating margin between 27.6% and 28.1%. Our guidance contemplates a healthy balance between investments in strategic priorities with strong flow-through of operating leverage to the bottom line. We forecast non-GAAP earnings per share between $1.46 and $1.51, representing year-over-year growth between 7% and 11%. Next, I will share some updated thoughts on the full year, excluding the impact of the pending Depop acquisition, which I will discuss separately. For 2026, we are now planning our business around year-over-year GMV growth between 7% and 7.5% on an FX-neutral basis. This updated view reflects the strong momentum we are seeing across our business balanced against more challenging comparisons as we move through the year, including lapping considerations from the prior year and a moderation of some of the category-specific tailwinds we have discussed on this call. We continue to expect revenue growth to be in line to slightly ahead of GMV for the full year on an FX-neutral basis, as healthy growth in advertising and shipping revenue is expected to be partially offset by mix shifts in our business, including higher growth contributions from Live and vehicles. We are now anticipating non-GAAP operating income growth of between 9% and 11% for the full year, reflecting our stronger GMV and revenue expectations. As we have noted previously, when our business outperforms, we will continue to evaluate opportunities to reinvest a portion of that upside into our strategic priorities to further strengthen our marketplace and drive future growth. We continue to expect non-GAAP earnings growth to be relatively in line with non-GAAP operating income in 2026. We anticipate our lower cash balance and higher interest expense would pressure the net interest and other line item year over year, partially offsetting the tailwind from our share repurchases. We continue to expect a non-GAAP tax rate of 17.5% for the full year, which is one percentage point higher than our tax rate in 2025. Our capital allocation outlook remains unchanged. We forecast capital expenditures to be between 4% and 5% of revenue for 2026. We are targeting roughly $2 billion of share repurchases for the full year. In addition, our board declared a quarterly cash dividend of $0.31 per share for the second quarter to be paid in June. As I noted earlier, we expect our pending acquisition of Depop to close by the end of Q3 2026. Given the updated timeline, we expect Depop to contribute approximately one percentage point to total FX-neutral GMV growth year over year in 2026. From a profitability perspective, we expect the acquisition would represent a low single-digit headwind to the 9% to 11% operating income growth we anticipate for the core eBay Inc. marketplace, which includes planned investments in Depop and integration costs. We would also expect the Depop acquisition to dilute our non-GAAP earnings per share growth by low single digits, with the EPS impact modestly higher than operating income due to foregone interest income from the cash used for this transaction. In closing, we are encouraged by our strong start to the year and the broad-based momentum across the business. Our results reflect continued execution within our established strategic priorities and strong returns on our investments in emerging growth vectors like eBay Live and vehicles. As we look ahead, we remain committed to balancing disciplined investments in areas that can strengthen our business over time with continued earnings growth and thoughtful capital allocation. Overall, we feel very good about the path ahead and our ability to create long-term value for our shareholders. With that, Jamie and I will now take your questions. We will now open the call for questions. Operator: Today’s session will be utilizing the raise hand feature. If you would like to ask a question, simply click on the raise hand button at the bottom of your screen. If you have dialed in, please press star 9 to raise your hand and star 6 to unmute. Once you have been called on, please unmute yourself and begin your question. Thank you. We will now pause a moment to let the queue assemble. Our first question will come from Nikhil Devnani with Bernstein. Please unmute and ask your question. Nikhil Devnani: Hey there. Thank you for taking my question. Jamie, I was hoping you could help bridge the gap between that 6% U.S. buyer growth number and GMV number, which was much higher than that. What have you seen on order frequency trends relative to ASP growth? And I guess bigger picture, is the funnel for new buyers that are coming to eBay Inc. expanding again? Jamie Iannone: Yes. We are encouraged by what we are seeing with our buyers, and we see even more positive signals when you look at the underlying trend. So, while global active buyers increased by 1% year over year and enthusiasts grew by 2% year over year, that really does not tell the whole story. Our U.S. growth has been much stronger at 6% year over year, and U.S. enthusiast buyers grew even faster at 8%. We have also talked about our mid-value buyers, Nikhil, and what we have seen is they have also grown year over year every quarter since the beginning of 2024, consistently outpacing our total active buyer growth, which really suggests strong trends beneath the surface. That is somewhat counterbalanced by some of the trends that we are seeing internationally, mitigated by the macro pressure. So overall, what I would say is I am very pleased with the strength we are seeing across the board: the improvements in buyer count, the cohort mix, the engagement, and the spend. And it is really balanced. When you look at U.S. GMV, Nikhil, it is balanced between active buyers, sold items, and ASP, which I think is a healthy place to be. Nikhil Devnani: And maybe if I could follow up with a question around gross margin and COGS for Peggy. As we think about initiatives like Live and all the AI product investment you are making now, how do we think about the puts and takes on COGS over the long term for the business? And any offsets that you might have elsewhere—productivity gains or otherwise—to counter that? Thank you. Peggy Alford: Thanks for the question. When we look at our Q1 gross margin, we saw it was driven primarily by cost of payments and operational efficiencies. We said it was up one point year over year. It benefited from the U.K. managed shipping program switching from gross to net accounting at the beginning of the year. And as we look further into the year, we do see that there are going to be some similar puts and takes to the gross margin drivers. But what we are really excited about is that we are continuing to see a lot of strength on the top line. And because of the diverse nature of our growth areas—if you look at Live and some of the AI efficiencies that we are seeing—you are going to see different drivers to gross margin, but all of this is going to benefit both the top line as well as our operating profit dollars as we scale. Operator: Our next question will come from Nathan Feather with Morgan Stanley. Please unmute your line and ask your question. Nathan Feather: Hey, everyone. Thanks for taking the question. Broadly, consumer sentiment has weakened a bit over the past two months, although spending seems like it has held strong. How do you think about balancing those inputs as you put together guidance for the remainder of the year? And then more generally, what have you been seeing in consumer health over the past few months as gas prices move? Jamie Iannone: Look, we continue to see a dynamic global macro environment with a divergence between the U.S. and international. In the U.S., for our business, consumer demand continues to be resilient so far, despite the volatility in trade policy and geopolitics. Strength was really broad-based across the board in Q1, including collectibles, motors, and fashion. I would say it is a different story in Europe where it is more challenging, as reflected in the consumer confidence and some of the data, but the investments we have been making in the region have really helped offset that, and our international year-over-year growth improved from Q4 to Q1, as did CBT and our other solutions. We have maintained a status quo approach in our assumptions. Our ability to incrementally guide Q2 and raise the year is really based on the confidence in the resilience we are seeing in our marketplace. Remember, Nathan, we are a bit more resilient because even in more challenging times, people turn to eBay Inc. to find value and used or refurbished items. From that perspective, we feel well positioned. Nathan Feather: Great. That is helpful. And then, given the really strong GMV performance over the past twelve months, on a go-forward basis—if we look at maybe a two-year stack to exclude the impact of softer comps—any limitation that would prevent the GMV momentum you are seeing in Q2 from persisting into the back half? Jamie Iannone: We feel really good about the momentum that we are seeing overall. Peggy talked about the real divergence that you see between Q2 and Q1 as just due to the number of factors she called out, whether that be bullion or some of the lapping dynamics. But what we continue to see is a strong consumer, and more importantly, we see a great return on the investments that we are making in the business. So when you look this quarter at the focus category growth of 24%, the areas that we have invested in are really resonating with consumers. We feel good about the back half and the strong two-year stack. We feel great about what we are seeing in the consumer right now and the underlying growth in the business. Operator: Your next question will come from Wells Fargo. Please go ahead. Zach Morrissey: Thanks, guys. This is Zach Morrissey on for Ken. I just wanted to double-click on the C2C strength specifically in the U.S. It has obviously been a source of strength—you said double-digit GMV growth there. Just curious what you are seeing from a competitive dynamic. Vinted appears to be scaling and investing more aggressively in the U.S. Curious if you are seeing that reflected in parts of your business, or is this contributing to broader industry secular growth? And then on marketing investments, specifically in C2C, is that something we should expect to continue to be an area of focus throughout the course of the year? Thanks. Jamie Iannone: We continue to have a very strong C2C business around the globe. The U.S. is among our strongest businesses in C2C, and we saw really healthy growth there. We have been operating in a very competitive global landscape for fashion recommerce for years, and it has really raised the bar for the customer experience and helped unlock the total addressable market that is locked up in closets, attics, basements, and garages. What we are seeing as we roll out things like Magical Listing—using AI for listings, which is now up to 500 million listings created with AI—is more listings per lister and great seller metrics because of our ability to unlock all that inventory. That has had a meaningful impact on our performance. If you look at total GMV growth in fashion, it accelerated sequentially in Q1. Our fashion-focused categories contributed roughly a point of growth to our overall marketplace, with luxury growing at healthy double digits. Our improved C2C value proposition has been impactful in fashion and, frankly, across the board, and we have seen double-digit growth in each of our top three markets by demand—the U.S., U.K., and Germany. Overall, we feel really great about the momentum that we are seeing in fashion. And our pending acquisition of Depop indicates that we are leveraging our build, buy, and partner playbook—just like we did in collectibles—to enhance the fashion experience for enthusiasts. Peggy, do you want to talk about the full-funnel marketing that we are doing? Peggy Alford: Sure. In Q1, we leaned into full-funnel investments in support of our strategic priorities, notably in focus categories, C2C, and Live. Full-funnel marketing remains a really important way for us to support our strategic priorities. It drives awareness and consideration of eBay Inc. We did a number of events and activations during the quarter. Going forward, we continue to see it as a strong lever. We also take the opportunity, when we have strong GMV performance and strong profitability in the quarter, to invest—including in sales and marketing—in order to continue that growth ahead. That is the important balance we will continue to look at: balancing strong flow-through to the bottom line with investing in continued growth from quarter to quarter, with sales and marketing being one of those levers. Operator: Our next question will come from Eric Sheridan with Goldman Sachs. Your line is open. Please ask your question. Eric Sheridan: Thanks so much for taking the question. Maybe building on the last answer and asking a two-parter. When you look out over the next six to twelve months, what do you see as the critical investments to maintain and build momentum around the enthusiast-buyer part of your business, so that continues to move in a very positive direction? That would be one. And then against the dynamic of what you laid out with respect to marketing, how do you think about marketing changes that you are seeing out there across the social media and the search landscape, referencing back to what kind of ROI you might be able to get as marketing ramps for you relative to innovations that are happening across performance marketing more broadly? Thanks so much. Jamie Iannone: We are going to continue to invest in the areas that are really driving healthy growth across the business. We will continue to invest in focus categories; you are seeing the nice return from the investments that we have made there. We are leveraging AI throughout the entire product experience, really taking friction out of the experience, and you are seeing more and more of that with the agentic search beta that we have going on and the incremental improvements in the new Magical Listing. We have been investing in Live and seeing really nice returns from that—growing in the last few weeks 8x year on year in that format—and it is really engaging buyers and sellers in a new and different way. And while a little bit earlier, vehicles is also going to be another area for us to continue investing over the course of this year. We are really pleased with the ROI that we are seeing from those investments. On our marketing plan, our full-funnel approach has been working. You have seen more mid- and lower-funnel supported by the upper-funnel that we are doing. We have been driving really interesting activations across social media—we were at all the popular events from the Grammys to the Oscars. We are sponsoring Saturday Night Live and Berlin Fashion Week, driving all the way down to putting products that are most relevant inside of people’s social feeds. Facebook is a good example. We have new tests with them going on, in addition to putting items inside of Facebook Marketplace in the search experience. We are going to continue to push forward. AI is giving us a ton of new capabilities there—the ability to create creative at incredibly low cost and build a lot more of a test-and-learn infrastructure is really compelling, and we are seeing strong ROI on that. It is also helping in our own marketing and CRM. As one example, AI-generated subject lines and creatives are driving around 40% more engagement in some tests. I feel really good about how our marketing team is embracing those new AI technologies to speak to the long tail of inventory and opportunities that we have on eBay Inc. Operator: Your next question will come from Needham. Your line is open. Please ask your question. Analyst: Great. Thanks for taking the questions. I wanted to ask on strategic priorities. GMV from strategic priorities grew and accelerated in Q1. Is this mostly C2C, or is the strength more broad-based? Within C2C, is this primarily being driven by Magical Listings or any other product you would call out? Thank you. Jamie Iannone: It is really broad-based across the board in our year-over-year growth across all of our major categories sequentially, with the strongest growth in focus categories like collectibles, motors, and fashion. And while U.S. GMV was particularly strong at 27%, we also saw improvements in our international trends. When you look at our specific strategic areas—you asked about C2C, but focus categories, C2C, and recommerce now make up about 70% of total GMV—and individually they each saw double-digit growth. That gives you a sense of how broad-based the growth is. The strength we are seeing in C2C is coming from significant and helpful marketing about Magical Listing and the value proposition we have there, and we are finding that the KPIs are fantastic. It has a customer satisfaction of 95%. We are seeing 50% more listings per lister and more engagement. It is driving a higher customer lifetime value for the sellers that are using it. This is why we are expanding it to new geographies, and we will expand it to additional seller segments over time. But it is really helping us drive that part of the business. Overall, it is across all of those priorities that we are seeing really nice double-digit growth. Operator: Your next question will come from Andrew Boone with Citizens. Your line is open. Please ask your question. Andrew Boone: Thanks so much for taking the questions. I wanted to ask about advertising strength in the quarter. It surprised us in terms of the strength you saw. And then can you connect that into just expectations for 2026? And then you called out the benefits of AI search. Where are we in the process of making search more performant? What are the benefits today, and what should we expect going forward? Thank you. Jamie Iannone: First on advertising—strong quarter. Ads grew 27%. That was a combination of strong volume growth and the continued monetization of our ads products. That was mainly driven by our 1P business, which grew 28%. Across the board, our CPA and CPC products on eBay Inc. and our off-site ads all contributed to Q1. Looking forward, we continue to expect ads revenue growth for 2026 to be healthy, driven by multiple levers, including seller adoption, listings penetration, ad rate optimization, and scaling new products. We are now leveraging AI in our advertising products to increase the yield on the same types of placements while continuing to give sellers a strong ROAS. We continue to see advertising revenue outpacing GMV for the foreseeable future, and I am really pleased by the innovations happening there. Operator: Your next question will come from Shweta R. Khajuria with Wolfe. Please unmute your line and ask your question. Andrew Ruff: Hi, this is Andrew Ruff for Shweta. Thanks for taking the question. I want to ask about agentic commerce. Starting off more broadly, what are your updated thoughts on agentic commerce and eBay Inc.’s role in that, particularly as it relates to third-party partnerships? And if we think about the terminal state of agentic commerce as more agent-to-agent based, would that impact the ad revenue potential? Is eBay Inc. okay with making a trade-off of ad revenue for volume growth? Your thoughts on that would be great. Thanks. Jamie Iannone: We see agentic AI as a real structural tailwind for eBay Inc., and it plays right into our core strengths. First, our innovations leveraging AI are already having a meaningful benefit for our business today. Take Magical Listing—we have talked about the compelling stats. Sellers have created roughly 500 million listings using our AI tools. And our agentic search beta—where we are seeing higher engagement and increased purchase behavior—shows encouraging early proof points. We will continue to bring the latest agentic technologies to eBay Inc. to make it easier for sellers to list and for buyers to find the things they love. Second, eBay Inc. offers unmatched breadth and depth of unique and differentiated inventory—90% of our 2.5 billion listings are non–new in season—where items are more likely to be one-of-a-kind. In our strategic priority areas, we have optimized the end-to-end experience to make it more seamless and enjoyable. Third, and most importantly, what differentiates eBay Inc. is the trust and enablement layer we have built over decades. Capabilities like our global network of authentication centers, our suite of proprietary global shipping solutions, regulatory compliance, Guaranteed Fit—these provide a trusted experience for everything from a trading card to a designer dress to a vintage car sold across state lines. All three of these areas are enhanced by our 30 years of proprietary data, which gives us powerful insights that no one else has. Overall, we see AI as a powerful force multiplier for our business, and it is already supporting the accelerated GMV we are seeing today. On agentic search specifically, it is early innings, but there are encouraging proof points about the quality of that traffic. Even though it is still very small, new buyers who find us via AI the majority of the time come back directly and organically to eBay Inc. We will continue to test and learn. You see us doing the OpenAI ads pilot, and we have expanded more of our inventory to Facebook Marketplace as the space evolves. Operator: Your next question will come from Tom Champion with Piper Sandler. Your line is open. Please ask your question. Tom Champion: Hi, good afternoon. Jamie, you have made a tremendous amount of progress over the last several years around authenticity and shipping cost for sellers. I am curious what you think of as the remaining frictions for sellers today. What are you looking to improve from here on out for the seller experience? And then, Peggy, could you talk a little bit about headcount growth and how you are thinking about that through the year as you incorporate efficiencies from AI? Thank you. Jamie Iannone: It is more than just Authenticity Guarantee. It is really trust across the board that we are focused on. That includes Authenticity Guarantee, Guaranteed Fit in Motors, eBay Money Back Guarantee, warranties against refurbished, secure checkout that we are building in vehicles, and more. Having that trust layer at eBay Inc. is incredibly important to us and to our consumers, and we will continue to invest in it. You just saw us roll out more authentication—expanding to 70 clothes, shoes, and accessory brands in the U.S.—to drive that program further and build trust in fashion. Beyond shipping, it is all of the selling services we provide, whether that is eBay International Shipping, which we expanded into Canada last quarter, SpeedPAK—which we expanded from China and Japan to now Germany and six more markets—or our forward deployment centers. Handling those end-to-end pieces makes it really easy for sellers. We will continue investing in our payments technology to make it easier, and we continue to invest in areas like seller financing and other elements that help sellers grow their business with working capital, along with compliance and protection, to ensure we run an incredibly trusted marketplace. We are seeing really nice AI efficiency giving our teams leverage so we can innovate more on behalf of our seller community. It is why we are seeing great response to the tools we are building and strong seller CSAT. We are going to continue to invest to make eBay Inc. a great destination where you can not only get started, but build a strong business on the platform. Peggy Alford: We are really focused, as Jamie mentioned earlier, on investing in our strategic priorities. To do that well—and still do what we are very focused on, which is balancing our top-line growth and our operating income dollar growth—we are looking to create efficiencies in the business so that we can invest in our strategic priorities. Even as we invest significantly in our AI talent, capabilities, and tech stack, we are able to maintain that balance and generate more capacity to invest in these areas without pressuring our bottom line. That is the balance we will continue to take: drive efficiency to create capacity to grow these very strategic initiatives. Operator: Your next question will come from Michael Morton with MoffettNathanson. Your line is open. Please ask your question. Michael Morton: Hi, good evening. Thank you for the question. I wanted to talk about live shopping. It is something e-commerce platforms have tried for almost my whole career, and listening to what you are saying, it sounds like it is hitting a real inflection point. I was curious to hear why you think it is gaining so much momentum now. We were at an industry conference, and people were talking about eBay Inc.’s live commerce momentum. And this is a long shot, but would love if you could maybe quantify the impact or your expectations for the impact to GMV growth going forward. Thank you so much. Jamie Iannone: You have seen live shopping be strong in Asian markets, and we are seeing real excitement and momentum with live shopping in our Western markets. After our recent expansion, eBay Live is available across seven countries. It is becoming a more meaningful contributor to growth, particularly in our collectibles and fashion categories. That is part of why we saw such strong growth in focus categories. We have been doing meaningful activations around eBay Live. This quarter, we did a 48 Hours of Drops in the U.S., and we did the same in the U.K. and Germany where we did 24 Hours of Drops. That helped drive engagement and boost sales, with each market reaching a single-day milestone as a result. Even our newest markets—the U.K. and Germany—saw a seven-figure day on that day. We continue to scale by adding new sellers, growing content density, and expanding entry points. This quarter, we added eBay Live to the bottom navigation for all mobile iOS users in the U.S., helping to increase discoverability. What we are hearing is that buying inventory on eBay Inc. Live is different—there is engagement, community, and excitement. Many of our sellers are finding that streaming on Live brings their community together and drives excitement that not only drives new business for them in Live, but also drives more visits and buyers to their core business as a result. Our scale, global buyer base, and high bar for trust really differentiate us in live commerce. While it is still early, we believe Live can be a meaningful growth factor over time and an increasingly important part of how enthusiasts shop on our platform. Operator: Thank you for joining. This concludes today’s call. You may now disconnect.
Operator: Afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to Meta Platforms, Inc.'s First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. We ask that you limit yourself to one question. And this call will be recorded. Thank you very much. Kenneth J. Dorell, Managing Director of Investor Relations, you may begin. Kenneth J. Dorell: Thank you. Good afternoon, and welcome to Meta Platforms, Inc.'s First Quarter 2026 Earnings Conference Call. Joining me today to discuss our results are Mark Elliot Zuckerberg, CEO, and Susan Li, CFO. Our remarks today will include forward-looking statements which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release and in our annual report on Form 10-Ks filed with the SEC. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.appmeta.com. And now I would like to turn the call over to Mark. Mark Elliot Zuckerberg: Alright. Hey, everyone. Thanks for joining today. We had a strong quarter for our community, our business, and our progress towards AI. More than 3.5 billion people use at least one of our apps every day. We saw a small decrease in total family dailies due to Internet outages in Iran and blocks in Russia, but otherwise, trends across our apps are strong. Daily and monthly actives on Instagram and Facebook continue to grow, with video driving all-time-high engagement across both apps. WhatsApp continues to see strong momentum too, including in the US, and Threads continues on its trajectory to be the leading app in its category. Our biggest milestone so far this year has been the release of our Muse family of models—our first model, Muse Spark, along with a significantly upgraded new version of Meta AI. This was the first release from Meta Superintelligence Labs, and it shows that our work is on track to build a leading lab. Over the past ten months, we have built the strongest research team in the industry and established the scientific and technical foundations to scale very advanced models. Spark is just one step on that scaling ladder, and we are already training even more advanced models. But Spark has already made Meta AI a world-class assistant that leads in several areas related to our vision of personal superintelligence, including visual understanding, health, shopping, social content, local, creating games, and more. We are hearing very positive feedback on it so far. We have seen large increases in Meta AI use since releasing the updates, and the Meta AI app has consistently been near the top of the app stores as well. Now that we have a strong model, we can develop more novel products as well. Since I first wrote about our vision for personal superintelligence last year, we have been focused on delivering personal and business agents to billions of people around the world. Our goal is not just to deliver Meta AI as an assistant, but to deliver agents that can understand your goals and then work day and night to help you achieve them. My view of AI is very different from many others in the industry. I hear a lot of people out there talk about how AI is going to replace people. Instead, I think that AI is going to amplify people's ability to do what they want, whether that is to improve your health, your learning, your relationships, your ability to achieve your personal career goals, and more. My view is that human progress has always been driven by people pursuing their individual aspirations, and I believe that this will continue to be true in the future. People will be more important in the future, not less. Meta Platforms, Inc. believes in empowering individuals. Those are the kinds of products that we are going to build, and I believe that they are going to be some of the most important and valuable products of all time. We are building a personal agent focused on helping people achieve the diverse goals in their lives. We are also building a business agent focused on helping entrepreneurs and businesses across the world use our tools and others to grow their efforts, reach new customers, and serve existing customers better. These agents will work together to form an ecosystem. And whether you use our personal or business agents to achieve your goals, I believe that the future will see a massive increase in entrepreneurship from people creating new things that they have always wanted to exist but previously did not have the tools to bring into the world. We are already testing an early version of business AIs and weekly conversations have grown 10 times since the start of this year. We are also working on using Spark and our upcoming models to improve our recommendation systems and core business in Facebook, Instagram, and ads. Right now, our apps primarily help people accomplish three important goals: connecting with people, learning about the world, and entertainment. But we have always wanted our apps to understand more of people's goals so we can help their lives in all the ways that they want. These new AI models will let us understand this in more detail. So instead of just looking at statistical patterns of what types of people engage with what content, for the first time in Meta Platforms, Inc.'s history, we are going to be able to develop a first-principles understanding of what you care about and what each piece of content in our system is about so that we can show you more useful things for what you are trying to accomplish. We will also be able to create personalized content specifically for people to help you achieve your goals as well. Since our recommendation systems are operating at such large scale, we will phase in this new research and technology over time. But the trend over the last few years seems clear that we are seeing an increasing amount that we can improve engagement for people and value for advertisers. This encourages us to continue investing heavily in what we expect will provide increasing value over the coming years as well. On that note, we are increasing our infrastructure CapEx forecast for this year. Most of that is due to higher component costs, particularly memory pricing. But every sign that we are seeing in our own work and across the industry gives us confidence in this investment. That said, we are very focused on increasing the efficiency of our investments, and as part of that, we are rolling out more than one gigawatt of our own custom silicon that we are developing with Broadcom as well as a significant amount of AMD chips to complement the new NVIDIA systems that we are rolling out as well. One of the primary goals of our Meta compute initiative is to lead the industry in efficiency of building compute, and we expect that will be a strategic advantage over time. Talking about building physical goods at scale, our AI glasses continue to perform well with the number of people using them daily tripling year over year. This continues to be one of the fastest growing categories of consumer electronics ever. We released Ray-Ban MetaOptics this quarter designed for all-day wear rather than primarily as sunglasses. And building on our release of Oakley last year, we have some exciting new partnerships and styles that I think are going to have the potential to reach even more people coming later this year. All of our glasses are designed to easily update to use our newest AI models and features. I am also really excited to see the glasses evolve from being able to answer questions to being able to be a personal agent that is with you all day long, helping you remember things and achieve your goals. Beyond glasses, I am excited for more of our metaverse efforts to be powered by the AI models we are training as well. We remain the biggest investors in the VR space across the industry, but we are focused on making our VR business sustainable as we invest more in other areas like AI and glasses. Before wrapping, I want to talk for a moment about how AI is transforming our work. We are seeing more and more examples where one or two people are building something in a week that would have previously taken dozens of people months. And I want to make sure that Meta Platforms, Inc. is the best place in the world for these types of people to come and make an impact. We are building the next evolution of our company around these people. And there is a lot that we can do to enable this: building the best infrastructure for creating and delivering products at scale, streamlining our teams so they are not bigger than they need to be, recognizing and rewarding the people who are having outsized impacts, and setting ourselves up to try many more ideas and take on many new projects in the future. Of course, we will continue pushing to increase our efficiency as well, but overall, I think the future is about building many more higher quality products than we have ever built before. Alright. That is what I wanted to cover today. We are living through a historic technological transformation. We are among the few companies positioned to shape the future, and we are on track to do that. I am looking forward to delivering personal superintelligence to billions of people, and as always, I am grateful for the hard work of our teams and to all of you for being on this journey with us. Susan Li: Thanks, Mark, and good afternoon, everyone. All comparisons are on a year-over-year basis unless otherwise noted. We estimate 3.5 billion people used at least one of our family of apps on a daily basis in March, which declined slightly from December due to Internet disruptions in Iran and a restriction on access to WhatsApp in Russia. Absent these impacts, growth in family daily active people would have been positive quarter over quarter. Q1 total family of apps revenue was $55.9 billion, up 33% year over year. Q1 family of apps ad revenue was $55.0 billion, up 33%, or 29% on a constant currency basis. In Q1, the total number of ad impressions served across our services increased 19%. Impression growth was healthy across all regions driven primarily by growth in engagement and users, as well as ad load optimizations. The global average price per ad increased 12% year over year in Q1 with broad-based growth as we benefited from ad performance improvements, better macro conditions versus Q1 of last year, and currency tailwinds in international regions. This was partially offset by strong impression growth including from lower-monetizing regions. Family of apps other revenue was $885 million, up 74%, driven primarily by WhatsApp paid messaging and subscriptions revenue. Within our Reality Labs segment, Q1 revenue was $402 million, down 2% year over year due to lower Quest headset sales, which were partially offset by continued strong growth in AI glasses revenue. Moving now to our consolidated results. Q1 total revenue was $56.3 billion, up 33%, or 29% on a constant currency basis. Q1 total expenses were $33.4 billion, up 35% compared to last year. Year-over-year growth was driven mainly by infrastructure costs and employee compensation. The growth in infrastructure costs was due to higher depreciation, data center operating costs, and third-party cloud spend. The growth in employee compensation was driven by technical hires we have added over the past year, particularly AI talent. We ended Q1 with over 77.9 thousand employees, down 1% from Q4 as the impact of headcount optimization efforts in certain functions was partially offset by hiring in priority areas of monetization and infrastructure. First quarter operating income was $22.9 billion, representing a 41% operating margin. Q1 interest and other income was negative $1.1 billion driven by unrealized losses on our equity investments. Our tax rate for the quarter was negative 23%, which was favorably impacted by a tax benefit of $8.03 billion. This benefit partially relieves the $15.93 billion non-cash tax charge we recorded in 2025, which reflects updated guidance from the US Treasury issued in February 2026 regarding the tax treatment of previously capitalized R&D expenditures in the United States. Absent the tax benefit, our Q1 tax rate would have been 14%. Net income was $26.8 billion or $10.44 per share. Absent the tax benefit, our net income and EPS would have been $18.7 billion and $7.31 respectively. Capital expenditures, including principal payments on finance leases, were $19.8 billion, driven by investments in servers, data centers, and network infrastructure. Free cash flow was $12.4 billion. We ended the quarter with $81.2 billion in cash and marketable securities and $58.7 billion in debt. Turning now to the business performance. There are two primary factors that drive our revenue performance: our ability to deliver engaging experiences for our community, and our effectiveness at monetizing that engagement over time. On the first, we are continuing to see significant gains from our content recommendation initiatives. On Instagram, the ranking improvements that we made in Q1 drove a 10% lift in Reels time spent. On Facebook, total video time increased more than 8% globally in Q1, the largest quarter-over-quarter gain in four years. Within the US and Canada, ranking improvements we made drove a 9% increase in video watch time on Facebook in Q1. These gains are benefiting from advances we are making across the full stack. Starting with data, we doubled the length of user interaction sequences we use for training on Instagram in Q1 and increased the richness of how each user interaction is described, enabling our systems to develop a deeper understanding of user interests. Within our models, we have significantly increased the speed with which our ranking models index new posts, which is enabling us to recommend them sooner after they are published. We are also applying more advanced content understanding techniques, which is enabling us to quickly identify posts that may be interesting to someone even if they have not engaged with a lot of similar content. These and other improvements have enabled us to increase the diversity and recency of recommended content, with same-day posts now representing more than 30% of recommended Reels on both Instagram and Facebook, more than double the levels one year ago. We are also using AI to unlock more inventory by auto-translating and dubbing videos into a viewer's local language, enabling us to recommend a more diverse set of content. Over half a billion users on each of Facebook and Instagram are now watching AI-translated videos weekly. Looking forward, we are making several investments we expect will deliver more valuable recommendations. This year, we will continue scaling up our models in several dimensions, including their size and complexity, while incorporating LLMs to deepen content understanding across our platform. This will enable us to better match people to a wider variety of content aligned to their interests. At the same time, we are executing on our longer-term efforts to develop the next generation of our recommendation systems. This includes building foundation models that power organic content and ads recommendations as well as developing LLM-based recommender systems. Our focus this year is validating the model architectures and techniques in these domains before we scale them out in future years. Aside from our recommendation work, we are focused on deploying the models from Meta Superintelligence Labs to enable a new set of product experiences. We are seeing encouraging results within Meta AI since we began powering responses with the first model from MSL, MuSpark. In tests we ran leading up to the launch, we saw meaningful engagement gains that accelerated week over week with each new iteration of the model. We are seeing similar gains within Meta AI following the broad rollout of our new model with double-digit percent increases in Meta AI sessions per user. MuSpark is now powering Meta AI in direct chat threads across our family of apps, as well as the standalone Meta AI app and website, giving billions of people globally access to our latest model. Overall, we are very encouraged by the momentum within our research and product roadmap and look forward to sharing more detail on what we are building over the course of the year. Turning to the second driver of our revenue performance, increasing monetization efficiency. The first part of this work is optimizing the level of ads within organic engagement. Here, we continue to enhance our systems to show ads at the optimal time and location. In Q1, we also expanded availability of ads on our newer surfaces, including bringing ads on Threads to people in more markets. On WhatsApp, we are making good progress with the rollout of ads in Status, with hundreds of millions of people now viewing them daily. Moving to the second part of increasing monetization efficiency, improving performance for the businesses who use our services. To do so, we are deploying AI more deeply across each layer of our systems and tools. Within our ad systems, we are delivering performance gains as we deploy more complex and predictive models. In Q1, enhancements we made to Lattice’s modeling and learning techniques along with advances in our GEM model architecture drove a more than 6% increase in conversion rate for landing page view ads. In addition, we have been investing in more performant inference models for when we are serving ads. In the second half of last year, we began rolling out our new adaptive ranking model, which is an LLM-scale ads recommender model that we use for inference. This model improves our inference ROI by routing requests to more compute-intensive inference models when it determines there is a higher probability of conversion. In Q1, we expanded coverage of our adaptive ranking model to off-site conversions, which drove a 1.6% increase in conversion rates across the major surfaces on Facebook and Instagram. We are also leveraging AI to make it easier for businesses to manage their customers, develop ad creative, and engage with customers. The Meta AI business assistant has now been fully rolled out to all eligible advertisers on supported Meta buying services, providing personalized recommendations to advertisers, resolving account issues, and surfacing campaign insights to help optimize results. Performance has been strong since we began testing the assistant in Q4, with common account issues being resolved at a 20% higher rate. This week, we are also introducing Meta Ads AI Connectors in open beta, providing advertisers the ability to connect their Meta ad account directly to an AI agent. We have always supported advertisers both on our platform and through tools like the Marketing API, and now we are extending that to AI so businesses and agencies can analyze and optimize campaigns with the tools they are already using. Usage of our ad creative tools is also scaling, with more than 8 million advertisers using at least one of our GenAI ad creative tools and particularly strong adoption among small and medium-sized businesses. These tools are benefiting performance as well, with advertisers using our video generation feature seeing more than 3% higher conversion rates in tests. We are also seeing good traction in using AI to facilitate customer engagement. In Q1, we expanded business AIs on WhatsApp to SMBs across Latin America and Indonesia as well as on Messenger in Asia Pacific. We now have more than 10 million conversations each week being facilitated through business AIs, up from 1 million at the start of the year. We will further expand access to more countries this quarter while adding more capabilities to the AIs. We also continue to invest in the value optimization suite, which helps advertisers maximize their return on ad spend by prioritizing the highest-value conversions rather than optimizing solely for the most conversions at the lowest cost. Adoption by businesses has been strong following performance improvements we have made over the past year, with the annual revenue run rate of our value optimization suite now over $20 billion, more than doubling year over year. Last, I want to touch on our commerce efforts. People discover products on our platforms through ads and organic posts, with brands increasingly turning to creators to promote their products. This is contributing to rapid growth in our partnership ads product, with its revenue run rate more than doubling year over year in Q1 to $10 billion. To support the product discovery and purchasing happening through creators, we are expanding our solutions beyond ads. Last month, we rolled out our affiliate partnerships offering on Facebook to more test partners so creators can tag products from participating retailers on their posts and earn a commission when someone makes a purchase. We have also started testing similar experiences on Instagram. We see a real opportunity to help people more easily discover and buy products within our services, particularly as we incorporate AI deeply across our platforms. Next, I would like to discuss our approach to capital allocation. Compute is becoming increasingly important as a driver of the quality of services we can provide, including powering more capable models and delivering innovative new products. It is also becoming more critical to how we work at Meta Platforms, Inc., as we are entering a world where employees are managing agents to help them generate new ideas, run experiments, execute tasks, and build products. We are investing aggressively to meet our infrastructure needs and ensure we maximize our strategic flexibility over the coming years. This includes substantially expanding our own data center footprint and striking deals throughout the supply chain to secure necessary components for future capacity. We are also signing cloud deals that will come online over the course of this year through 2027, allowing us to scale more quickly. These multiyear cloud deals and our infrastructure purchase agreements drove a $107 billion step up in our contractual commitments this quarter. Our investments will support our training needs for future models and, most importantly, provide us the inference capacity necessary to deliver personal and business agents to billions of people around the world, along with several other AI product experiences we are developing. As we grow our infrastructure spend, we remain committed to operating efficiently, and we recently shared internally that we plan to reduce the size of our employee base in May. We believe a leaner operating model will allow us to move more quickly while also helping to offset the substantial investments we are making. Moving to our financial outlook. We expect second quarter 2026 total revenue to be in the range of $58 to $61 billion. Our guidance assumes foreign currency is an approximately 2% tailwind to year-over-year total revenue growth based on current exchange rates. Turning to the expense and CapEx outlooks. We expect full year 2026 total expenses to be in the range of $162 to $169 billion, unchanged from our prior outlook. We continue to expect to deliver operating income this year that is above 2025 operating income. We anticipate 2026 capital expenditures, including principal payments on finance leases, to be in the range of $125 to $145 billion, increased from our prior range of $120 to $135 billion. This reflects our expectations for higher component pricing this year and, to a lesser extent, additional data center costs to support future-year capacity. Absent any changes to our tax landscape, we expect our tax rate for the remaining quarters of 2026 to be between 13%–16%. Finally, we continue to monitor active legal and regulatory matters, including headwinds in the EU and the US that could significantly impact our business and financial results. For example, we continue to see scrutiny on youth-related issues and have additional trials scheduled for this year in the US, which may ultimately result in a material loss. In closing, Q1 was a solid start to the year, with strong execution across our core ads and engagement initiatives. We are also making exciting progress on our AI research and product efforts and expect to build that momentum over the course of this year. With that, Krista, let us open up the call for questions. Operator: Thank you. We will now open the lines for a question and answer session. Please limit yourself to one question. Please pick up your handset before asking your question to ensure clarity. If you are streaming today's call, please mute your computer speakers. And your first question comes from Brian Thomas Nowak with Morgan Stanley. Please go ahead. Brian Thomas Nowak: Thanks for taking my question. Mark, I wanted to ask you just about the level of investment you are making and the signposts you are watching to ensure you are going to generate ROIC on all these investments behind Muse and the other products. So if you could just let us know some of the key factors you are watching over the next 12 to 24 months—whether it is Meta AI, Muse advances, core algorithm—what are you watching most to make sure that you are on the right path to generating healthy ROIC on all this CapEx and infrastructure spend? Mark Elliot Zuckerberg: That is a very technical question. Basically, the things that we are watching are to make sure that we are on track building leading models and leading product. The formula for our company has always been: build experiences that can get to billions of people and focus on monetizing them once you get to scale. I think that we are seeing a little bit of that here where we invest in advance to build leading models, then we convert that into leading products. And then we think that these are going to be some of the most important products that get built over the next decade. So just like anything else that we have done over time, the basic milestones that I look at are around: first, technically, are we delivering the quality to enable a great product? Second, when you have the product, how is it scaling? And third, you look at the monetization, and then you drive up the efficiency of it towards increasing profitability. I do not think we have a very precise plan for exactly how each product is going to scale month over month or anything like that. But I think we have a sense of the shape of where these things need to be. And if you look at the usage of these and the quality of the product, and the quality of the models that are out there and the use that other frontier models are getting and the trajectory of that, I am quite comfortable that the lab that we are building is on track to be a leading lab in the world. I think Muse Spark was a very high-quality model. It powers Meta AI, which I think is now a world-class assistant. We have an ability to be able to grow that and have a large amount of engagement. And over the coming quarters, we are just going to be tracking how our next set of training runs go, how our products scale, how excited we are about the products. Right now, we are very excited. And then we will also ramp up monetization over that period of time as well. So those are the set of things that I look at. I think for the more specific financial questions, I think Susan can jump in if there is anything more to add. Operator: Your next question comes from the line of Mark Elliott Shmulik with Bernstein. Please go ahead. Mark Elliott Shmulik: Yes. Thanks for taking the questions. Mark, now that we have got Muse Spark out there launched, how are you thinking about the teams’ focus divided between further model training runs and pushing further in that personal superintelligence goal versus product launches and shipping more products out the door? And Susan, as a follow-up to Brian’s question, I know it is too early to discuss 2027 CapEx, but we have had peers mention a potential significant step up. Any way to think about dimensionalizing how we think about some of the returns or traction this year and how it might affect 2027 spend? Thanks. Mark Elliot Zuckerberg: I think the roadmap from the team has been pretty consistent. We have the research team, which is focused on scaling increasingly intelligent models with capabilities for the specific things that we are focused on, which are business and personal agents. We just released our first model, and I talked about in my comments how we are climbing the scaling ladder towards greater capabilities and scale for the models. That work continues. We have our next set of more advanced models in training now, and that work will just continue. That is a loop. I do not think we are going to be done with that anytime soon. We are going to have teams that are consistently focused on training more intelligent and more capable models in the ways that we want. Then we have our product team, and that team is now really unlocked to be able to build things on top of our models because we now have very strong models. Before this, we had been prototyping a bunch of things using other different models, whether it was our previous older models or using the APIs from other companies. And now we are unlocked to be able to go build things and get them to scale on top of our own models. I think you will see that over some period of time. I tried in my opening remarks to give a bit of a sense of where we are going, but I think that more of the details of that will become clear over the coming months. And these are both loops that we will iterate on. We will keep iterating on the intelligence. We will keep working on building new products and scaling the products. And then as we get to product-market fit, we are also going to increasingly focus on building the business around them and decreasing the costs. This is how we have done everything over the last twenty years of running the company, and that is basically the plan. Susan Li: Mark, on your second question, we are not providing a specific outlook for 2027 CapEx, and we are frankly undergoing a very dynamic planning process ourselves as we are working through what our capacity needs will be over the coming years. Our experience so far has been that we have continued to underestimate our compute needs even as we have been ramping capacity significantly, as the advances in AI have continued and our teams continue to identify compelling new projects and initiatives—and now, too, there are very compelling internal use cases. So our expectation is that compute will become even more central to the business going forward, and it will be critical to determining the quality of the models we develop, the types of products we can introduce, and how productive we can be as an organization. So we are going to continue building out our infrastructure with flexibility in mind. And if we end up not needing as much as we anticipate, we can choose to bring it online more slowly or reduce our spending in future years as we grow into the capacity that we are building now. Operator: Your next question comes from the line of Eric James Sheridan with Goldman Sachs. Please go ahead. Eric James Sheridan: Thanks so much for taking the question. Maybe if you can build out on one of the topics that was discussed in the prepared remarks: the opportunity set that sits in front of the company with respect to putting compute in front of both consumers and enterprise. You have long been associated with the consumer landscape, and I am curious about how you are thinking about extensions of the media engagement parts of your business model and the commerce parts of the business model to become more agentic over time. But what do you see also as the opportunity set across SMBs and enterprises where historically you maybe have not had as much product velocity? Thanks so much. Susan Li: Thanks, Eric. So I would say in the near term, the biggest focuses are some of the areas that you mentioned—deepening engagement with our existing community and user base, making ad experiences meaningfully more engaging and more valuable, and helping SMBs find and engage with customers across our platform. Those are some of the most intuitive and adjacent opportunities to the business that we have today. And then, of course, as we are able to build out more agentic capabilities—enabling agents to help people be more productive, but also agents for businesses and enabling those agents to interact with each other—we hope to build a thriving commerce ecosystem on our platform. Some of these are a little bit further out, especially in that latter category. Again, the focus is on building personal superintelligence—building a consumer agent that can work for you and help you get things done. That right now is a consumer experience that we are focused on, but we think there will be clear monetization opportunities over time. You can imagine commission structures or a premium offering. And on the business side, we are seeing a large opportunity around agents and scaling our business AI initiatives. I mentioned earlier that there are over 10 million weekly conversations between people and business AIs on our messaging platforms—up from 1 million at the start of the year—and we are going to continue expanding globally in Q2. Business AIs today are currently free for most businesses on our messaging apps, but as we make more progress, we expect that we will also work towards establishing a longer-term monetization model, and we will also consider other services that we can offer to businesses in the future, but we do not have anything more to share today. Operator: Your next question comes from the line of Youssef Squali with Truist Securities. Please go ahead. Youssef Squali: Great. Thank you very much for taking the questions. Maybe one for Mark and one for Susan. Mark, Ray-Ban and Oakley AI glasses continue to perform really well for you, but EssilorLuxottica looks like it owns more brands. What are the gating factors to see the launch of additional glasses under these other brands this year? And what would be a successful year for you as you look back at 2026, maybe in terms of units sold? And then, Susan, on that 10% RIF, how much of that is due to efficiencies from AI implementation versus just the need to stay fit? And as you look at your employee needs over time, how do you see that growing relative to your overall top-line growth? Thank you very much. Susan Li: I can go ahead and take both of those. I might answer your second question first. In terms of the optimal size of the company over time, we do not really know what the optimal size will be in the future. There is a lot of change right now with AI capabilities advancing rapidly. We are very focused on leveraging AI tools to substantially increase our productivity, and we are seeing that reflected in the accelerating output from our engineers. We are generally approaching this with a bias toward wanting to use these tools to build even more products and services than we would have before. At the same time, we are making very significant investments in infrastructure, and we are very focused on continuing to operate efficiently. So we will be continuously evaluating how we are structured to make sure we are best set up to deliver against our priorities over the coming years. On the AI glasses, we are continuing to see strong growth in AI glasses sales over the course of Q1. Demand for the expanded portfolio lineup has generally been quite strong, and we are seeing sales shift from the prior generation of Ray-Ban Metas to the latest generation, which speaks to the value of the improved features like extended battery life and higher-resolution video capture. We are pretty excited about the progress we have made with glasses. We see strong interest now in the Meta Ray-Ban displays with the Meta Neural band, so that is an encouraging sign that there is consumer appetite for display glasses, which is the next generation of how this product evolves. So this is an area that we continue to be excited about and are investing in. Operator: Your next question comes from the line of Justin Post with Bank of America. Please go ahead. Justin Post: Great. Thanks for taking my question. Mark, it took about ten months to get Muse Spark out. I think it is a pretty good pace. Help us understand what kind of unlock that is for some of the new products you are developing. And how is the product cadence going to be over the next nine months on either consumer or business/enterprise products built on top of that model? Mark Elliot Zuckerberg: The field is moving pretty quickly. I am very happy that we are, I think, the lab that has gone the fastest from standing up the lab to having a very widely accepted strong model. I take that as a significant validation of the effort—that the team is working well together, that the infrastructure is working, that the effort is on track. That is basically the main thing that we have learned over the last quarter: we started this pretty big bet, and it is on track for our plan. In terms of what exactly the cadence is going to be, it is tough for me to say both because I do not want to share competitively sensitive information and because we are more focused on quality than hitting a specific date. On the research side, this is research—we are trying novel things and do not exactly know when they are going to land. And on the product side, we care a lot about just having something I would give to my mother. There are a lot of agents out there that people are building for different things, and there are not that many that I would want to give to my mother. Getting to that quality bar is something that I care about more than hitting a specific week for launching. But with that said, we are in a zone where the teams make meaningful progress day over day. Small groups and teams can make very rapid progress. So I think we are going to see a lot of innovation. The timing of this call is good in some ways because the Muse Spark release was positive. The Meta AI first release is positive. That shows that we are on track. I am trying to paint a picture of the very high-level direction that we are going in, but the picture is going to come into focus a lot more over the subsequent quarters. Operator: Your next question comes from the line of Ross Sandler with Barclays. Please go ahead. Ross Sandler: Thanks. Mark, related to that last answer, there are a lot of new consumer applications cropping up—everything from something like OpenClaw to something a little bit more consumer-friendly that you would build for your mom, like Poe or Dreamer, which you recently acquired. How are these new ideas changing your view around the direction that core Meta AI or Dreamer or your overall agentic strategy needs to go? And second, do you think the lab will stay in this consumer lane, or do you want to go down the route that others are going down with code writing and the recursive self-improvement loop? Just thoughts on that. Thank you. Mark Elliot Zuckerberg: On OpenClaw and other agents, I think they give you a very exciting glimpse of what should be possible. They are pretty rough systems today. To set up OpenClaw, you need to install on a computer locally and then get into a terminal and configure a bunch of things that hundreds of thousands or maybe a small number of millions of people could do. But we are talking about delivering personal superintelligence for billions of people around the world. How do you make a version of that experience that is a lot more polished, dialed, and easy, that has all the infrastructure done for people already, and that just works? That is what we are focused on on the consumer side, and I am really excited about that. If you had something like that that worked quite a bit better than those systems and was easy enough that people could just get, then I think you go from something that hundreds of thousands or millions of people are going to use to something that is going to be addressable to billions of people. That has been our primary focus from day one of the lab: being able to deliver something like that as a product, and I think it is going to be very exciting. The same thing is true for businesses. There is the personal version of this, but a lot of people's goals are to create things—to create websites, products, grow their products. These are all things that good agents are going to be able to help people do, which is partially why this is so exciting. In my opening comments, I talked about how today we can handle a few goals for people. They are big goals—helping people stay connected with people they care about, learn about the world. These are big things, but not the only things people care about. One of the things that I would love for our products to be able to do is understand people's goals specifically and then be able to go work on them for them and check back in when needed. Whether those are personal goals or you are trying to create a business or do work, I think this is something literally every person in the world is going to want some version of. It also scales where the more you want to get out of it, people are going to be willing to pay a lot of money to have premium or high-compute versions of it. That is a very exciting area. What you should be waiting to see is whether we can build the version that really just works, and how effective we are at converting people who are using our products into hundreds of millions and then billions of people using this stuff, and then over time how we can effectively convert that into something that is increasingly profitable by monetizing it and getting the cost down. You asked whether we are primarily focused on consumers or recursive self-improvement. We have talked about two main goals for the team. One is this agents vision of what we are doing. The other is that self-improvement is really important because you cannot build a leading AI product if you do not have leading models. You are not going to have leading models in the future if your models cannot improve themselves. Today, the models are still able to learn from people, and then at some point, the models will have to improve themselves. That is how improvement in the models is going to happen. If we—or anyone else—do not have an ability to do that, then we are not going to be leading labs, and we are not going to produce leading products. That is table stakes that we are focused on. Does that make us a developer tools company? Not necessarily. I am not against having an API or coding tools, but it is not our primary focus. People conflate coding with self-improvement more than they should. Coding is one ingredient for the model self-improving; it is not the only thing. We are focused on all of the parts that are going to be necessary for self-improvement in service of the personal superintelligence vision that we have for people and businesses. Operator: Your next question comes from the line of Ronald Victor Josey with Citigroup. Please go ahead. Ronald Victor Josey: Great. Thanks for taking the question. Mark, a quick follow-up around personal agents and business agents: with Muse Spark now live and more models in development, do you look at the personal agent opportunity more as a short-, medium-, or long-term goal? When will we see a product—short or medium term? And then, Susan, the ranking/recommendation model improvements are very impressive given the size and scale of both Instagram and Facebook. Could you help us understand how doubling the length of these interaction sequences can drive greater usage? There is a thesis that maybe some of the ranking recommendation improvements are along the same lines, so it seems as if there is more room to go. Any help there would be helpful. Thank you. Mark Elliot Zuckerberg: I think that the agents work will have short-term versions, but there is going to be massive upside from delivering more intelligence and more capabilities in the models. You are seeing this across the industry. Each generation of models has more capabilities, can do more things, and people absorb it and are able to get more superpowers. It is the most exciting time in the industry. I think of the agents as the product vehicle for delivering that capability to people, and I think this year is going to be a key period for establishing that as the vehicle for how people are going to use this. But then the model work is going to be something that goes on for a very long time. There is a lot to do in the short, medium, and long term. Susan Li: On your second question about the ranking and recommendations improvements, there is still a lot of room to continue improving recommendations over the rest of the year, and we expect we will be able to drive additional engagement on both Facebook and Instagram. We will continue to improve our data infrastructure to allow our models to train on more data. We are adding more detail to how we describe the content that users have engaged with in the past and scaling up the complexity of our model architecture to take advantage of those larger datasets—like using even longer histories of content interactions—and that should improve the overall quality of recommendations. We are also focused on making the recommendations even more personalized and more relevant to any given user's interests. We are redesigning our content retrieval system to show more content that matches the full range of a user's interests and tailoring the diversity of topics to the broadness of someone's interests. Someone with particularly concentrated interests might see relatively more of that content, while people with a broader set of interests might see a greater range in the topics we show them. Finally, we are continuing to make improvements to our LLM-based user control features that allow users to provide more granular natural language feedback on what they want to see more of or less of in their feed. The sequence length you called out is one of many improvements we made in Q1, and there is a big roadmap of further improvements going forward. Operator: Your next question comes from the line of Douglas Till Anmuth with JPMorgan. Please go ahead. Douglas Till Anmuth: Thanks so much for taking the questions. Mark, how do you think about the step up as you go from leveraging smaller models in the ad business to Muse Spark and future large language models going forward? What are some of the key unlocks across engagement and monetization? And then on Manus, can you talk at all about the strategic importance and the role in developing agentic products for Meta Platforms, Inc., and the current status around the tech and the deal? Thanks. Susan Li: I will take that question. On Manus, we are still working through the details, so we do not have an update right now. On your first question about going from leveraging smaller models in the ads business to larger models, there is already work underway. Even in the current landscape of the ads roadmap, we are advancing the architecture to allow us to leverage the abilities of larger models. Historically, we have not used larger model architectures like GEM for inference because their size and complexity would make them too cost prohibitive. The way we drive performance from those models is by using them to transfer knowledge to smaller, more lightweight models that are used at runtime. The inference models are bound by strict latency requirements, and they need to find the right ad within milliseconds, which has historically prevented us from meaningfully scaling up their size and complexity. But in the second half of last year, we introduced a new adaptive ranking model, which enables us to leverage LLM-scale model complexity of trillion-parameter class, and we made advances in the model architecture and the system with the underlying silicon so it maintains the sub-second speed required to serve ads at scale. We also developed an approach that intelligently routes requests to more compute-intensive inference models if it determines that there is a higher probability of conversion, and that lets us drive both better performance and increased inference ROI. There is a lot of work being done there before we even incorporate more of the LLM work into our underlying ads ranking models. Operator: We have time for one more question. Kenneth Gawrelski with Wells Fargo. Your line is open. Kenneth Gawrelski: Thank you very much. Two, if I may. First, on the Muse Spark launch, you talked about two verticals: health and wellness and shopping. Can I ask you to dive a little deeper into shopping and commerce? Were there any learnings in the 2021–2022 phase where you pushed deeper into commerce on Instagram and on Facebook that you might apply? Is there an opportunity for a next-gen marketplace-type business in e-commerce? And second, Susan, based on your model improvements and the content recommendations, how much visibility do you think you have into the growth trajectory on the core business? You continue to grow basically at double the pace of the industry despite being a very large share. Could you talk about your visibility into continued outperformance? Mark Elliot Zuckerberg: I might give you a somewhat loftier answer to the shopping question. It is an interesting example of how the work we are doing is different from what others are doing. AI agents get better when you fully optimize the stack. That is why we believe we need to be a company that builds frontier models in addition to building the agents. To do that well, you need to build your infrastructure. So we are undertaking this large investment to do that top to bottom. A lot of the way to think about the investment that we are making is a bet that the individual things that people care about—and that people—are going to be more important in the future. So much of the rhetoric around AI in the industry is around a company trying to build some kind of centralized thing that does all the productive work in society. That is very different from how we see the world. Our vision for the future is one where society makes progress by individuals pursuing their own aspirations. Some people care about big, grand things like curing diseases. A lot of people care about personal things like finding the right shirt for my daughter. I think that we are going to build things that help deliver this vision for personal agents for people. Part of what is interesting and differentiated about what we are doing is that this is so different from how I hear everyone else talking about the work. Even though some of these ideas seem like they should be obvious, our approach of trying to empower individuals and building consumer things is, in the details, extremely different from what others are doing. Shopping might be one specific example that will have interesting commercial implications and that consumers will like. But I do not hear any other labs talking about how they are building an AI that is really good at shopping. The reason for that is not because shopping is the most important thing by itself but because empowering people to do the things that matter in their lives—whether that is local, understanding social context, shopping, personal health, or understanding what is going on around them visually (which is going to be really important on the glasses)—these are all elements of the personal superintelligence vision. When you are thinking about the investment in Meta Platforms, Inc. over time, you should think about it as coming down to these values around what we want AI to do in society. If what you want it to do is empower individuals and build a world where the AI is in service to individuals' goals, then that is what we are going to build, and I think it is going to be incredibly valuable. Susan Li: Gosh. I almost wish we could end on that answer, but I will answer the second question. There are two versions. One is the revenue outlook, and we gave the Q2 guide, which embeds a range of macro outcomes as well as the ongoing work to continue improving usage and engagement on our family of apps and our ability to make the ads better and more performant. The second version is more of a higher-level question about the overall trajectory of the roadmap. One of the things I will say, having been working on this for a very long time, is I am always impressed by the team’s ability to continue to advance the state of the art here. Our planning process is really fine-tuned around this. I have mentioned on a couple calls the budgeting process in which we run a very ROI-based process to make sure that we are funding all of the ads initiatives that we think will drive growth in future years. That process is quite dialed in. Our ability to measure the impact has been robust, and it has been a very important driver of our ads revenue growth, and that continues to be a process that we ran in this past budget. As far as we have line of sight, we feel good about the investment opportunities ahead of us. Kenneth J. Dorell: Great. Thank you everyone for joining us today. We look forward to speaking with you again soon. Operator: This concludes today’s conference call. Thank you for joining and you may now disconnect.
Operator: Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation March Quarter 2026 Earnings Conference Call. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead. Kevin Kessel: Welcome to the March 2026 quarterly earnings call for KLA. I'm joined by our CEO, Rick Wallace; and CFO, Brent Higgins. We will discuss today's results as well as our outlook, which we released after the market closed and is available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. We will not reference fiscal years in our discussion, all full year references we may refer to calendar years. The earnings material contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events presentations, corporate governance information and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Brent with financial highlights on our outlook. Now over to Rick. Richard Wallace: Thanks, Kevin. KLA delivered strong results across the board for the March quarter with revenue of $3.415 billion, up 4% sequentially and 11% year-over-year driven by increased investment in leading-edge foundry logic and high bandwidth memory. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12. We continue to see AI as a core driver of KLA's performance and an enabler for our growing momentum. Highlights in the quarter include KLA achieving the #1 position in process control for advanced wafer level packaging for 2025 due to continued customer adoption KLA's packaging portfolio. We continue to see improving momentum and advanced packaging revenue growth and market share, and we now expect semiconductor process control product portfolio revenue for advanced packaging will grow from approximately $635 million in 2025 to approximately $1 billion in 2026, well above our prior estimates. CLA service business was $775 million in the March quarter, up 16% year-over-year but down 1% sequentially due to the timing of revenue recognition. Consistent long-term growth in service is a key aspect of KLA's business model and delivers predictable cash flow to anchor our capital return strategy. Quarterly free cash flow was $622 million, over the past 12 months, free cash flow was $4 million, producing a free cash flow margin of 31%. Total capital returned in the March quarter was $875 million comprised of $626 million in share repurchases and $249 million in dividends. Total capital return over the past 12 months was $3.2 billion. Additionally, recently published industry research shows KLA increased its global share of both the overall wafer equipment and the process control market in 2025. This growing market leadership was highlighted by significant gains in advanced wafer-level packaging, where KLA increased its market share by 14 percentage points and achieved approximately 70% year-over-year revenue growth. KLA's market share also improved across basket inspection, optical pattern wafer inspection and electron beam inspection. Since 2021, KLA shared process control has grown by 360 basis points and is approximately 7x greater than the nearest competitor. Looking ahead to 2026 and 2027, our expectations for growth in the wafer equipment industry are accelerating. KLA's relevance has increased across all vectors of semiconductor manufacturing as process control enables a growing volume of design starts at the leading edge and supports the needs for increased performance and reliability in the production of high-bandwidth memory. It's important to distinguish that design activity and rising memory complexity are not the only catalyst driving benefits for KLA and process control, faster product cycles, higher-value wafers and mask, rising design complexity and variability and the growing demand and complexity of advanced packaging all require significantly more process control solutions. These solutions shorten time to results by addressing process integration challenges in R&D and early fab ramp phases, while continuing to manage yield with strong design mix and high-volume manufacturing. Turning to services. As KLA systems become more technologically advanced and have longer service lifetimes in fabs, our service business continues to gain strategic importance, driven by rising customer expectations for tool performance and availability across all customer segments, creating a strong, predictable long-term tailwind for overall KLA revenue growth. KLA also recently held an Investor Day in March, detailing our position in the semi-sector market and our unique portfolio approach to solving customer process challenges and enhancing yield learning cycles within process control. We introduced new long-term revenue growth targets along with a 2030 financial model and increased our capital allocation to target over 90% of free cash flow. We also announced the 17th consecutive increase in our quarterly dividend level and an incremental $7 billion share repurchase authorization. KLA revised up 13% to 17% revenue CAGR objective through 2030 reflects strong growth across our key business segments and includes an increased long-term services revenue CAGR growth model of approximately 13% to 15%. Our long-term model assumes a baseline semiconductor industry growth CAGR of 11% from 2025 to 2030 and wafer equipment market growing 1% faster than the semiconductor industry to $215 billion, plus or minus $20 billion by 2030. Given the growing relevance of process control across all customer segments, we expect KLA to continue to outperform the wafer equipment market on the top line, driving operating leverage and continuing to deliver our best-in-class financial model. I'll close my remarks by saying that KLA's sustainable outperformance reinforces the strength of our leadership and process control. It also underscores the critical role KLA's suite of products and services play and enabling AI field growth in the semiconductor industry. Our consistent execution reflects the resilience of the KLA operating model, the talent of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights. Bren Higgins: Thanks, Rick. KLA's March quarter results reflect strong year-over-year growth with an industry-leading margin profile, highlighting our market leadership, consistent execution and the dedication of our global teams and meeting customer commitments. Revenue was $3.415 billion, above the guidance midpoint of $3.35 billion. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12 each above the midpoint of the respective guidance ranges. Gross margin was 62.2%, 45 basis points above the midpoint of guidance, driven by better-than-modeled service business mix and manufacturing scale due to higher business volume. Operating expenses were $670 million and included $389 million in R&D and $281 million in SG&A. Operating expenses were higher than expected, principally due to [indiscernible] materials timing and other reserve adjustments. Operating margin was 42.6%. Other income expense net was $9 million in income. The variance relative to guidance was due to a significant mark-to-market gain of a strategic supply investment. The quarterly effective tax rate was 15.4% at the guided tax rate of 14.5% and non-GAAP earnings per share would have been $0.10 higher or $9.50. Breakdown of revenue by reportable segments and end markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet. KLA ended the quarter with $5 billion in total cash, cash equivalents and marketable securities and debt of $5.95 billion. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. KLA generates consistent strong free cash flow, driven by our high-performing operating model. Over the past 5 calendar years, Free cash flow has grown at approximately 20% CAGR, above the revenue CAGR of 16% over the same period. This growth, coupled with resilience across business cycles, enables a comprehensive capital return strategy, featuring double-digit dividend growth and share repurchases to support long-term shareholder value creation. This strategy prioritizes predictable, assertive capital deployment and remains an important differentiator of the KLA investment thesis. Now turning to the industry outlook for 2026, which continues to strengthen across all segments. We expect the wafer equipment market which includes advanced packaging to exceed $140 billion in 2026. The strength of demand and customer engagement and ensuring KLA has the capacity to support numerous new fab projects currently under construction, has led to unprecedented demand visibility from our customers. While normally, we would not comment on 2027 growth rates at April of 2026. This demand environment gives us confidence in 2027 visibility for the wafer equipment market. Today, we expect the 2027 year-over-year growth rate to be higher than our growth rate expectations for 2026. KLA has strong business momentum, expanding market share and higher process control intensity at the leading edge across all segments. Given all this, we are well positioned to continue to increase our share of the overall market in 2026 and 2027. The strong customer momentum that we are experiencing is reflected in our growing systems backlog and sales funnel. We continue to expect quarter-to-quarter revenue growth throughout 2026 and strong business momentum leading into 2027. For 2026, we expect sequential revenue growth for the company to accelerate, leading to high teen revenue growth year-over-year in the semiconductor process control systems business to grow over 20%. KLA's June quarter guidance is for revenue of $3.575 billion, plus or minus $200 million. Foundry logic revenue from semiconductor customers is forecasted to increase to approximately 82% and and memory is expected to be approximately 18% of semi process control systems revenue to semiconductor customers. In memory, DRAM is expected to account for roughly 84% with NAND accounting for the remaining 16%. As always, these business mix approximations pertains solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Gross margin for the quarter is forecasted to be 61.75% plus or minus 1 percentage point. Although volume levels are up quarter-to-quarter, product mix is modestly weaker than in the March quarter. As discussed last quarter, the guidance also includes the persistent impact of elevated DRAM ship costs for the company's image processing computers that ship with our systems, creating a headwind to the company's gross margins. While the memory pricing environment remains challenging in the near term, we have secured the required supply to meet our build plan requirements. Our view of elevated memory pricing persisting through at least calendar 2026 is unchanged. And we continue to see a roughly 100 basis point negative impact on our gross margin over the next several quarters. Considering this impact, the tariff environment, along with product mix and volume expectations, our view of gross margins remains unchanged at approximately 62%, plus or minus 50 basis points in calendar '26. Operating expenses are forecasted to be approximately $665 million in the June quarter. For 2026, we will continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years, and we anticipate these expenses to grow by roughly $15 million sequentially throughout the calendar year. Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of an approximately $25 million expense for the June quarter, and we expect it to remain at approximately this quarterly level for the calendar year. The planning tax rate is 14.5%. As always, we expect some quarter-to-quarter tax rate variance due to discrete items as we move throughout the year. In the June quarter, non-GAAP diluted EPS is expected to be $9.87, plus or minus $1, and GAAP diluted EPS is expected to be $9.66, plus or minus $1. EPS guidance is based on a fully diluted share count of approximately 131.4 million shares. In conclusion, our near-term revenue guidance reflects consistent growth and strong profitability. We expect our semiconductor process control systems business to outperform the wafer equipment market in 2026 driven by rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that supports customer technology road maps and production efficiency, driving our long-term relevance and growth expectations. Daily operating model drives our best-in-class execution. Our focus on customer success, innovative solutions and operational excellence enables industry-leading financial performance and consistent predictable capital returns. As we detailed at our March Investor Day, KLA's business is uniquely positioned to capitalize on today's technology inflection points and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in wafer equipment are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading edge R&D investment and fab capacity ramps to now addressing all row phases in wafer equipment enabling leading-edge process development, time to results in fab capacity ramps and optimizing yield in a high-volume manufacturing environment. In addition, the growing investment in custom silicon particularly among hyperscalers developing their own custom chips has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume and time to market. Design mix and complexity grows, so does the need for process control. As a result, KLA has seen consistent growth in process control intensity as each new chip design requires rigorous inspection metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Kevin, please begin the Q&A. Kevin Kessel: Thank you, Bren. Operator, can you please provide instructions and then begin the Q&A session. Operator: [Operator Instructions] We'll now take our first question from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess first question I would love to dig a little bit deeper in terms of your extended lead times and visibility into '27. Can you kind of speak to we're in the portfolio, kind of what in the end markets and how you kind of see that progressing into perhaps soon having visibility into 2028. Bren Higgins: Yes, CJ, thanks for the question. It's really broad-based. Certainly, we're seeing backlogs build. And so order flow is very high. customer engagement as we talk about slot planning into next year is also very strong. So I think when you take that, couple it with now we're working really hard here to make sure that we can enable the capacity to meet our customer time lines. But most of our focus and discussion is on how do we address the opportunities in '27, lots of new greenfield opportunities. So I think customers want to make sure that they're in the queue is to align with their construction schedules. And I think it's pretty broad-based across our product portfolio. Certainly, most of it is more leading edge centric. So it's the most advanced products in the product families. Kevin Kessel: Yes. Just to build on that, CJ, the conversations I've had with customers in the last few months, there's there's a higher level of urgency around securing capacity for our customers that I remember seeing. And I think it's indicative and speaks to the demand that they're feeling from their customers. And so there's a huge amount of interest and push to make sure that they can get slots assigned. And I think the other realization they all have is that they're not alone in doing this. So the whole industry is trying to support that growth as we go forward. So there's no question '27 is going to be a massive buildup. Christopher Muse: Perfect. And maybe as a quick follow-up. I guess as you think about the sequential going to the high teens in the second half, should we be thinking about kind of $49 billion, $15 billion as the right framework for calendar 2016 revenues? . Bren Higgins: Yes, I think so. If you just take the commentary, getting the high teens, it gets you into the 15-ish range -- and I think when you look at the second half and we'll call it 15% to 20% type second half sequential growth or growth over the first half. It puts you up into that ballpark. I think you're thinking about it the right way. Operator: We'll move on now to Stacy Rasgon with Bernstein Research. . Stacy Rasgon: At the Analyst Day, you talked about a 2030 model, which had a $250 million WC and like $1.4 billion in semis and I mean it's looking increasingly likely that we might get to those kinds of levels like this year or next year. I guess maybe you could talk a little bit more about the underlying assumptions for that long-term model? And maybe it's a little craft asset, like why isn't it higher, given where we're sitting right now and what you guys are seeing? . Bren Higgins: Say, great question. I think a couple of things are driving the increased revenue. And I think the number you're referring to that might be closer to what we talked about for 2030 is the semi revenue number, not the equipment number. And the reason the semi revenue is going higher, faster is pricing. And so there's been more elasticity, especially around memory and that pricing that's driven that number up. So when we talk about 2030, we talk about a normalized level of capital intensity associated with the revenue that we said would be in the range of $1.3 billion to $1.5 billion. If we had to redo that today, there are a lot of reasons why you'd push that up from that -- as you know, that was 6 weeks ago. So things have changed. But I think the numbers around equipment haven't moved nearly as fast as the numbers around semi revenue associated with pricing. Does that help? Stacy Rasgon: Yes, that actually does help. And I guess just for a quick follow-up. There's been some news flow apologize if you maybe mentioned this on the call or not, but there's a new law about bands for a Huahong. And I guess, is there any implication of that on you? And just, I guess, how are you thinking overall about the kind of trajectory as you go forward from yours, has your thinking there changed at all? Bren Higgins: So we got the letter. I'm not going to say too much about it other than we're still looking at it. The impact on the company in terms of our Q2 guidance and the commentary around 26%, I would say, is fairly immaterial. It's focused on not all affiliated fabs. So the impact, I would say, is fairly immaterial and contemplated in the guidance we provided. Stacy Rasgon: Broader thoughts on China? Richard Wallace: Broader thoughts broader thoughts. I think when you look at China overall, it's playing out more or less consistent with the way we've talked about it. I think if you look at overall spending in China, it's more or less flat, maybe a little bit up has been fairly flat in terms of spending levels over the last few years. And so what's driving our business is what's happening at the leading edge. I would expect that the China growth rate is probably lower than where the overall WFE growth rate is projected to be here moving forward. Operator: We'll move next to Harlan Sur with JPMorgan. Harlan Sur: On your 2026 WSE better outlook now $140 billion plus of kind of high-teens percentage type of growth outlook. On the incremental upside this year, is it being driven by new brick-and-mortar sort of greenfield programs being pulled forward or are customers just accelerating technology migrations on existing capacity or maybe focusing on improving yields on existing capacity? Any color there? And then for on the '27, now you are saying WLC will go faster than '26 versus your prior view of in line or better. Looking at your order book, is that a continuation of the broad-based spending growth across segments, foundry, logic, memory advanced packaging? Or is there a particular segment that is driving the strong growth? Any color there would be helpful as well. . Richard Wallace: Yes. So I think around the [indiscernible] view, just the urgency from customers to take slots or take deliveries. As we have moved here into better visibility into the second half, we're seeing nothing more than just general urgency across different segments with our customer base. And that caused us to increment the views of industry growth upwards. If you look at 2027, obviously, you've got a lot of new fab projects out of greenfield activity, both on the logic side and memory. I think you'll also see some greenfield activity in flash. So -- and packaging of role also. So I think it's really pretty broad-based across the -- all our different customer segments. Harlan Sur: I appreciate that. And then your serves business grew 15% last year with an exit run rate of about 18%. That strong growth carried into the March quarter with 16% year-over-year growth. you guys just outlined the 4 CAGR Analyst Day of 13% to 15% growth rate. In the current environment, just given the very high customer utilization for advanced services offerings obviously, lots of focus on driving as much output and yield per fab as possible. How should we think about the services growth profile this year? . Richard Wallace: I think the service will be in the range as we move across this year. Obviously, a lot of the shipments that we're shipping this year will start to flow into service as you move into next year and beyond. So I think that's an accelerant to we'll call higher end of the range growth opportunities as we move over the next couple of years. But more or less, we're trending in service in line with the target range. We would expect to to be within it. Operator: We'll move on to Krish Sanker with TD Cowen. Sreekrishnan Sankarnarayanan: The first one, I think, Rick or Bren, I think the visibility angle was pretty interesting. How much of that is really driven by true demand? Like the customers doing [indiscernible] maybe in '28 versus trying to ensure that you have enough capacity or even personnel who needs to be trained and service the tools. So how much do you think -- how much of that do you think is actually true demand versus setting you up for what could be potential demand? Then I have a follow-up. . Richard Wallace: I'm sorry, it's a little hard to hear. So the question is -- is the demand real? Is that the question? Or do we think we're getting orders in anticipation of shortages? Is that your question? Sreekrishnan Sankarnarayanan: No, no, I was just wondering how much of it is actually true demand versus customers making sure that there's enough capacity and service personnel, et cetera, people looking like [indiscernible], et cetera. Richard Wallace: Well look, I think our customers, given they're going to -- these are significant investments they're going to open these fabs. I mean part of the discussions are not only around tools and tool delivery timing, but also in our support resources, our installation resources, applications, which are people that are out there working with our customers to drive value out of the tools, that the service teams are there to support. So it's really across the company that we're in position to support what they expect to be a pretty significant ramp in terms of business activities as those fabs come up to higher levels of productivity. Sreekrishnan Sankarnarayanan: Got it. And then a quick follow-up. It seems like some of the incremental WFE demand this year is coming from the CPU titles. But like inter last week spoke about incremental CP capacity coming from Intel 3 and Intel 7, which are prior nodes where I believe the initiatives are already being solved. So will the incremental CPU demand actually benefit KLA or not as much. Richard Wallace: Certainly, it's something we've talked about over the last year is that we're encouraged by is the broadening of investment at the leading edge in our lease edge. And so that has been, I think, good for KLA. Our collaboration levels are very high with our customers. And so if you look at what we're -- the easiest way to drive efficiency out of the existing installed bases to drive yield. And so that plays to KLA ability to help drive learning cycles and drive yield in a high-volume manufacturing environment. So I think we're well positioned. We're encouraged by the engagement levels really across the installed base and the broader participation I think lends itself to a pretty robust leading-edge environment as we go forward. Operator: We'll move on now to Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Yes. Maybe just a follow up on that. I guess, like when we think about your customers trying to obviously drive higher yield to drive higher output, is that a bigger driver for potential incremental like process control system sales for you? Or is it largely flowing through the service line? Richard Wallace: Well, it absolutely drives process control sales. It drives both, but the process control, especially if they're dealing with fabs that are already up, but don't have a particularly high yield and if they've changed die size. So that's the challenge, I think, that they're dealing with when they're trying to put out more capability to support AI. And I think that's a different fact that's driving a lot of the activity around process control. And you even heard -- I mean, Intel was public about increasing their metrology usage as you heard on their call. So we're definitely seeing, in general, because there's a shortage in the industry, the easiest lever anyone can use is to get more yield out of the existing capacity that they have. even the leaders have gone back to prior nodes and added process control because they recognize that's a faster way to get more that's far less true in historical cycles when they're meeting demand. So once you see utilizations go way up on leading edge, the only lever you have left, you can build new fabs. But the thing you can do before that is try to squeeze out more yield. I think one of the other benefits we see is just the product types change that our customers are shipping serving different parts of the market that the need for different capability arises -- it might be different than how they originally set up the fab to run a different type of parts or different mix of parts. So that tends to create opportunities for us because new and different capabilities required to support different like higher performance compute markets, for example. Joseph Quatrochi: That's very helpful. Maybe as a follow-up, I was wondering if you could maybe talk about your own lead times and just kind of thinking about your own supply chain and kind of I think last quarter, you talked about maybe things being tight from a component standpoint in the first half of this year. I mean the really opening up in the second half. And obviously, you've increased your WSE guidance now a couple of times. Just how do we think about KLA's capacity to support this ramp as we continue to increase into 2027? Richard Wallace: Yes. So thanks, Joe. So look, I think the thing that surprised us was the slope and duration of how quickly the business started to ramp into the first half. And so that did put some constraints on our ability to to scale from an overall supply chain capacity point of view in the first half of 2016. As we move into '27 and some of the context we provided and some of my comments earlier around growth rate in the second half. I think we're much better positioned to support this ramp and support customer requirements. And as we look at '27, as I said earlier, our focus has been really to ensure that we we have the capacity to support the different forecasts that are out there. So we feel pretty comfortable about the guidance we gave today and our ability to support that and then some. We always try to to think about all the conceivable opportunities as we plan along our supply chain. And so there's a tremendous amount of focus across the company to ensure that we have that capacity to support what looks to be a very strong environment next year. And then as we said earlier, we've got to do -- we're hiring a lot too. We need to make sure we've got our installed resources or service resources to be able to support the tools after we ship them. Bren Higgins: Yes. Joe, and the folks in our operations service know that we're matching the urgency in providing capability to our customers that our customers are sharing with us. So this is a time, like I said, I've not seen this before, but there's such broad demand, such capacity at [indiscernible] speed. So we're working very hard to support that. And historically, we've always done it, but it's going to take a lot of work. Operator: We'll move on now to Timothy Arcuri with UBS. Timothy Arcuri: Bren, I just wanted to come back to this idea that you're outgrowing WFE this year. You're guiding up sort of high teens. I think the general consensus among all the other companies is that WFE is growing like mid-20s. So is it that you just think that, that WFE growth is too high, maybe your baseline for WFE last year is more like 120 or something. So actually, you don't think there'll be even high teens. Is that -- is that how you get to the concept that you're going to outgrow this year? . Bren Higgins: Well, yes, I think you're right. I think the baseline is about 120, and that aligns with where the various third parties. And if you do kind of a consensus view of all the different forecasts that are out there, you end up somewhere more or less in that ballpark in terms of where 2025 growth rates were. And if you look at the different relative performance of the different players, it does imply that that '25 was a pretty good year, greater than 10% growth. So from a baseline point of view, we see it at about 120, growing to about 140 plus, as we said, which translates into this call it, mid- to high-teen growth rate. If you look at the semi PC business, as I said in the prepared remarks, we expected it to grow our systems business to grow in excess of 20%. So that's aligns with our view of growth. As we talked about at Investor Day, we spent a lot of time trying to explain how we're defining the. Everybody, of course, defines it in different ways. But we believe that the approach that we've taken, as I said, it lines up with third parties. I think there's a lot of opportunity out there that starts to span not just traditional WFE, but also in the advanced packaging parts of the market. And as we've seen our revenue inflect in that part of the market, we think it's appropriate if you're going to measure yourself on share of market that you got the numerator, but you also get the denominator, right? So that's how we see it, and that's that kind of informs the forecast that we have here. Timothy Arcuri: Okay. Got it. And then I guess just, Rick, I wanted to ask you about the pushout of High-NA. And just like what the puts and takes are for you? I mean, I can see on one hand, you've got like 25%, 30% direct attached to litho. So maybe that's a bad thing that is pushing up. But on the other hand, there's going to be some other process things that get more complex and things like that, which obviously would actually help you. So how do you weigh those puts and takes. Richard Wallace: Yes. Thanks, Jim. There's no change in the high NA forecast from everything that we've modeled. It's exactly what we've modeled and started talking about a couple of years ago. So in that sense, this is what we're talking about when we put out the 2030 plan. However, INA has puts and takes, as you say. So ultimately, it's going to be better if people are printing smaller geometries and the defectivity challenges are going to be greater. But it's also the case that, that's not going to happen until the economics support it. So I'd say for us, it's a push. It's going to happen, it's going to extend the time line for which people could keep getting benefit out of process. That's good for the industry. But it is in our -- what's happening is in our model. So that there was no change from our expectations. Bren Higgins: Yes, Tim, and I think this attach rate to litho historically when scaling was driving the innovation in the process road map, that was more true than it is today. Today, you have architecture changes, you have the nature of a high mix design environment. We talked a lot about larger die and what that means in terms of defect density the value of that die and how that translates to how much you're willing to invest to ensure that those die are good and are performing at spec process and performance requirements are much more significant. So there's a lot of drivers there for process control that's beyond just traditional lympho scaling. If you look -- we need a lot to scaling road map, as Rick said, it's important. It's good for the industry, but it's not the only factor that drives process control intensity. The 2-nanometer node has higher intensity than 3-nanometer node and the amount of EUV layers hasn't changed all that much from node to node. So I think that gives you an indication that that it's not the only factor that influences how customers invest in our products. Operator: We'll move on now to Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe address your expectation for the advanced packaging market and your revenue growth there in calendar '26. And maybe just kind of talk about how that's likely to kind of filter as we go throughout the year. Richard Wallace: Yes. And so it's a pretty exciting part of our story. Of course, we spent a lot of time talking about how it's how that market has moved to the need for more front-end like requirements and how well the KLA portfolio is positioned here. We talked about exceeding being somewhere in the range of $1 billion in business and advanced packaging for our process control business this year, growing from about $635 million in 2025. One of the great things that we're starting to see also is as the packaging market has evolved and more nanometer level inspection is required, but the need for more precision and more capability from the tool set. So as we look at 2026, we're actually seeing meaningful revenue increases across some of our more advanced systems as we talked about that, that was going to come, and we're starting to see that both in terms of of [indiscernible] packaging, but also emerging SOIC packaging as dista is happening, driving hybrid volume requirements and so on. So we're pretty excited about the growth in that part of the market for us. It's likely one of the top growing markets certainly in overall packaging, and we expect it to continue to grow into next year. James Schneider: And I was wondering if you could maybe provide a little bit of color kind of given your extended sort of order book and higher visibility, can you see your way clear to a point in time in the future where you would expect the process control intensity to really step up and start to really materially outgrow the overall WFE envelope you're forecasting? Richard Wallace: Well, the last 5 years, we gained 160-ish basis points of share, and that translated into about a 6.5% growth rate for KLA above the market baseline. If you go back to what we talked about at Investor Day, we thought that we could gain another 150 basis points plus share of the overall wafer equipment market, and that translates into a 4.5% growth for the company over the market baseline of WFE growth of 12%. So it's -- these are small increases, but on a pretty big base, and it translates into meaningful CAGR upside relative to the overall market. And that's our plan that then feeds into our $26 billion target for 2030. Operator: We'll move on next to Charles Shi with Needham. Unknown Analyst: I have a question around some technology in metrology. There is a lot of discussion around x-ray versus optical for CD measurement in the front end, let's say, in [indiscernible] detection, those kind of other stuff in hybrid bonding type of advanced packaging. And Rick, I'm sure you're familiar with all of this discussion around the debate around optical versus e-beam DUV versus actinic. I think you've said that when you can use optical, customers will stay with the optical, but -- is this new debate around metrology, x-ray versus optical, you would have the same view, maybe optical eventually win or you have some other starts? I understand you do have XTD tool, but I want to get your thoughts. Richard Wallace: Yes. I think that the history of inspection and measurement and really the industry is you move to the highest capability tool that can do the job additionally to debug it and then you go to the cost of ownership play. So whatever can do the job and most efficient. And we talked about the roll off, for example, in our wafer inspection portfolio where you might under process at a very high level of, say, e-beam during characterization along with high and optical. But then if you can possibly go to higher throughput, lower cost, you do. The case of X-ray is interesting because in some ways, when we introduced Axion a few years ago, that was a product that was really solving a problem that could only be solved in failure analysis. And the challenge with that was getting the tech to work, getting adoption and getting proof of concept with enough players that they would make the change. And we've done that, but it took quite a while because the industry it's remarkably aggressive in new technology development, but slow in making changes in manufacturing except for when it has to. So I think the question is, is there a capability that you can use and you can drive more with x-ray and can you do it? And the answer is you might be able to do it, but the question is, is it something you can do in production? You can do it to debug the process. But if even in e-beam, what we're seeing now with our portfolio is we might use our eBay system, coupled with our inspection system to tune that inspection system, but offload as much as we can to higher throughput. So I think there's a scenario in which you see that that's what happens with X-ray as well. You want to have the capability, but the problem is always eventually is the cost. And if it's something that is so out of control that the only way you can do it is with massive amounts of very inspection metrology and it's very expensive, you are not going to do it, and you're going to figure out another process. So I think the answer is yes, there's a lot of work going on, and there's people that are really focused on getting something to work, but that's different than what they'll use in volume production. As a company, we've always focused on the difference between the characterization, development phase and what you can pan out. So when we laid out our 2030 plan, we obviously work very closely with our customers on their packaging road maps and what we anticipated was having capability across our portfolio to solve all the tool, the needs they have, including in their development phase. So I don't think you're going to see a quick adoption of X-ray anytime soon. And those of us who have been around a while, there was an x-ray lithography company 30 years ago. So it's not like it's a new idea to leverage x-rays, just the cost and throughput is really challenging. I hope that helps. Bren Higgins: And just to build on that, the market size, most of the adoption has been in memory. And so the market size has been roughly, I'll call it, today, it's about $75 million to $100 million. And I'd say we have probably about, call it, 60-ish percent share of the overall market. I think as adoption starts to increase as maybe more production opportunities become available, you could see that moving up into the $150 million range over the next few years. But the challenges of the productivity of the tool and how that then translates into volume production as Rick said, has been the biggest challenge, and I think has affected how the pace of adoption for that technology. Unknown Analyst: Maybe a quicker one as a second question. You gave that advanced packaging revenue outlook from $635 million to $1 billion. But if I recall correctly, one quarter ago, you were basically calling advanced packaging. I mean, probably gets like a much lower growth -- it feels like that was a Abrevision to advanced packaging revenue outlook. So may I ask what was the big upward revision about? I mean, it happened like a just over 60, 90 days? And what's changed? -- from maybe a quarter ago. Richard Wallace: Yes. So we thought in a quarter ago, we thought that the overall growth rate in Process Control Advanced packaging was somewhere in excess of 30%. Obviously, if you do the math on the numbers we've talked about, we're now in the upper 50% range in terms of growth. There's clearly been -- and one thing about packaging is it's shorter lead time business generally. And there's clearly been momentum from a number of customers for additional capacity this year. We didn't have the visibility to it going into this calendar year. And we see it growing more, and it's I think it's going to be a little bit more of a second half dynamic in terms of of half to half of that growth. But it has absolutely picked up over the last 90 days or so. And I think the competitive positioning, the need for more capability, as I talked about earlier, are big drivers in it. So semiconductor process control, growing in the range of $1 billion, up from about $635 million, which translates, as I said, into the high 50% range. Operator: We'll move on now to Srini Pajjuri with RBC Capital Markets. Srinivas Pajjuri: I have a clarification -- sorry, I've been jumping between calls here. It looks like you're raising the WFE number to about 140 versus 135 to 140 at the Analyst Day. But at the same time, your annual guidance, revenue guidance is still for high teens. I understand high teens can mean a lot of things. Just trying to see if I'm reading that correctly, if you can kind of give me some additional color on that number. Richard Wallace: Yes. I think that we're talking about a pretty small adjustment from where we were about 6 weeks ago, but we think it's 140 plus and I think that, as I said, I'm pretty comfortable with the guidance that we provided, I would say, it probably translates into consistent with the stronger view of the industry that translates into probably a little bit stronger view of of 2026 for KLA than we thought 6 weeks ago. But look, we've got 9 months to go here, and we have a number of opportunities to provide an update to that forecast. So we're pretty excited, and we'll see how the second half plays out in terms of opportunities to to reduce the risk and increase the -- our views of performance here for the year. But I think that's as good as we can do for now. Srinivas Pajjuri: Yes, that's fair enough. And then on the 2027, just a few clarifications, Bren. So you're obviously guiding for high teens or better. It seems like I'm assuming WFE is at least growing in one or maybe you continue to outperform WFE as you've been doing over the past few years. Just trying to understand the moving pieces there. I know you said it's fairly broad-based, but can you maybe parse it out by end market, memory versus logic, what you're seeing it also. What's your base case assumption for China WFE from next year? Bren Higgins: Yes. So I think that if you look at the greenfield opportunities, which I think is for DRAM but also in the flash market is that memory is probably a few percent higher than this year. So this year, memory is about, we'll call it, 60 -- logic [indiscernible] about 62% of the overall spend. I think it's probably closer to 60% more memory focused versus logic into next year. I don't think it's hard to say about China, we're a little ways away, but at least in terms of how we're modeling it, our general view on China is that it grows at a slower rate than overall WFE. And we haven't seen it change much at least in terms of KLA's business levels over the last couple of years. So I would say that you'll see us more along those lines. Now it's more greenfield, less around technology upgrades. And so that drives a different dynamic. And with the rising process control intensity that we're seeing in memory, we feel very good about how well we're positioned for that activity into next year. Logic foundry continues to be very broad-based. And legacy is pretty weak this year. So I would think that legacy probably has some upside into next year. I don't want to quantify it yet though. Operator: We'll move next to Shane Brett with Morgan Stanley. Shane Brett: My first question is on margin. I want to assume that your customers are likely fighting for KLA shipment slots at the moment. Just how should we think about your ability to take advantage of this demand via margin I'm especially curious in the context of your memory customers, given you have seen a gross margin headwind due to higher DRAM pricing, but shouldn't we be able to pass this cost on earlier than the historical 1-year pricing pass-through cycle? . Richard Wallace: Yes, Shane, we don't price based on scarcity at KLA, our pricing is based on cost of ownership improvements from one generation to the next. We're pretty disciplined about about that, and that translates into terms of meeting our customers' view of incremental performance and incremental cost of ownership improvement. If you start to price based on different price changes and components, I would expect that your customers would want symmetry with that. And so that's not how we think about it. At KLA, it's much more about the value that we offer, the value-based pricing and how we're able from product type to product type to deliver new capability at better cost of ownership to our customers. So I think we do a pretty good job around that at KLA. And this is a headwind around memory that we think ultimately will normalize out in the future. I don't think it's going to I think it's going to be with us for a little while, but we feel pretty good about the supply that we have to be able to support the growth outlook we've talked about. And as I talked about at Investor Day, I think it's highlights why our new product introduction cadence is so important for KLA because it allows us to introduce new products, rethink how we're pricing that incremental value, how do we share it with customers as we move forward. So I think we feel pretty good about how we're positioned. And the last thing you're going to do is go to a customer in the middle of a transaction or middle of a buy and change pricing. So that just -- it doesn't work that way. So I think we're pretty good and feel pretty good about what we do. Shane Brett: Got it. That's very clear. And for my follow-up, this is more of a clarification on advanced packaging. So I understand you see your business growing 30% in packaging. But your process peers are now also talking about 50% plus growth. Correct me if I'm wrong, but does that mean that relative to your initial packaging guide of approximately $12 billion that you disclosed in late January, we should be looking at closer to $13 billion or $14 billion for this year. . Bren Higgins: Yes, Shane, so we're growing greater than in the high 50%, as we said in the prepared remarks, the shareholder letter and the question I answered earlier. The overall market is somewhere growing up in the range of about $13 billion, we think. And so that's approximately 30% growth in the overall market from 2025. Operator: We'll move on now to Edward Yang with Oppenheimer. Unknown Analyst: Just following up on DRAM and the gross margin headwind. You mentioned having procured enough hits now. Is that through calendar year '26 or possibly longer? Richard Wallace: Longer. I feel very good about our supply situation going into to support our bill plans through next year. Unknown Analyst: Great. And second question is on AI CapEx assumptions. A couple of hyperscalers reported tonight as well, not a couple of few, a couple have appeared to have come in a little light on CapEx tonight. Microsoft and Google for the quarter, Meta and Amazon were a bit higher. But we all appreciate those numbers can be lumpy quarter-to-quarter. But given sporadic market concerns around data center CapEx durability, can you bridge your updated '26 WFE view of greater than $140 billion and your expectation of growth in 2027 to the underlying AI infrastructure assumptions. Put differently, what level of hyperscaler end customer AI CapEx due to WFE forecast effectively require? Richard Wallace: Yes. So when we talk -- and like I said, we've had all these conversations with customers recently about what is their expected demand and what kind of capacity are they bringing online recently, within the last 2 weeks, I've had those conversations, both on the foundry live side and on the memory side, there's still -- with all these very aggressive plans through '26 and '27 they're not going to close the gap. And in some cases, the gap is even expanded from where it was a few months ago because of the demand. So this equilibrium between what the CapEx hyperscaler you guys say and the notion that you can draw a straight line to WFE, you can't because they're -- we're way under serving those demands. So our contention has been for quite a while that there's not enough silicon to be able to support the plans that people have. And so the WFE is literally just as fast as we can go as an industry. That's kind of what we're seeing when we talk to our customers and we talk to their plans for build-out in '27. And the reason '26 isn't bigger is because they can't build enough fast enough. And take the extreme of this because he said it on his call, if you say what Elon Musk was saying about SpaceX and the demand and why he talked about building Parapat because it was going to be a massive shortage of semiconductor capacity through 2030. So nothing about the short term, and I think that's -- that confuses a lot of people. What is talked about short term in terms of the hyperscaler CapEx and the buffer between that and what's happening in terms of the ability of the industry to bring on all that capacity. So I understand people are trying to correlate it, but there's a massive assumption in there that this thing is even close to filling that capacity and it's not. Operator: We'll take our last question from Chris Caso with Wolfe Search. Christopher Caso: Just as a follow-on to the prior question. And it does certainly sound like demand is well ahead of the industry's ability of supply. Does that cap the amount that [indiscernible] ship to customers and that the customers have clean room space to be able to put tools right now. I mean you talked about perhaps the opportunity to increase the view as the year goes on, but are we sort of towards the upper limits of what can be supplied in '26 and we're just going to have to supply it in '27, '28? . Richard Wallace: Well, yes, I think so. And the way to think about this, and I think this is we are an ecosystem. So it kind of takes all the parts of the ecosystem to make it happen. And so when you look at what are the constraints or one of the limits, I know when we talk in the AI world about power constraints or other constraints. But in the semiconductor industry, the first constraint is how many fabs do you have? Like how many shelves can you fill? And then you got to have enough equipment from all the different suppliers to be able to make functioning line. So in many ways, this is why we talk about the overall investment in the industry, you kind of have to think about it in aggregate because let's say, we could infinitely ship. -- there'd be nowhere to send it because you'd be sending it in a fab that haven't been built yet. So that's why we look very closely at what the overall industry is doing, what our customers are doing. And that's why when we say you can get a marginal increase in 2026 to the numbers we're talking about, you can't go from 140 to 200 in 2026. And there's only so much you can add in 2027 and those fabs have to be built now. So when our customers say, it's just not easy, it's because it takes a long time to get through even in places where they build fabs very quickly takes a long time to build them and then to get the equipment and the fastest in the world, places to build fabs have big plans for expansion next year, and they're still going to be short by the end of next year. And so that's how the whole system is working. So when we give our guidance for the year, it's -- yes, it's what we can do, but it's also collectively what we as an industry can do. Does that make sense? Christopher Caso: Yes, it does. That's clear. So the last question, I have something more mundane on gross margins for the year. And I think you indicated you're kind of sticking with a view of 62% for the year. Can you talk about the pluses and minus on that? I know you had some mix headwinds earlier, and there's some cost increases. So what should we be watching for on the gross margins this year? Richard Wallace: Pretty consistent guidance with what we had last quarter, I would say the memory pricing environment is on the margin worse. I thought that the headwind was 75 to 100 basis points. I think it's 100 basis points now. And part of that has been the relative pricing on DDR4 versus DDR5, where they're generally, and it depends on what type of memory level. But but more or less the same prices. You still have tariff dynamics. I would expect as we move through the year, the tariff headwind that we have at KLA will become less, but it's still meaningful, I'll call it. I talked about 50 to 100 basis points of overall impact. I said we're operating at the middle of the higher end of that range today, but would expect that to come down to the lower end of the range as we go through the year with some of the things we're doing here operationally. Overall mix generally is pretty consistent with how we thought about it. So like anything else, there's always puts and takes. But in general, we said 62%, plus or minus 50 basis points, and we still feel that that's an appropriate way to think about the company at the revenue guidance that we provided for the year. Unknown Executive: Thank you, Chris, and thank you, everybody, for tuning in. We appreciate your support. Apologies for those that weren't able to get a question on this call. We will catch up [indiscernible]. And with that, I'll turn the call back to the operator to provide any closing remarks. Operator: Thank you. This concludes the KLA Corporation March Quarter 2026 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.
Operator: Good afternoon, and welcome to the MGM Resorts International First Quarter 2026 Earnings Conference Call. Joining the call from the company today are Bill Hornbuckle, Chief Executive Officer and President; Ayesha Molino, Chief Operating Officer; Jonathan Halkyard, Chief Financial Officer; Gary Fritz, Chief Officer and President of MGM Digital; Kenneth Feng, Chief Executive Officer of MGM China Holdings; and Howard Wang, Vice President, Investor Relations. [Operator Instructions] Please note, this conference is being recorded. Now I'd like to turn the conference over to Howard Wang. Howard Wang: Thanks, Rocco. Welcome to the MGM Resorts International First Quarter 2026 Earnings Call. This call is being broadcast live on the Internet at investors.mgmresorts.com, and we have also furnished our press release on Form 8-K to the SEC. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we'll also discuss non-GAAP financial measures when talking about our performance. You can find the reconciliation to GAAP financial measures in our press release and investor presentation, which are available on our website. Finally, this presentation is being recorded. I'll now turn it over to Bill Hornbuckle. William Hornbuckle: Thank you, Howard, and thanks again to all of our employees. Their continued dedication and execution drove another gold plus NPS record-breaking quarter, reinforcing the strength and sustainability of our business and our ability to deliver unique and lasting experiences that people find incredibly exciting. MGM Resorts once again delivered consolidated growth in the first quarter, driven by strength in digital and China. Net revenue for Las Vegas in Q1 grew on a year-over-year basis for the first time in over a year despite an exceptionally strong leisure comparative. We achieved this with solid group and convention business in the first quarter, and we expect this to carry into the second quarter. The first quarter is simply our seasonally strong group and convention quarter of the year, and we experienced robust business related to both citywide conventions like CES and ConAg as well as in-house programs at Mandalay and MGM Grand. We achieved record 1Q convention ADRs and catering and banquet revenue and drove increased production from our strategic relationship with Marriott. Importantly, we expect this momentum to continue in the second quarter with convention room night mix to up 2 percentage points year-over-year to 20%. As the city evolves, we are making sure we are leaders in innovation. The MGM Gaming streaming lounge, which opened at Park MGM and received all regulatory approvals during the quarter is another exciting step. We developed a premium creator environment where gaming stores can come to life with plans to integrate celebrities into both the content and the broader guest experience. Another theme in our Las Vegas business has been our value. MGM has always offered opportunities for our guests seeking value experiences. This quarter, we challenged ourselves to have been more creative and launch an all-inclusive experience at bundles hotel, dining, entertainment and all parking and resort fees. Guests can now choose to stay at Luxor or Excalibur with access to a wide range of dining options across 5 MGM properties. The feedback we're getting from guests is very positive and roughly 1/3 of the bookings are from first-time Las Vegas visitors. The program enhances our ability to convey our value props in innovative ways that resonate with our guests. Ultimately, Las Vegas' true value lies in delivering iconic one-of-a-kind experiences. We look forward to welcoming the Super Bowl back at Allegiant Stadium in 2029, particularly given our proximity to the venue, which drove outsized benefits during the '24 Super Bowl. In the near term, Allegiant will host a College Football Playoff National Championship in 2027 and the Final 4 in 2028. That same year, the Ace are set to begin their inaugural season in Las Vegas. During the quarter, Las Vegas has also been named a Target City for the NBA expansion team, and we are actively engaged in discussions with the league and respective team owners. If successful, no U.S. City will have assembled all 4 major professional sports leagues faster than Las Vegas. The ability to attract professional sports franchises and tentpole events exemplifies Las Vegas structural resilience. The city consistently advances through challenging operating environments by evolving alongside customer demand. Today's consumers are decisively gravitating towards live events and experiential travel in Las Vegas and MGM is capturing that momentum. Las Vegas's ability to adapt its mix, its pricing and entertainment continues to differentiate the market and reinforce its resilience through economic cycles. Our regional operations have maintained steady market share, strong casino volumes reported solid results for the quarter, reflecting the premium positioning of these properties and their ability to drive consistent, reliable performance. At MGM China, we grew net revenues by 9%, while segment adjusted EBITDA was impacted by our new brand fee. Jonathan will remind you of those details in his section. Our market share for the quarter was 15.4%. And while February was negatively impacted by hold, we concluded the quarter in the month of March with a share of 17.3%, which has held steady into April. We continue to invest in our competitive advantages in premium mass to support future growth and the suite conversion and renovated premium gaming areas at MGM Cotai were recently completed ahead of the upcoming Golden Week holiday. The next capital projects will involve renovating the suite product in Macau if we want to ensure our offerings stay fresh and ahead of market growth. While we will continue with targeted capital spending, we believe our operating expenses are appropriately sized and scaled to match our growth profile and our margins are sustainable. At BetMGM North America venture, Adam and Gary reported first quarter results a few weeks ago. We continue to prioritize the iGaming segment where underlying fundamentals are healthy and growing, and we are approaching $2 billion in annual revenue from operators. We are moderating spend in sports to focus on returns, while our online sports business also continues to grow, and we remain focused on driving profitable growth and margin. Our core strengths remain unchanged: iGaming, multiproduct states, our omnichannel presence in Nevada and our focus on premium mass sports players. We remain disciplined and focused on executing our strategy in areas where we have a competitive advantage. MGM Digital reported another quarter of double-digit revenue growth as it continues to make progress towards profitability. Sweden and the U.K. continue to drive our LeoVegas B2C business, where the top line grew over 30%. These are also the next 2 stops to our sportsbook integration, further validation of our acquisition of Tipico's U.S. sportsbook technology. We're continuing to invest in Brazil and plan to leverage our global marketing assets and in-house sportsbook capabilities on the significant World Cup opportunity a little later this year. And in Japan, over 40% of the foundation piles have been installed or completed. The first concrete floor has been poured, and the first structural steel has been erected. I recently visited and approved our markup rooms, which I found exceptional, and we are opportunistic as ever, keeping in mind we expect to be the sole licensing and operator in Japan upon opening. The population and visitation metrics are massive, as we've discussed, Japan has over 120 million residents and hosts over 40 million international visitors annually. MGM Osaka remains on time and on budget for 2030 opening. For the first quarter of '26 complete, our optimism across all various business segments continues to hold firm, especially in Las Vegas. We remain on track for growth this year. With that, I'll now hand it over to Jonathan to provide additional details on our performance this quarter. Jonathan Halkyard: Thanks, Bill, and I'll certainly join you in thanking all of our employees for their continued hard work and dedication this quarter. We really value our daily contributions and appreciate everything you support our company and our guests. In Las Vegas, as Bill mentioned, we were able to grow net revenues despite the strong leisure comparison in the prior year. Segment adjusted EBITDA decreased by $62 million which can be explained by just 2 items: an increase in self-insurance expense of $30 million -- of $37 million and a decrease in business interruption proceeds of $31 million versus last year. Now that we're into the second quarter, comparisons in our leisure offerings should become more normalized, especially towards the latter part of the period. We're encouraged by the incremental momentum driven by our all-inclusive program as well as the convention strength we have on the books. Our regional operation proved resilient in the first quarter, exhibiting top line growth of 2%. And similar to the Las Vegas story, segment adjusted EBITDA decreased by $20 million, in part due to an increase in self-insurance expense of $9 million and a decrease in business interruption proceeds of $10 million versus last year. Borgata and National Harbor also faced some weather-related disruptions, but we ended March on a very solid footing, and those trends continued into April. We closed on the sale of the Northfield Park operations earlier this month. So just a reminder for your models, Northfield Park will no longer be in our regional operations going forward. As usual, though, we'll provide same-store results for easy comparison. Before diving further into our other business segments, I do want to briefly address this external factor that continues to pressure operating costs across our industry and drove a meaningful portion of the increase in our self-insurance expenses this quarter, and that's the growing prevalence of frivolous litigation often backed by large pools of capital, including private equity. As we noted earlier, we were negatively impacted by $37 million in Las Vegas and $9 million across our regional operations this quarter. While we support a fair and balanced legal system, claims that lack merit, they divert capital management attention and resources away from investments to benefit employees, guests and our communities. We're focused on what we can control, which is enforcing high standards and process and the other operational elements of our business with the utmost care. Now let's move on to MGM China, which exhibited solid performance in the first quarter. The decrease in segment adjusted EBITDAR of $13 million was primarily driven by the new branding agreement through which we received $23 million more in fees than in the prior year period. As a reminder, the brand fee increased from 1.75% to 3.5% of revenue starting this year. While this impacts segment adjusted EBITDAR, it results in higher cash flow for MGM Resorts. Moving to digital. Our BetMGM North America ventures at first quarter results reflected continued successful execution of refined player management strategy, delivering 6% growth in net revenue from operations and 11% growth in adjusted EBITDA. This was also the first quarter where we earned branding fees from BetMGM, which amounted to about $1.5 million. Separately, no quarterly distributions were made in the first quarter given the seasonality of cash outlays, which included marketing investments around NFL postseason and March Madness as well as accrued annual compensation payouts. MGM Digital drove growth in net revenues of 43% in the first quarter and reported segment adjusted EBITDA losses of $26 million. We are continuing to migrate our sports books to our in-house platform such as BetMGM Sweden, and are investing in the opportunities presented by the upcoming World Cup in both Europe and Brazil. Specific to Brazil, we continue to have confidence in the total addressable market. and we may drive investment beyond our original guidance, reflecting regulatory and tax developments as well as competitive intensity as we pursue our long-term share objectives, and we'll keep you posted as the year progresses. In Japan, we are expecting our funding for the year to be approximately $200 million to $225 million after investing approximately $140 million in the first quarter. Much of it will be addressed with proceeds from the yen-denominated credit facility we closed last October. So in essence, it's prefunded for this year. For the quarter, we bought back about 2.5 million shares for $90 million. Over the last 5 years, we've decreased our share count by almost 50%. As a reminder, and I can't help myself -- we sold Northfield Park for a 6.6x trailing EBITDA. That's a multiple significantly higher than what is implied by our current share price. With the transaction now closed and the proceeds received, we have increased flexibility to redeploy capital, including reaccelerating share repurchases at our current valuation levels. I'll turn it back to Bill. William Hornbuckle: Thanks, Jonathan. Before we go to questions, maybe I'd like to reiterate just a couple of things that were said. Obviously, our diversification strategy is proving successful. Consolidated revenues, again, should grow over 4% and Vegas for the first time in 6 quarters also showed growth at the top line. And as I think about the balance of the year, our group and convention business looks strong. Obviously, we have the benefit now of the MGM rooms for the entire year. We have easier leisure comparatives coming up. And the high end continues to demonstrate itself not only in gaming, but in non-gaming spend event-driven to be sure and live entertainment to be sure it absolutely shows up and shows up often. And regionally, despite headwinds and the ones that were mentioned in the overall economy, we've seen a solid performance, and we expect to continue to see through the balance of the summer. MGM Macau continues to hold on to a major market share. We're very proud of what's been created and what they're doing there. And we do believe costs and our margins are sustainable now throughout here. And Japan is off to a great start, albeit early, but we're excited by our progress. We're excited about the design and ultimately, the market that it will provide. And then BetMGM continues to track itself along and you've seen additional and tremendous growth in overall digital business for rest of world. So with that, Howard, I will turn it open to questions. Operator: [Operator Instructions] Today's first question comes from Dave Katz at Jefferies. David Katz: A lot of information here, and I took note of the all-inclusive offerings that you decided to introduce, I think, earlier in the quarter. Can you just talk about what kind of response you're getting to that? Is that a strategy that we could see you deploy in other properties or other areas of the portfolio? Ayesha Molino: Sure, David. This is Ayesha Molino. We've been really pleased with the response to the all-inclusive package. We've seen really steady momentum since we first deployed that and the customer response has been very good. As Bill noted in his remarks, we're also seeing a significant portion of those customers as net new customers, which we believe is a positive trend line. We're going to continue to evaluate it, understand customer response, understand some whether there are new strategies we could deploy alongside it and whether it needs to be scaled or should be scaled to other properties. So it's going to be -- we're going to continue to watch, continue to refine over time, but we have been pleased with the reaction to date. David Katz: Understood. And if I can just as my follow-up, talk briefly about Macau. Having been over there, the operations and the commentary seem relatively stable. But it's always been a market that tends to have surprises around every corner now and again. How are you looking out at the rest of the year in general terms or qualitative terms? And how do you feel about sort of how that market rolls through the rest of this year? And that's it for me. William Hornbuckle: Thanks, David. I'll kick it off and then Kenny turn it over to you. Look, I think we feel really good about the balance of the year. we brought on many things last year in terms of capital enhancements and just the overall product, and we're excited by that. We've got some more to go. So we're adding some more suites, which will be beneficial. I think everybody understands we're still undersuited, and that will be beneficial. It's always difficult to say Macau is stable, but I feel good about it. I feel very good about our market position and what we're doing and how we're doing it. And so Kenny, I don't know if you want to add some more color there. Xiaofeng Feng: Thank you, Bill. This is Kenny from Macau. As we all know, McCall has always been competitive from day 1. Macau market is a premium one. It's not simply about supply. It's not like a purely like a quantity play. It's more about quality. So it's about understanding to serve the purpose of the target guests. Here at MGM China, first, we are very focusing on the products and services. We want to make sure they are meaningful, effective and targeted to the premium customers. As Bill just mentioned, we opened like 63 at MGM Cotai side. You never source such products in Greater China area. They are unique. They are different. They are refreshing. They are cozy. And we opened like a yearly for a week, our customers they love it. And also, we just opened like 40,000 square feet of like premium gaming space at Cotai area, we have about like 40 tables or 15 private rooms. This is also new the design, the construction of services there. I can see a lot of customers that are better playing even right now. Secondly, it's the products, and we will continue to refresh our products. Like, for example, we are in the designing stage, about 100 suites at the Macau, MGM Macau side. and also some kind of gaming spaces, F&B outlets. We want to spend money wisely to really to reflect the purpose to serve the purpose of the customers, why they are in Macau. It's not a typical like hospitality products or resort products. they are serving their targeted premium guests, premium customers. Secondly, I want to see like the MGM has developed a pretty unique corporate culture here that encourage from the senior management from myself to all other senior management members for team members to react fast effectively to make changes in making changes in developing products and services which evolving with fast-changing customer tastes. So actually, reinvestment CapEx, products, services, they are owning one package. It is a package about how we take care of customers, I think that's the key for us to continue to grow for the rest of this year and next year. Operator: And our next question today comes from Dan Politzer with JPMorgan. Daniel Politzer: Bill or Jonathan whoever wants to take it. I was hoping to talk a little bit about the strip and health of the customer base there. It seems like you're talking about this evolving health. Can you maybe talk about the first quarter kind of progressed and how you kind of saw that resonate in your customer base? And then expectations for how the second quarter should evolve given your competitor last night had some comments on April? William Hornbuckle: Yes. I'll start it and Jonathan could kick it off. Look, we had -- interestingly, in the quarter, we had an amazing January last year. So we had a tough kickoff in mostly in gaming. But as the quarter progressed, and obviously, I think you heard yesterday, you heard from us, ConAg was tremendous. And so as the quarter progressed, each month got successively better. March being obviously for us, the best month yet. The market has changed. Consumer has changed -- obviously, we're focused on -- luckily for us, we have a lot of luxury product and brand brands that can cater to that, and it's going to continue. Despite many headwinds, whether they be air, gas, et cetera, we have yet to see a slowdown. That doesn't mean over summer, that can't happen because booking cycles still remains short. But we feel resilient about it. We feel good about it. We get air care, air traffic coming into the community. Half of the traffic that was lost when -- who is it that went bankrupt? Spirit went bankrupt, has been picked up. We see a couple of additional international flights coming into the market. That's a little early to tell what gas will mean to all of it. But to date, we feel good about it. Our April is fine. We just had a very successful Baccarat Tournament come through here last weekend. May will be a good month. And so we like the second quarter, but it's early. It's just the end of April. And so time to tell on these short-term bookings and where leisure will ultimately go. Daniel Politzer: Got it. And then just on that self-insurance, $37 million, I think that you guys had a $13 million charge last year, maybe in the third quarter. this. So is this something just to think about more commonly that this could be impacting results and bearing in mind it does sound onetime in nature? Just any better clarity or a way to think about that going forward? Jonathan Halkyard: Sure, Dan. It's Jonathan. I mean we certainly hope not. This is something that we at historically once a year. We, of course, we expense amount every month, but we do a bit of a true-up once a year after that experience, and you remember it correctly, we decided to do it twice this year. And the impact of that examination is this additional accrual that we took across our businesses and the first quarter. So we -- of course, we expect that, that's adequate now. But on the other hand, it has been an increase in cost in our business. It's the reason I wanted to call it out. Clearly, but for that charge, our results this quarter would have been. I think we'd all agree we've been much better on an operating basis, but we certainly hope that, that's not going to be anything that recurs and in fact, it is an unusual onetime item. Operator: And our next question is from Steve Wieczynski with Stifel. Steven Wieczynski: So Bill, I want to stay with Vegas here for a little bit. Obviously, you noted you feel better about that value customer. It seems like the customer base is now somewhat stable. So I guess the question is based on what you're seeing right now from a forward demand perspective, coupled with that healthy group and convention business, do you think it's going to be possible to grow Vegas EBITDA this year? I mean, you obviously kind of talked about the second quarter and you feel pretty good there. But the first quarter obviously didn't put you guys off to the best start. William Hornbuckle: Yes. Thanks, Steve, for the question. Look, the one comment you did make, I want to be clear about the leisure customer at the lower end of sets -- for us, obviously, it's Luxor or Excalibur. Midweek is still a challenge. Now the good news is it's like those 2 properties represent about 6% of our overall EBITDA. On the weekends, we are fine, the balance of the portfolio is performing from fine to good. And to answer the core question, we do see growth through the balance of the year. it's going to be tempered modestly, and it's got to be tempered with -- it's a crazy world out there right now. But based on what we see, particularly in advanced bookings, et cetera, we still remain optimistic that we will have growth by year-end. Steven Wieczynski: Okay. Got you. And then second question, we heard last night from Caesars, and obviously, you probably listened to that call that they've been starting to work a little bit more aggressively with the LVCVA to help kind of find and identify bigger events or corporations to bring into the Vegas market. And wondering if you could maybe expand on that a little bit more? And maybe help us understand if you're involved in that process and potentially and then what the potential upside could eventually be there? William Hornbuckle: Well, it's 40,000 feet. Yes, we're involved. Gary Fritz, who's sitting next to me is on the board. So we have been and we'll continue to be active Look, I think you know this about our business. Remembering we have over 4 million square feet of our own convention group space. We're big into tech. That sector continues to grow and it's looking exciting. We've got some really good groups lined up for the summer. We've got Google coming back and a few other, Cisco is coming in with a massive group this summer. So the question becomes because ConAg rotates, are there other groups in the world like ConAg, and the answer is yes, there are. And yes, we have been cooperative and will go on with them from time to time field trips to go pursue some of this stuff. I think you heard yesterday, it is true that some of it is "political" in that these groups mean a lot for each one of these communities that they're currently in, whether it's San Francisco or Dallas, you picked the community. And so they're not as easy just to pick up value proposition. There's generally more to it than that. But no, we are active. Now we completely agree with the sentiment that was laid out yesterday, and we'll continue to pursue it. Operator: Our next question today comes from Brandt Montour with Barclays. Brandt Montour: So I wanted to key off of that question earlier on about the all-inclusive effort and encouraging commentary around first-time visitors to Las Vegas. You guys obviously have a decade of data in terms of first-time visitors to Las Vegas. Maybe you could kind of open the hood and share some metrics on sort of what a typical first-time Vegas visitor kind of behaves like what the retention is like for a second trip, what you kind of can assume for flow-through and profitability for that guest versus the corporate average? William Hornbuckle: Brandt, I think the core thing to remember about first-time visitors is I can remember in Las Vegas where visitor profile would indicate that 20% of the visitors were first time. And I think over recent years, that number has been in the mid- to low teens, it drops below -- it dropped to 8% or 9% last year. I think all of the noise around Canada, which were as a place -- many of them came from is real. Our general Canadian business is down 30% to 40%. Obviously, we hope to improve that. We've had a couple of missions up into Canada a convention center and ourselves to help that. I think we have one plan later this summer that I'm actually going on. In terms of behavior, international has always been a big play there. Mexico opened up a few years ago meaningfully with air traffic. And it's interesting. The majority of first-time visitors actually many of them come through conventions and they come because they have to, they're told to. And then they learn about this place and they go, this looks interesting and fun. I want to come back. so they come back with family, friends, et cetera. And so I think the only real differentiator for now is that internationally is hurting that number to see it grow again through this package has been great because it's important, obviously, for the future growth of Las Vegas as we continue down the road here. I don't know, Ayesha, if you want to add anything. Ayesha Molino: I mean in terms of customer behavior, we're certainly seeing the customers they are engaging in all aspects of the business. And so we please see that response. And generally, I think in terms of what we're seeing from a flow-through perspective, we're happy with the results. And so no concerns there either. Brandt Montour: Great. Second question would be a follow-up on Macau. Looking at the first quarter, obviously, we're in a new structure with the management fee change and those margins, obviously, on that basis were below what you've talked about on this call in the past. Under the new structure and sort of considering the comment you made about March's exit rate for market share being a little bit better than in the first quarter. How should we kind of think about target margins for that segment under this new structure? Jonathan Halkyard: Yes. It's Jonathan. I'd certainly invite Kenny to comment as well. But even with this new structure, I mean the property, first of all, before the branding fee, we expect to be able to continue in the mid- to even high 20s in terms of its property level margin. And then reducing their EBITDA by the amount of the new fee would get you to the new going-forward margin. But I think we feel that safely in the mid-20s. Operator: And our next question today comes from John Decree of CBRE. John DeCree: I wanted to ask question or 2 about the digital business. Revenue growth in the quarter was really strong, a little bit more than we thought. I mean is that a comparison to the heavy marketing in Brazil last year? Was there something else in terms of revenue uplift? And then just my follow-up in there, how do we think about the kind of time line to profitability in that MGM digital business from here? Gary Fritz: It's Gary. Thanks for the question. The real growth engine on the top line, the digital business has actually been the Leo Vegas, the consumer business. So most of that concentrated in Europe with particular emphasis markets in the U.K. and Sweden. We've also had a lot of success launching the business in the Netherlands and expanding it there. Brazil helps, obviously, because it comps against very little revenue. But the core LeoVegas business and consumer business as I believe noted in the prepared remarks, is growing north of 30% year-over-year. So it's not all down to Brazil. In terms of the path to profitability, I believe we've indicated in the past that we would see the loss this year for the digital segment having relative to last year. We might see a little bit more investment this year than that, given some of the regulatory changes and tax changes in Brazil. but we're definitely anticipating the loss to materially narrow vis-a-vis last year, which then sets us up into '27 for close to a breakeven year, if not 100% getting there. Operator: Our next question today comes from Shaun Kelley at Bank of America. Shaun Kelley: For whoever wants to take it, Bill, I think you mentioned a bit earlier that you were still seeing a bit of midweek softness. But just wondering, you had called out a pretty large dynamic between your high and low properties. And I was just wondering if you could kind of update us on the trend line you're seeing there right now. Obviously, inclusive side or offer should help maybe narrow that gap as we get towards the summer. But in terms of what you're seeing right now and just trying to put into context the RevPAR performance for the company sort of relative to some of the market numbers we saw out there, which I think would have bridged a bit higher? William Hornbuckle: Yes. Shaun, thanks for the question. Ayesha should probably best suited to start this off, so go ahead. Ayesha Molino: Yes. Sure, John. With regard to the RevPAR question, I think that we look at it as in a couple of different ways. Overall, we think the fundamentals of the business are healthy from a RevPAR perspective. And from an ADR perspective as well as an occupancy perspective, particularly among the luxury portfolio, we're seeing real stability and growth in some segments, and all of that's been positive and all indications forward-looking remain good there as well. In terms of the lower end of the portfolio, I mean we discussed this in the last quarter as well. We had seen some softness really starting, as you know, in the second quarter -- towards the second quarter of last year, and that's been pretty consistent. We have been deploying strategies against it. As you know, with the all-inclusive as well as with overall cost control there, and I think that's been productive. We're continuing to watch closely as the summer unfolds in terms of what happens with that customer. But as Bill noted, we feel pretty good about the weekend in terms of the midweek. We're hoping to continue to see more stability as the year progresses. And certainly, I think there are pockets where we have evidence of that, whether that's convention group business continuing to stabilize, including those properties midweek. And then also with some of the programming in the South Strip Allegiant, we're seeing positive reaction that's positively impacting those properties as well. William Hornbuckle: Shaun, and remembering MGM, we've got about 54,000 more room nights in the bucket this year because obviously, they were offline. So just as clear math, that's going to, yes. . Shaun Kelley: Yes, fair point on that. And then as a follow-up, but probably a good segue off Allegiant, Bill you mentioned in the prepared remarks a little bit about the NBA, which is a pretty exciting development. It may be too early to speculate, but I think you have a lot of vested interest in making sure that, that ended up at one of your venues, particularly or potentially something like. So can you just talk to us about the strategy there for the city and MGM element to the extent you have a hand in possibly where either a purpose-built stadium ends up or if one of the venues that exist right now could be used for that? William Hornbuckle: Yes, Shaun, I appreciate the question. Fun question. I will start by saying I'm already under 3 NDAs. So the good news is the NBA has clearly earmarked Las Vegas and Seattle. We have had huge interest and obviously, whether T-Mobile becomes -- and Las Vegas becomes the ultimate side or not time to tell. Obviously, it will be up to the Board of Governors sometime next year. That said, we're excited by it, how could we not be. We've all seen the success in what it means to Las Vegas with the sports teams come. T-Mobile is part of that conversation, whether it's short-term or long-term, all roads lead to it for now because the league has expressed interest to host a team as early as 2028. And so we're intimately involved in many of those conversations. And I hope, I believe if the answer is -- well, yes, or no. I think we'll know hopefully by this time next year. A process is beginning to start. We've been asked how we would position T-Mobile for any and all bidders, and we're beginning to do that with our partner at AEG and Bill Foley. But we're open to all comers and there has been extensive interest in Las Vegas. And so it's exciting. It's very exciting, actually. Operator: And our next question today comes from Barry Jonas at Truist. Barry Jonas: I'm wondering if the current Iran conflict has impacted your UAE nongaming project and its time line? And then I guess do you believe there's still a chance you could get gaming there or in Abu Dhabi? William Hornbuckle: Barry, let me hand -- it hasn't impacted the ultimate timing, i.e., construction. For now, a China state who is building the project continues, and the project remains on schedule. We have not heard yet nor do I think we will, given the environment for a while whether gaming will be prevented or not, reminding the balance of the group crew who may not be as familiar with that project. They're allowing us to hold 0.25 million square feet of space for a potential casino on one of the podium floors there. And so it could be very exciting. For us, that is our key focus, not Abu Dhabi, to answer that part of the question. Right now, their business is struggling. The tourism business in that particular neck of the world is down to like or take. I'd say occupancies are down to that level. So it will take some recovery time no matter what happens here over the next couple of months. But long term, we remain very excited. The project is fascinating and fabulous. And so we're going to be all over to continue to push both the agenda, the initiative and the opening. Barry Jonas: Great. And then just thinking on international development for Japan, I guess they've reopened the process for additional licenses in the country. Curious how you think that potentially impacts your 2030 project? And then I guess as a follow-up with Iran, any impact to construction costs that you're seeing? William Hornbuckle: And on the second question, no, not yet, although like everybody in the world with respect to cost of inflation and cost of goods, a lot of it -- a lot of our concrete and steel has been contracted. So that's the good news. But there's obviously a long way to go. We still have 4 years to go there. What was the first part of the question? First part of the question? Barry Jonas: Just about additional licenses now, the reopening. William Hornbuckle: Japan, I'm sorry. Yes. They have started the process. They put some dates on I think it runs through next spring. Time to tell, given the scale and scope and what we all went through, there's only 2 or 3 markets that could actually accommodate something that I think that would make sense and be successful, whether there's the political will at the end of the day to do that or not time to tell. We've all witnessed first time around that there was not. And then knowing Japan as well as we do, I'll remind everybody, we're in our 17th year of this. So I think it would impact us too quickly no matter what happens. And frankly, if they were able to get better terms and/or conditions that would only work to our betterment. And with 120 million people to share, I'm not overly concerned to the contrary. Operator: And our next question comes from Stephen Grambling at Morgan Stanley. Stephen Grambling: Can you hear me? William Hornbuckle: Absolutely, Stephen. . Stephen Grambling: So Jonathan, you mentioned the multiple for Northfield versus the current trading was higher than where the base line is. I guess does that make you reconsider monetizing other assets as a way to surface value? Are there things that you see out there that could ultimately end up being sold or rethought as a way again of surfacing value? Jonathan Halkyard: It really has is a way of hopefully monetizing the price of our shares. We have -- although it's been for a few years now, I would say we've been fairly active in doing just that, starting with the sale of the Mirage at a nice double-digit multiple the sale of our Gold Strike property in Tunica at the same double-digit multiple. And now North Park. I mean, a slot-only facility with no hotel and while performing nicely, I mean, a pretty good multiple and well in excess of what our enterprise trades at. We're guided in our dispositions more by our strategies and market positions than we are necessarily by the by the level at which these properties could be sold, and that was the case with all 3 of those transactions that I mentioned they're all done really for strategic reasons. I just think they do. These valuations just highlight what we think is a real disconnect with the enterprise valuation. So in short, no, it doesn't really cause us to say, hey, what other properties might we be able to sell because that's usually informed by a strategic approach. Stephen Grambling: Fair enough. And then an unrelated question just on Macau. It looked like the mass market hold was better than kind of the historical trend. Is there something structurally changing there as we think about either the player type or the bet types or even the technology being implemented that could make that sustainable? William Hornbuckle: Well, I'll make one comment and let Kenny comment. There's a lot of prop bets now. I mean, I think some back tables have made prop bets. And so that has changed the game, the nature of the game and frankly, the odds of the game. Ken, I don't know if you want to comment a little further? Xiaofeng Feng: Yes. Thanks, Bill. We are seeing like increasing adoption of some side bets on gaming floors. As you know, like a side bet in general, carry a house advantage higher than the traditional games. We are rolling out some more side bets literally this week at MGM following some recent approval by the ICG. But the history of side being in Macau is still relatively short. These games only got popular after pandemic. Along with volatility in a premium dream market, we do not think it is the right time to adjust the mass -- the theoretical mass hold we will keep monitoring the adoption of the games, the player and the GGR trends, et cetera. Operator: And our next question today comes from Chad Beynon with Macquarie. Chad Beynon: Wondering if you can talk about the international business in the first quarter in Las Vegas, either around Chinese New Year or Super Bowl as those comps have been fairly easy over the past couple of years. We're not anywhere near back to where the peaks were. But wondering if you're starting to see some nice improvement there that could carry forward throughout '26? William Hornbuckle: Chad, thanks for the question. Look, I would say, yes, to a limited degree. I mean, obviously, the very nature of what's happened with our core Far East business in China and restriction of capital leaving that marketplace has not been eradicated, I guess, or change back to where it was. We do see Mexico more often than ever. I mentioned earlier in my comments, a tremendous backroom at this -- last weekend, this April. And so we -- and it was, as always, full of international land players. The good news is despite the overall traffic decline international, as I was mentioning earlier, mostly driven by Canada. When it comes to rated play and particularly premium-rated play, it's very healthy, and that hasn't changed. And so -- and I don't think there's anything out there other than an outright or that would change that anytime soon. Chad Beynon: Okay. And then on the LeoVegas or the digital business, there's been some contraction in public multiples on affiliate companies and sports data companies and even so on the B2C given regulatory change. What's your appetite in terms of improving or growing the ecosystem from a tech standpoint to just grow that business at a time when multiples might be attractive? Gary Fritz: Yes. Listen, I think we feel confident about the assets that we have under the hood right now. We were very deliberate in assembling the portfolio of assets that we did. We didn't buy sort of the most obvious shiny new thing. We were very deliberate turned over a lot of rocks and assembled the portfolio that we did. I think we've mentioned before, we feel we're largely fully deployed in terms of capital commitment to the International and MGM Digital business. can never say never, but I don't see any glaring holes in our portfolio at the moment. So it would take something extraordinary probably to see us deploy additional capital. Operator: And our final question today comes from Ben Chaiken at Mizuho. Benjamin Chaiken: I've got one kind of 2-parter. If I recall, maybe clarify, I think there was a small fine in the prior year 1Q. I don't know if that sticks out or if it kind of just gets caught in the wash -- and then maybe you could help us think about 2Q last year in the correct base. In Las Vegas, you reported around $710 million, $711 million, but I think you flagged $60 million of headwinds, $20 million from grand, $20 million from some event spend and $20 million from hold, I believe, I guess if you think about the business today, do those 3 buckets still kind of make sense to you? Or have things changed? Jonathan Halkyard: You're correct. There was a small fine in the first quarter of 2025 that we incurred that affected our results there. And so that's one of those things we have those types of not fines, but we have those types of relatively small impacts one way or another in our results pretty much every quarter. Second quarter last year, you're correct that we are underway with the renovation at the MGM Grand during the quarter that affected us for pretty much all of the year. We did have, I think, kind of a negative impact on hold during the second quarter last year. That was roughly $20 million. And so I guess those are probably the 2 things that I would call out that when I look at this quarter, we certainly have the benefit of the MGM Grand in those rooms back. And then you never know how old is going to go. But last year, in the second quarter, we were impacted negatively by hold. Benjamin Chaiken: And then, I guess, the event, the $20 million event, is that just kind of like maybe forget that one? Or how are you thinking about it now? Jonathan Halkyard: Well not forget about it, but that was a VIP event that we had. And part of that was also reflected in the hold results that we had during the quarter. But again, we do VIP marketing events in our business, whether it's Chinese New Year, we just had actually the same VIP marketing event this past weekend, which is it's costly, but we think it's really important for our customers and for that segment of the business. So that particular event we've had last year and we had again this year in the quarter. William Hornbuckle: And did well. And did well with it. Operator: Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Bill Hornbuckle for any closing remarks. William Hornbuckle: Thank you, operator, and thank you all for listening in. I hope there's nothing we've shown that we're resilient that this market is resilient, that people -- and this weekend is another good example. I think we have Morgan Wallen here at Allegiant. People are still excited by what we do. And despite all the noise in the world, and we all know there's a lot, we're pleased where we are and we're excited for the future. So thank you all. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Sprouts Farmers Market First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Susannah Livingston. Please go ahead. Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2026 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our first quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings, in the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack. Jack Sinclair: Thanks, Susannah, and good afternoon, everyone. Before I dive in, I want to start by thanking our team for their disciplined execution and continued focus throughout the quarter. The first quarter played out largely as we expected. We continue to work through tough comparisons and a cautious consumer backdrop. Our recent new store openings are performing well and we continue to be trusted partners for innovative product launches. Progress in our self-distribution of meat has been encouraging and is nearly complete. In addition, we continue to strengthen our talent across the organization. Our purpose is clear. We help people live and eat better. Our immediate 2026 priorities are to strengthen differentiation through forging and innovation to reinforce our great in-store experience, to accelerate customer engagement through loyalty and personalization, to build an advantaged supply chain, to expand access to healthy food through new store growth, and to take targeted actions to strengthen value, all supported by our investment in our talent and technology. This quarter, we executed with discipline, balancing early loyalty investment and targeted value actions with cost control, while continuing to advance the capabilities we need to support our long-term growth. I want to thank our team for their focus across the organization. With strong execution and easing comparisons, we're expecting sequential improvement in our business as we move through 2026. For now, I'll hand it to Curtis to review our first quarter financial results as well as our updated 2026 outlook. Curtis? Curtis Valentine: Thanks, Jack, and good afternoon, everyone. In the first quarter, total sales were $2.3 billion, up $93 million or 4% compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 1.7% decline in comparable store sales. Innovation is a differentiator for Sprouts and continues to drive our sales. E-commerce sales grew 10% and represented approximately 16% of total quarterly sales. Sprouts brand also continued to perform well, growing faster than the rest of the business and representing more than 26% of total sales. During the quarter, we maintained discipline around margins and returns. Our first quarter gross margin was 39.4%, a decrease of 20 basis points compared to the same period last year. This primarily reflects loyalty investment consistent with our plan and unfavorable shrink performance. These headwinds were partially offset by benefits from self-distribution, which is performing as expected. We've taken initial steps to improve affordability for our target customers. We have made select price -- selective price adjustments on the most relevant items to our customers' baskets alongside a more focused promotional plan. We believe our P&L and guidance provide flexibility to support these actions and our customers' needs. SG&A for the quarter totaled $659 million, an increase of $36 million and 42 basis points of deleverage compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales. We remain focused on cost discipline while funding key growth and customer initiatives for the near and longer term. Depreciation and amortization, excluding depreciation included in the cost of sales was $42 million. For the first quarter, our earnings before interest and taxes were $215 million. Interest income was approximately $129,000 and our effective tax rate was 24%. Net income was $164 million and diluted earnings per share were $1.71, a decrease of 6% compared to the same period last year. On unit growth, we opened 6 new stores, ending the quarter with 483 stores across 25 states, including our entry into New York. Our strong and healthy balance sheet continues to provide flexibility. For the first quarter, we generated $235 million in operating cash flow, which enabled self-funding of our investments in capital expenditures of $98 million, net of landlord reimbursement. We also returned $140 million to our shareholders by repurchasing 1.9 million shares and have $696 million remaining under our $1 billion share repurchase authorization. We ended the first quarter with $252 million in cash and cash equivalents and $22 million of outstanding letters of credit. Turning to our outlook. We continue to lap some exceptional numbers from last year. We expect year-on-year comparisons to improve in the back half as trends ease. We also believe our initiatives will build as the year progresses. As a reminder, 2026 will be a 53-week year with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we are maintaining our outlook for total sales growth between 4.5% to 6.5% and comp sales between negative 1% to positive 1%. We still plan to open at least 40 new stores in 2026. Earnings before interest and taxes are expected to be between $675 million and $695 million. We expect our corporate tax rate to be approximately 25.5%, and we expect capital expenditures net of landlord reimbursements to be between $280 million and $310 million. We are increasing our earnings per share outlook to be between $5.32 and $5.48, assuming at least $300 million in share repurchases. For the second quarter, we expect comp sales to be in the range of negative 2% to 0% and earnings per share to be between $1.32 and $1.36. EBIT margin pressure is expected to be approximately 75 basis points due to fixed cost deleverage from lower comp sales, annualizing our loyalty points investment and the impact of higher fuel costs. We will continue to manage the business with a balanced approach, investing for the future where we see the best returns while remaining disciplined on execution and cost control for 2026 delivery. And with that, I'll turn it back to Jack. Jack Sinclair: Thanks, Curtis. As always, we are confident in our strategy and the long-term potential of Sprouts. Our focus is to stay true to our strategy and sharpen execution across our priorities, foraging and innovation, customer experience, supply chain and new store growth, supported by targeted investments in talent and technology. We strive to make healthy eating accessible and affordable. As health and wellness evolves, delivering differentiated attribute-driven products remains central to how we stand out and meet our customers' expectations. We're leaning into foraging, innovation and discovery to introduce new and distinctive items with clean ingredients. We've seen particular success with organics as they remain an important quality standard for our target customer and a meaningful growth driver for Sprouts. In the first quarter, more than 55% of produce sales were organic and over 34% of total sales came from organic products. We've already launched 1,500 new items this year, including brands like PRESS Coffee, Cold Brew Protein drink, Pendulum Probiotics for gut health and Proda, a protein soda. Innovation remains our strength, and we continue to attract a strong and healthy pipeline of emerging health and wellness brands that view Sprouts as the preferred launch partner. Sprouts brand continues to grow, expanding our differentiation across both fresh and nonperishable categories. Several of these innovations are resonating with customers, most notably our Regenerative Organic Certified Coffee, Seed Oil-free Hummus and Beef Tallow Kettle Chips. As we innovate, we remain focused on maintaining the right balance of everyday wellness essentials to curated premium wellness items, ensuring relevance, value and quality for our customers. As we go to market, you'll see us leaning more into our leadership in the health and wellness space. This is why customers seek us and continue to shop with us. As a result, we're sharpening our marketing to more clearly express what makes Sprouts unique, highlighting differentiated brands, founder stories and product innovation. The store experience remains another core differentiator, and our customers consistently cite it as a key driver for the love of Sprouts. That advantage starts with what we believe is the best store team in the industry. Our team members are essential to delivering our unique assortment and supporting customers with attribute-driven needs, combining expertise with authentic personal service. This year, stores are focused on simple genuine customer connections that make shopping easy and enjoyable while elevating daily execution, improving in-stocks, freshness and production efficiency. I want to thank our team for the work they do every day to make our customers feel welcome. Another theme core to the DNA of Sprouts is making healthy eating accessible and affordable. It always starts with our assortment. And we're working to bring healthy, delicious meal solutions such as wellness bowls under $10, $5 Sushi Wednesday and our $4.99 sandwiches. We will continue to innovate in the areas that highlight Sprouts' healthy attributes in everyday essentials, such as our recently launched 2 new yogurt parfaits with restaurant quality at a great value. We're also taking a targeted approach to price and promotion with a clear focus on returns. In the first quarter, we took initial price reductions on a small number of SKUs such as coffee and a handful of other essential items. As well, we continue to test additional pricing opportunities. We're reshaping our promotional plans to be more streamlined and targeted on driving greater value on the categories and items that matter most to our customers. We continue to invest in talent and technology to strengthen our operating model and build the capabilities needed to scale. This year, we're bringing new training and tools to our team to help them see opportunities in their business, to improve how we drive in-stocks and better manage shrink. We believe these investments support consistent execution in stores, enhance customer experience and position Sprouts for sustainable long-term growth. Our loyalty program continues to scale and is a strategic lever to deepen the customer engagement. We're seeing positive customer response to both broad-based and targeted offers, including loyalty multipliers. As participation grows, we're gaining richer insights into customer behavior and using these learnings to accelerate personalization. Building on first quarter insights, we're adding resources to increase the pace of testing and learning and investing in capabilities and tools needed to turn what works into scalable programs. Vendor participation and demand have been strong, reinforcing our ability to expand these programs over time. From a supply chain standpoint, our focus is on building an advantaged distribution channel that allows us to take more control of our fresh inventory. Our plan to open our new Northern California distribution center in the second quarter is on track and will complete our initial meat self-distribution journey. In addition to our structural changes, we're making targeted enhancements that improve service levels, inventory management and allow the organization to respond more quickly to shifts in demand. As I noted, new stores are off to a strong start, reinforcing our confidence in our long-term strategy. Already in 2026, we've opened stores in New York, Texas, Florida and Virginia to resounding success. We're seeing a great reaction as we enter new communities, and we're sharpening site selection as we scale, expanding access to healthy foods from sea to shining sea. Looking ahead, we have nearly 150 new stores approved and more than 105 executed leases in our pipeline. To wrap up, while the near-term backdrop remains challenging, we believe we are well positioned to navigate through it. We're encouraged by what we can already see in new stores, execution, supply chain and the team. With easing comparisons, discipline around cost management and the initiatives we have underway, we're confident in our strategy and our ability to drive long-term value. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions. Operator? Operator: [Operator Instructions] Our first question will come from the line of Rupesh Parikh from Oppenheimer. Rupesh Parikh: Just given some of the macro concerns out there, just curious just overall what you're seeing in terms of the healthier consumer. And then as you look at different segments, low, middle, high, just curious if you're seeing any changes there. Jack Sinclair: So yes, clearly, there's a lot going on in the macro environment, and we're watching it pretty closely. We're focusing in on what we can do in terms of making life as good as we can for all of our customers. Certainly, the macro environment suggests that our loyal customers have stuck very much to us going forward. The less engaged customers are feeling a little bit more pressure, and it could well be to do with the income levels, but I think it's a kind of general pattern across our customer base. As we look at the marketplace, it's a little bit uncertain what's going to happen going forward. And we are focusing on doubling down and being good at what we do. And I'm kind of encouraged by certain categories in terms of when we've done some price investments and some response to that. And I'm encouraged in some of the work that we're doing in our deli departments and increasing the options for people to access healthy, cheaper food direct from Sprouts. Rupesh Parikh: Great. Then maybe just going deeper into just your -- some of the price reductions. Just as you look at all your value efforts, how do you say they're progressing versus your expectations and just confidence in gaining further traction from here? Jack Sinclair: Well, we're doing a number of different tests in different places and some are working better than others and some work very directly, and that's what we're learning. The testing process is both a geographic test, which we're doing in certain places and specific categories. Tariffs put quite a number of -- we referenced coffee in the script. Tariffs put some pressure on the top line prices of a number of categories. And that's kind of eased off a little bit, and we've certainly been investing a little bit in that coming back the other way. So we're being very selective by category, and we're doing some specific tests across different geographies. Operator: Our next question will come from the line of Thomas Palmer from JPMorgan. Thomas Palmer: Maybe I could start off a little bit of a follow-up to Rupesh's question on affordability. What behavior change are you seeing, I guess, as you run these tests in terms of are you driving more new customers into the store? Is it more about seeing existing customers buying more items? And how do you communicate the improved price points to customers? What have you found effective? Jack Sinclair: Go ahead, Nick. I'll let you take that. Nicholas Konat: Tom, it's Nick here. So a couple of things. As Jack mentioned, it starts with the assortment work we've done. There are two areas I'd call out, I think that have been most successful at driving basket. And I think we're also seeing traffic in these categories is the work we've done in the deli with our wellness bowls, our new parfaits, our $5 sandwich, $5 sushi. Those have been really good for us, and we're seeing both basket and traffic to those areas increase. Sprouts brand, the other area I'd call out on the assortment side. If you look at -- we've got tremendous organic offerings, and that's driving organic growth. And as we push and market those, we're seeing increased sales and basket in those Sprouts brand items. On the pricing side, for us, our focus is twofold. It's to try to put a few more items in the basket and also to get our core customer to come back more often because those everyday essentials are more within reach for them. So that's how we're looking at the pricing activity and how we measure it. Thomas Palmer: Okay. And then just a follow-up on the commentary about the expected EBIT margin pressure in the second quarter. Any help just on kind of the split between gross margin and SG&A that you foresee? And maybe any framing of kind of how much of this 75 basis points might be related to fuel? Curtis Valentine: Yes. This is Curtis. Yes, a little bit of extra pressure from fuel in the second quarter. That's kind of what we've embedded for now, and we'll see how that evolves through the quarter here. The shape of it will look pretty similar, I think, to Q1. So if you look at our Q1 results, some pressure in gross margin, maybe a touch higher. We've got our new NorCal DC rolling out. So there's some overlap costs there as well as the fuel you highlighted. And then maybe just a touch better on the SG&A than what we saw in the first quarter, but generally, a pretty similar shape to what we've experienced here in Q1. Operator: Our next question will come from the line of Seth Sigman from Barclays. Seth Sigman: I wanted to follow up on the point around affordability and you're making some price changes. I know that's not all you're doing. There's other efforts to improve affordability. But can you just remind us how you can manage that all from a margin perspective? Like what are the offsets we should be thinking about? And then a related question on the loyalty program and specifically the vendor support. Where are we from that perspective? I know it's still early, but I know that's a part of the equation through the year to start to see some stabilization in the margin. So help us think about sort of that opportunity. Curtis Valentine: Yes. This is Curtis. I think, yes, the opportunities we've talked about are inventory management and continuing to improve in that space, specifically within shrink, a little challenging in the first half. That challenge eases, and we get some easier comparisons in the second half just because of the sales volatility we've had year-over-year. We should continue to get better at shrink. We should continue to get better at markdowns and how we move product through the ecosystem. Those are the things that we've been working on that we can continue to get a little bit better at as we move forward. Certainly, the vendor funding is another piece, and that's really, as you noted, early days, but we'd expect that to ramp as the year evolves and build as we continue to build programs around now that we've got the loyalty data and how we go to personalize off of that. So that will be a piece that kicks in and helps as well. But those are the primary drivers. Over the longer term, we'll think about self-distribution and further opportunities there, and that should also be a helper down the line. Seth Sigman: Okay. Great. That's super helpful. And then just thinking about sales, you're guiding to sequential improvements through the year. Comparisons are obviously a factor. But can you talk more specifically about the signals that you're seeing in the business now that gives you confidence that perhaps trends have stabilized after the slowdown that you've seen over the last couple of quarters? And I guess in that context, how are you thinking about the Q2 sales guidance? Curtis Valentine: Yes. It's played out pretty much as expected. As you know, it's only been 60 days since last we chatted here. So it's -- not a lot has changed, but we're seeing some slight improvement in traffic, some slight improvement in units as we get into the second quarter here, and it's kind of playing out as we thought. Similarly, we talked -- we have better visibility into the customer and a perspective on what that would look like as it relates to the improvement quarter-to-quarter, and that's played out as expected. And so it's early. It's 60 days later, but so far, so good. We've seen things play out kind of how we were thinking they would. Beyond that, if I go back to why do we have confidence from a broader perspective, it's the 4-year run we had prior to the last couple of quarters where we built sequentially over time to that 3% to 4% comp in the algorithm and then a really strong, obviously, experience with some tailwinds in '24 and '25. So obviously, the lapping is a challenge, but we believe we get to the other side of that, that we'll get back into our algorithm later this year. Jack Sinclair: Yes. And as Curtis said, the lapping is clearly a part of this dynamic going forward in terms of why we're feeling better about what's going to happen in the second half. But there is still continued tailwinds in terms of this health and wellness and clean ingredients. The marketplace is trending towards that. And there's clearly some macroeconomic dynamics that play into it. But that underlying trend that's been with us for a number of years, we think we're really well placed to be taking advantage of that. And to Nick's point on assortment in terms of making sure the assortment we're bringing forward on both the Sprouts brand products and the new products we're bringing in, playing to that health and wellness in differentiated agenda. We're feeling really confident about the way that assortment is evolving and the team and the response we're getting from the entrepreneurial spirit that's so prevalent in this space. They're bringing a lot of products to us, and that's something that gives a lot of confidence going forward. Operator: Our next question will come from the line of Leah Jordan from Goldman Sachs. Leah Jordan: I just wanted to ask a little bit more on the comp trends in the quarter. Just color there, cadence by month, differences by geography. Also more specifically, how is Q2 to date tracking? And maybe just remind us of the onetime lapse that we still need to be thinking about going forward. I know on the whole, the comps get easier, but just the onetime kind of months we should be mindful of. Curtis Valentine: Leah, it's Curtis. So yes, Q1, we talked a lot about the strike at a competitor in P2 that -- or February that drove some business our way last year, and that kind of played out as we expected. So Feb was our worst month of the quarter. January and March looked pretty similar. As we've evolved into April here, we are just slightly ahead of the midpoint of the guidance for the comp for the quarter. And then from a year-over-year perspective within Q2, we just talked about May and June last year being a little bit favorable on the produce season, which does look good again for us here in 2026. And then the cyber incident that impacted the natural organic space last year being a little bit of a tailwind for us in June. And so those are the moving parts. But again, things have really played out through February, March, April as we had initially anticipated. Leah Jordan: Okay. That's really helpful. And then just for my follow-up, I wanted to go back to the broader affordability discussion. You made some targeted price adjustments around essentials. It sounds like you're doing some more tests. But maybe in areas like coffee or other things that you've done, maybe help give us some detail around where price gaps kind of were and maybe where they are today. Like what -- and are you seeing any response from peers in the marketplace after doing that? And then also, I guess, because some of this momentum is still on the come, I guess, what kind of volume response are you seeing in these categories after you make those price adjustments? I mean, I guess, how are you able to measure like, okay, yes, we've made enough of a price investment at this point, given it's still being tested and in progress? Jack Sinclair: Well, the context of that conversation is the same today as it's been all the way through this dialogue in terms of the products that we're trying to invest in or put better prices in. They're based on what's important in our customers' basket and they're not relevant to what's not necessarily relevant in what other people's basket is. So we're not really looking at direct pricing comparisons. We do in produce, as we've talked about. But in other categories, we're looking at specifically our attribute-based products and looking at elasticity. And we have in some of those investments that we've talked about, when we drop prices, we've seen volumes go up. And that I suppose -- I suppose that's intuitive. And the question is how far do we go? At the moment, we're doing tests in broader-based categories in certain locations, and we're doing specific category work. But it's all about elasticity, it's all about comparing ourselves to our customer and what they do as opposed to comparing our prices to other people. So we don't think about it like a gap you might do in a traditional way of thinking about this. We think about how can we drive volume through price. Nick, maybe you want to add to that? Nicholas Konat: No. I think the only thing I'd add, Leah, is I think it's a combination. I don't want to lose touch of. It's the affordability focuses on assortment and then it's our everyday pricing. And then it's also on some of our promotion activity. And the customers told us as we look at broader category level and subcategory level promotions and being really targeted there, we've seen really good uptake in lift -- unit lift and sales dollar lift that we've seen good response to. So it's -- as Jack said, it's targeted to our unique customer, what's most important to them. And then we're seeing unit lifts and those things we're moving, and we'll measure that over time and make sure that translates into bigger baskets and more traffic. Operator: Our next question will come from the line of Edward Kelly from Wells Fargo. Edward Kelly: I wanted to ask maybe first, Curtis, could we start with the back half gross margin outlook and sort of how you're thinking about things? And part of that, I'm kind of curious as to what you're assuming for fuel. Obviously, it's a little bit of a moving target. Our math has maybe fuel is a 20 basis point headwind quarterly if it were to continue at this rate for the rest of the year. I'm just kind of curious, is that ballpark? And what's in the guidance for that? And then how are you thinking about gross margin in the back half? Curtis Valentine: Ed, yes, it's probably just a touch high, but pretty close, I would say, on the estimate there. Although, again, it's been pretty bouncy. So it depends a lot about what the price is. Right now, we've just factored it into Q2, knowing that it's right in front of us, and that's where the price point is. And we'll see how that evolves in the second half of the year. And so don't have a lot of that factored into the second half. As we think about the second half, we expect margins to stabilize. Really think about that from an EBIT perspective. There will be a little bit of pressure as the comp continues to improve and get back into the algorithm. But once we're there, we'd expect that stable margin kind of posture that we talk about. And then on the growth side, specifically, we do get some of those things that are challenging in the first half that do ease in the second half. So the loyalty piece will be fully anniversaried as we get to the end of Q3. We do have an easier shrink comparison, particularly in the fourth quarter. And so some of those things go away. And then we've got our benefit from self-distribution in meat that will be a little bit more clear once we get past the opening of the NorCal DC. So expecting margins to improve and be kind of flat to maybe slightly positive in the second half. And I'd also add that we do have for what we're testing right now, assuming that, that were to go. As we're testing, we've got a little bit built in for some of the pricing adjustments from an affordability perspective. Edward Kelly: Okay. And just a follow-up. Taking a step back on comp to leverage and sort of where this is evolving for you guys. If you get back to sort of 3, 4 comp here, can you leverage on that moving forward? I'm just curious as to how that leverage point has sort of changed in your thinking, if at all? Curtis Valentine: Yes. We talked about feeling good from a 4s perspective, and I think that's coming down as we continue to -- we're working hard on the cost side of the business, leveraging our scale as we get bigger as a business to improve our cost base, working hard on how we can leverage technology. These are the things that we've been talking about and investing in, in the past couple of years that are starting to help on that front. And that's just work that we'll continue to do over and over again as we continue to get bigger. So it should be less than 4%. And then it comes down a little bit to just how much we plan to invest in the business and where we need to make investments in the business. And so there'll be a bit of an ebb and flow on the investment front. We've been at that for a couple of years now at a pretty steady clip. If we find a reason in a high-return opportunity, we'll invest a little more. So that will be the other factor in that, but certainly should be less than the 4% we've talked about historically, and we feel pretty good late this year if we get back to that algorithm range to bring SG&A pressure in line and kind of have that moderate as well. Operator: Our next question will come from the line of Mark Carden from UBS. Mark Carden: So to start on loyalty, how have loyalty program sign-ups trended relative to your expectations? Have you guys seen any shifts in sign-up trajectories or consumer behavior as you've settled on the new earned model? And has it had any more or less of an impact on margin than you originally expected? Nicholas Konat: Mark, it's Nick. When we made the updates and improvements to the program in early '26, we did a lot of work studying the customer and their response. And the customer surveys and sentiment we had actually showed really well. We didn't see any decline, in fact, a slight uptick in support for the program as we were adjusting it to provide more tangible value through the point multipliers and other efforts as well as more personalization. So we feel pretty good about the customer sentiment with the program changes we made in early '26. And from a behavior standpoint, I think as Jack mentioned, our core customer, our core loyalty customer, we're seeing be really steady, good spend and increased spend and happy with what we're seeing there. And then much like we noted last quarter, new members in the program are joining the program and continuing to spend and spend more. So we feel good about that. But we have a lot of work to do in the first half to continue to invest to demonstrate and show how we can drive behavior in this environment and continue to test, learn and scale. We're making smart investments in accelerating that capability to help propel us in the back half and beyond. Mark Carden: That's great. And then just given some of the pressures on cost of living, including rising fuel prices, are you guys seeing much of a shift in purchasing behavior in categories like meat or seafood? And are you still seeing similar reductions in items per basket? Just any color there would be helpful. Curtis Valentine: Yes. In reverse order there, Mark, on the items per basket, not a material change, still just pressure like we talked about on the last call, that last item in the basket is always when there's a little bit of inflation or maybe fuel prices are up and the customer is thinking about just basket size and how much they can spend. We always see it in that last item in the basket, and that's been pretty consistent in the last couple of months since last we talked. Nicholas Konat: And I mean, Mark, on the mix or the categories, what I'm pleased with is our health attributes where we really lean in, as we talked about organic, grass-fed, protein and so on. We're seeing really good growth in those attributes. We kind of look at the business through that lens first, and we're seeing solid growth there. Where things a little bit more commoditized, as we mentioned, that's where you might see the item out of the basket, a little bit of pressure in the value channels, but we feel strong about where we lean in and where we want to win, which is that health customer. We feel good about the categories that are winning in that space. Jack Sinclair: And we take the responsibility for affordability really seriously. There's a real opportunity for us to help people live and eat better if we focus in on those areas where we can make things just a little bit better for our customers. Operator: Our next question will come from the line of Michael Montani from Evercore ISI. Michael Montani: I just wanted to ask on the top line side, if you could talk about the traffic and ticket that you experienced in the quarter? Should we think about food at home inflation kind of low 2s as like a rough proxy? And then like really, what's your outlook there? Because we were looking at like 150 to 200 bps step-up potentially through the course of the year due to oil and fertilizers kind of filtering through. So any color you have on that? As well as on the traffic side, could you just talk about the loyalty program, personalization, potentially some of the work in media and marketing you're doing? What gives you conviction that you can basically turn the traffic side to be positive again? Curtis Valentine: Mike, I'll start -- this is Curtis, on the kind of shape of the comp. And so yes, from an inflation perspective, similar to where we've been the last couple of times, we're typically on a like-for-like SKU basis at or maybe a touch higher than CPI based on our mix. We've leaned a little bit premium in the assortment and the things we brought in, and that adds a little bit. And we're mixing to organics and things like that. So from a mix perspective, we see a little bit higher kind of AUR and inflation. So those things are still the same as they were, and we're seeing a pretty steady basket, when you put all things together. So a positive basket, negative traffic kind of gets us to the Q1 comp. The sequential improvement should really come from the traffic side. We're not counting on a lot of additional inflation at this point. We'll see how we manage that and handle that if and when it comes. But for now, we're expecting the inflation piece to be fairly steady from what we've seen, and we're expecting a sequential improvement to come in the traffic as the compares ease year-over-year. Jack Sinclair: Yes. I'll let Nick talk a little bit about the marketing side of things. In terms of the cost and inflation and how it's playing out, fuel is a little bit uncertain. As Curt just said a minute ago, it's up and down. What exactly is going to happen with that, we'll have to wait and see. Fertilizer, we haven't really seen that come flowing through into our cost base yet. What that's -- and the good thing is when you sell a lot of organics, you don't need as much fertilizer. So there's a lot of opportunity for us to maybe double down on organics in the world where the fertilizer costs are flowing through into food prices. But I'll let Nick talk about the marketing side of things. Nicholas Konat: Yes. Mike, real quickly, I think a couple of thoughts on the marketing. One, I'm really happy with what's going on with new stores and how the marketing is working to bring new customers into those stores. It's a proof point one of the power of the brand, of our positioning in health and wellness and power of the marketing and the work the team is doing there. So that's been really strong. In addition, I think we continue to do a great job of launching new products and new items with a lot of our vendor partners and the marketing work there has been very solid. I think the good -- as I look at traffic in the back half, we've got a lot more data than we've ever had in how to drive customer behavior, what to learn from our customer. And our customer and marketing team is using that to help us think about how do we adjust our brand message and media to be more relevant to the customer right now, where they're at in the space. We've got some early tests and efforts in place that have shown an ability for us to move the customer to drive awareness and to move traffic. So I'm very happy with the early work the team is doing, and I think you'll see that impact us in the back half. Operator: Our next question will come from the line of Scott Marks from Jefferies. Scott Marks: First thing I wanted to ask about, maybe you already touched on this, but can you help us understand how comps, how performance is trending just across geographies, maybe across more recent vintage stores versus more mature stores, expansion versus existing markets? Just any color you can provide on that would be great. Curtis Valentine: Sure. Scott, it's Curtis. On the -- it's been pretty consistent from a geography perspective. As we've talked about before, we're not seeing materials. It's gone up and moderated here. It's all across all geographies. Maybe just a little bit of additional pressure in the Southwest than in the Southeast than the other category or geographies, but not material in that respect. On the vintages, I'll say it's -- we're pleased with the new stores, as we've highlighted in the script, and that's another good proof point there is -- there's still positive comps in the new vintages or the more recent 3 or 4 vintages. And so that's just another encouraging piece that even though there's an underlying lapping pressure, we're seeing some good results in those most recent vintages. And again, just gives us some confidence in the overall strategy and where we're headed and things bouncing back as the compares ease. I think that's really -- those are the kind of little bits that are a bit different as you break it down across either geography or store type. Scott Marks: Appreciate the thoughts there. And then maybe a second one for me. It sounds like you guys had another strong quarter for e-commerce. Wondering if you can share any updates on e-commerce, how you may be adapting your e-com strategy given some of the other changes you're making on affordability and everything else. So any comments you can share on that would be helpful. Nicholas Konat: Scott, it's Nick. As we mentioned, we saw double-digit sales growth in e-com, and we're now roughly about 16% penetrated. I think it starts with -- it speaks to the power of our assortment that people want the unique innovative items that we have, and it lends itself well as a secondary shop to e-commerce. And so it starts with, I think, a proof point of people are looking for the unique things that we have and make them part of their daily life. Two, I've been really happy with our -- the way our partners have worked with us, Instacart and DoorDash in particular, on helping us break into new markets, find new customers on their platforms and drive growth. And that's growth through targeted marketing opportunities, through targeted sponsored price investment and continue to grow the business and basket there. And the last thing I'd say -- the good news about e-comm for us is it's an omnichannel customer. And so when we grow that business and grow that customer base, most of those customers are shopping in store, and those are most valuable customers. And so it's really healthy for us to see that growth on the e-com side. Operator: And our next question will come from the line of Krisztina Katai from Equity Research Analyst. Krisztina Katai: So Jack or Nick, you talked about leaning into foraging and the launch of 100 new items so far this year. Just curious, what is the team targeting as a percentage of newness for the balance of the year? And just how that breaks down across opening price points versus more premium price points? And are you seeing competitors move faster on similar attribute-based products, just thinking around trending areas like protein forward offerings. Jack Sinclair: Well, I think everyone is seeing the trends, Krisztina. I think one of the advantages, and I think we talked about it in the script a little bit is that I think we're being seen as a place to launch these products going forward. We've got -- when you walk around the Expo West and there's the -- the whole place is buzzing around can we get into Sprouts or not. And we get -- I think we got 65,000 applications to -- SKUs to bring products to our business last year. We're only able to manage 7,500 of them into the space. But we don't have a specific target in terms of our percentage. What we've got to do is use these innovative and entrepreneurial new brands to continue to excite our customers. The innovation center that we have is working really well and continues to get better. And that's been one of the features that we brought into the stores over the last couple of few years, and it's getting better in terms of how we manage that. So I think we've got a great reputation with the vendor base. We don't have specific targets, and we've got to continue to reinvent ourselves. And that's kind of the role that we have in terms of this space. And I think a lot of people would view Sprouts as the right place to launch these products. Nicholas Konat: Yes. No, the only thing I would add to Jack's comments, Krisztina, on yours, this is Nick. We don't necessarily have targets, but I think we are going to expect to be able to launch as many new items this year as we have in the past. We've developed a really great capability and capacity between our foraging teams and our category management teams to take that massive influx of interest, work with partners and identify the best items to launch. So we are going to continue to do that as we be the -- hopefully serve the customers the most innovative and health forward retailer in the market. And then you asked about balance. The good news, I think that's a focus for us as part of affordability is how do we innovate across all categories and all price points, so everybody can experience the right healthy options for them and based on their preference. And because of the depth of innovation available to us, I think we've got a lot of great options that are good for our customer and also remain distinctive from what else is out in the market that buffers us from competition and price. Krisztina Katai: That's great color. And if I can just follow up, you're sharpening your marketing to highlight what makes Sprouts unique. Are you at all planning to change the percentage that you're allocating to marketing spend in 2026 or any of the key channels, just thinking digital, social that has worked really well for you? And just you're tying that in with the messaging around affordability. Just sort of how should we think about what has been achieved on that front versus what is still to do for the balance of the year? Nicholas Konat: Thanks, Krisztina. I appreciate you noticing. We're working hard at bringing what makes Sprouts to market and talk about the unique differentiated items and our store experience that sets us apart. So you'll see us continue to lean into that positioning. And I would tell you, I think you'll expect to see that even stronger in how we go to market and position ourselves against who we are, which is the best place to help you live and eat better. From an investment standpoint, no, we're not planning on making any incremental investments in marketing. I don't think we need to because we have a lot of opportunity to be more efficient in how we market. And I think we've got the tools in place as we build on the brand capabilities to do that. And to your point, certainly, we'll continue to look at where in the media funnel we invest and in which geographies that drive new customers, that drive the right customer into the store and that balance that awareness and traffic. So we'll continue to do that. And I think there's more opportunity in the back half of the year for us to get even smarter with our media. Operator: Our next question will come from the line of Robby Ohmes from Bank of America Securities. Robert Ohmes: The first one, just I think I might have missed it, but did you guys give the exact traffic and ticket comps for the quarter? Curtis Valentine: Robby, not specifically. But yes, traffic -- basket was positive, low single digits and traffic was negative and the offset there. Robert Ohmes: And then the Long Island store, any color you can give us on how that has come out of the box relative to expectations? Jack Sinclair: Well, I was lucky enough to be in there a couple of weeks ago. We've got a great team in there, and we're definitely going into new markets where we're establishing ourselves in a place where people don't know us. So the marketing team, as Nick alluded to earlier, on new stores have been doing a terrific job on it. It started well for us. I'm really pleased with the team. It will take a little bit of time. We're ahead of where we thought we would be. This thing could -- we've got a lot more stores coming. One of the things about stores on islands on their own, not just Long Island, but on islands on their own is how do you bring critical mass by having a few more stores. And over the course of the next 18 months, we've got a number of stores coming in Long Island, which will strengthen our marketing and strengthen our communication on our brand. But it's kind of -- it's been really exciting to go to a new market, and we've got more of them coming as we look through the next 18 months. It will be a similar challenge for us when we go to Chicago, similar challenge when we go to Boston. And we're learning a lot from what's happening in Centereach, which is a store in Long Island. Robert Ohmes: That's really helpful. And maybe my last question, just, Jack, the foraging team. We obviously, I don't expect you to give specifics, but are they seeing anything on the horizon that could reignite some momentum for Sprouts? Jack Sinclair: Well, I think the trends that are at play, and I'll let Nick comment on it as well, the trends that we're chasing after, just like everyone else is the protein trend is a big one, the fiber trends is a big thing. And there are some other things coming down the track is in terms of health and wellness, particularly in the supplements business and in the vitamins business, in terms of brain health and those kind of things. So there's a lot of trends happening. And our team -- we think we've invested in a really strong team over the last couple of years, and we'll continue to invest more so that we're ahead of the trends. And it will link a little bit. Certainly when celebrities launch products and make a big deal of it, that's something that can stimulate demand pretty quickly. So we're kind of working pretty closely with a number of kind of interesting people that come to see us. And so there's personalities and there's lots of trends within that. I don't know... Nicholas Konat: No, I think that's well said. I think, Robby, the only color I just would add is I think the part of this is how do we work with a lot of these new brands to help bring their brand to life and make them even stronger than they are on their own. And the other piece of it, as I say, we will also miss. We really push hard in finding brands that nobody else has seen, and there'll be times where they don't hit, but that's part of our DNA. And I think we've got -- because we're the best place to launch brands, our odds of getting those that really go big and viral are as best as anybody in the industry because of the way we launch brands and how early we are to do so. Operator: Our next question will come from the line of Kelly Bania from BMO Capital Markets. Kelly Bania: I wanted to go back and ask just another one on the price adjustments and the more focused promotions. Are you able to quantify the gross impact of what's the planned investment for 2026? And I'm just trying to understand if there's a shift of any dollars or how much is incremental. And then can you also help us understand the parameters for these tests? Meaning, is the goal to just get back to a specific level of traffic and then you would back off of these investments? Or is this more of something that we should think about evolving in years to come? Because without a specific price gap or level of pricing that you're targeting, where do you find completion with this initiative? Curtis Valentine: Kelly, it's Curtis. There's a lot in that. So I think -- no, I probably won't quantify too specifically other than to say kind of what we said earlier, which is we do -- we've been investing in the business and a lot of those things have shown up in gross margin favorability, and we still have tailwinds from those investments. And so we're thinking about it much more as a shift, so to speak, if you can use that term that you used, from those things that would have provided a little bit of favorability to now funding some of the affordability actions and helping out the customer. So that's definitely how we see it. As we think about the different things we're testing, again, it's a test. So I don't want to get too specific about what that impact may or may not be. But assuming that the majority of that rolls out, that's kind of how we're thinking about the back half of the year. And we want to see the response from the customer at item and category and all the different things we're trying, and we'll put some things into action in the second half. But we feel like we've got the funding to do that within the guidance based on some of the things that are coming in. And we talked earlier about things ramping up like participation in the loyalty program and some of the offsets that come from that data and from working with the vendors in that space to drive the business together. So we've got a few levers there to help support that effort, and that's kind of what's baked into the plan for the last part of the year. I think -- and then to your longer-term question, that's how we think about it in the longer term, too, right, continue to make the business better to continue to mature our processes and how we go to market and watch elasticities, follow our pricing strategy in order to deliver great value and affordability for the customer. So that's how we'll continue to think about it beyond 2026. Kelly Bania: Okay. And can I just also follow up on the SG&A growth, just the 5.6% there. Can you help us understand what is kind of happening at a same-store operating expense level? And if you kind of lap this next year, would you need to reinvest any more back into SG&A this year or next year, sorry? Curtis Valentine: Yes. I think the trends have been good. Like we've started to see some real progress in the cost work that we do that impacts all the stores. And so we talked a little bit earlier about bringing down that leverage point from the 4% we talked about historically. And then it just comes down to investment. And if we see great things to invest in the business, typically, there's an upfront there in resource or technology to build the capability, but we would only do it if we were going to see benefit on the back end. And so it's a little bit TBD as the year evolves for 2027 and what we might be thinking about from an investment perspective. But certainly, we feel like we can get SG&A kind of back to close to stable as we get to the latter part of the year and we start to get back into our algorithm. And then we'll start to think about next year and where we need to make investments to continue to drive the business for the long term. Jack Sinclair: And on a store-by-store basis, we're getting much more efficient in running each individual store, if that was the question you were asking. We made a lot of progress in being more efficient in operating the stores, and that's something that will flow through both in the new stores and the existing stores going forward. Operator: Our next question come from the line of Jacob Aiken-Phillips from Melius Research. Jacob Aiken-Phillips: I wanted to ask an inflation question just because there's growing concern that like increased fuel costs will flow through to petroleum and fertilizer markets are disrupted, some drought conditions. I know you're not seeing that yet, but can you talk us through like how the business would perform under different inflation scenarios, like low inflation, like normal and an elevated level? Curtis Valentine: Yes. Jacob, this is Curtis. I mean, again, every -- I think every version of that is a little bit different. I can point back to when the last round of significant inflation in '22, '23, where we saw our business continue to accelerate. And we had a lot of things going on that were moving the business as we reshaped our strategy. I think it's a lot of -- nobody quite knows exactly how that's going to play out, and we'll manage it when it comes, if and when it comes. And I'll talk to Nick a little bit about how we would manage it if it came through, but it's -- we've seen different versions of that over the years, and the business has been solid throughout. Jack Sinclair: I think the important thing in an inflationary environment is that we do what we do well. We've got to be serving our customers really well in terms of the health and wellness agenda. But I do think is relevant irrespective of inflation, deflation. People that want to eat healthy, want to eat healthy. And one of the dynamics that I think is a little bit of a moat for us is that we're not as prone to being affected by big inflation or no inflation. Whether that's going to happen or not, who knows. I think the fuel things and the fertilizer things are all a little bit uncertain how it's going to play out. But we'll certainly be very conscious of taking care of our customers and making sure we're giving people access to affordable health and wellness products within the assortment that Nick has been talking about in the call today. And it's something that we'll pay a lot of attention to. We take our responsibility of helping people live and eat better seriously, and that applies whether there's inflation or deflation. Jacob Aiken-Phillips: Great. And then my second one is you highlighted strong growth in attribute-driven categories and some pressure on the more commoditized ones. Can you walk us through how we should think about the mix implications of that for costs and margins over time? And then just as a follow-up, are vitamins and supplements attribute driven or more commoditized? Jack Sinclair: You've asked a lot of questions there and there's a lot of good ones as well. Let me just start off with vitamins and supplements is such an important category for us because we've got great people who can give you great advice. And I invite any of you to go and ask our people in the stores about how they can advise you on that. And it's less commoditized because of that. You maybe talk about the other stuff. Nicholas Konat: Yes. I mean I think overall, the core of what we do is stay differentiated and focused on core attributes. And that's what we'll always do and focus on. And if things do start to become more commoditized, that's when we then pivot and find different brands, different offerings to stay differentiated. From a margin profile standpoint -- the margin mix of our business is pretty consistent. There's not a massive gap between category or attribute that would have a real meaningful impact, Jacob, on our mix with those shifts. Again, small things here or there, but nothing consequential that you would see mix significantly flow through. Jack Sinclair: And we're unusual for a grocery store, if that's what we're described as, we're unusual in the sense that our margins are pretty consistent across the different categories. We don't have really low-margin, high-volume branded goods. So the mix is more consistent. And that makes one of the uniquenesses of our business is that margin mix profile. Operator: Our next question will come from the line of John Heinbockel from Guggenheim. John Heinbockel: Sort of an all-encompassing question here. But I think last quarter, we talked about emerging health enthusiasts as a cohort. How important are they, right, to the business, to the growth? How are they behaving, right? And then what are they reacting best to in terms of your desire to help them out affordability-wise? Nicholas Konat: John, it's Nick. I think let me start with -- we still feel really strongly about the overall market, right? We've talked about our $200 billion health enthusiast market. Whether you're new in the space or been there, I think that provides a lot of opportunity for growth for us overall. From an emerging standpoint, I think we've been pretty happy. In the past, we've seen good acquisition from younger or, call it, newer cohorts that you speak to. And we're seeing things like protein. One of the things we're seeing is non-alc is a big driver in that space. And we leaned into non-alc early about 3 years ago, and that continues to drive and grow our business, a lot of the supplement space. And so the good news is because of the emerging brands we have and how we work with them on social, I think we're well positioned to capture that customer. And between that customer and the existing health enthusiasts, I think the market is in a really good place for us. Jack Sinclair: And just building on what Nick said earlier on the marketing, how we can get more sharp at communicating with these people as they come into that space. There are more -- if the market today is 380, whatever we think, it's going to be bigger in the future. Our challenge is how we can really hone our message around that particular group of customers as they come into this space. Operator: And with that, this concludes the question-and-answer session. I would now like to turn it back over to Jack Sinclair, CEO, for closing remarks. Jack Sinclair: Thanks, everyone, for your attention and your interest in our company. We're excited about the future going forward and look forward to updating you over the next few quarters. Thanks so much, and take care. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Hello, everyone. Thank you for joining us, and welcome to RJET Q1 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Keely Mitchell. Please go ahead. Keely Mitchell: Thank you, Cara, and thank you, everyone, for joining our earnings call. On with me today are David Grizzle, Chairman and Chief Executive Officer; Matt Koscal, President and Chief Commercial Officer; and Joe Allman, Senior Vice President and Chief Financial Officer. In the Investor Relations section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This call is being recorded and will be available for replay on our Investor Relations website. Today's discussion will include forward-looking statements regarding Republic Airways future performance, strategic initiatives, and market outlook. These statements reflect our current expectations and beliefs based on information available to us today, but they are subject to various risks and uncertainties that could cause actual results to differ materially from our projections. The aviation industry operates in a dynamic environment with inherent risks, including regulatory changes, economic fluctuations, weather-related disruptions, and evolving market conditions that can significantly impact our operations and financial performance. Additionally, our business is subject to the operational and financial health of our major airline partners, labor market conditions, aircraft availability, and other factors beyond Republic's direct control. For a comprehensive understanding of the specific risks and uncertainties that may affect our business and financial results, I encourage all participants to review the detailed disclosures in our filings with the Securities and Exchange Commission, including our Form 10-K on file with the SEC. These documents provide important context and detailed information that supplement today's discussion and are or will be available on both the SEC's website and in the Investor Relations section of Republic's website at rjet.com. Throughout this webcast, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, to the extent available and without unreasonable effort, appear in today's earnings press release and accompanying presentation, which are available on our Investor Relations website. And now I will turn the call over to David. David Grizzle: Thank you, Keely, and good evening. Before we get into our prepared remarks, I'd like to update everyone on the anticipated leadership changes. The Board promoted Matt to the position of CEO effective June 15. Additionally, effective at the same time, the Board promoted both Joe Allman, our CFO; and Paul Kinstedt, our Chief Operating Officer, to the position of Executive Vice President, and I will continue in my role as Chairman. This completes our succession plan for Republic following its merger with Mesa and return to the public markets. We are blessed to have such a seasoned leadership team. I've had a chance to work very closely with these talented executives during the last year. I have tremendous respect for them and Republic is well positioned for the future. Our people and our culture are the backbone of our success, and we have an outstanding team. The first quarter of 2026 marked a couple of significant milestones for our company. First, this is our first fiscal quarterly reporting period following the merger with Mesa last November. And as a reminder, our quarterly results from Q1 2025 do not include any Mesa results. We reported Q1 2026 adjusted net income per diluted share of $0.73. Revenues were $527 million, and adjusted pretax income was $47 million, or an 8.9% pretax margin. These strong financial results demonstrate the resiliency of our business model to weather the storm. The first quarter is generally our lowest quarter of block hour production due to seasonality. This year, our operations were impacted by severe winter weather in January and February. Winter Storms Fern and Hernando had a direct impact on our operations in the Northeast and Mid-Atlantic regions. As an example, during 1 day of Fern, we were unable to operate 87% of the airline because of weather, which in turn created large crew positioning disruptions. I want to thank our frontline crew members and operations center associates that worked tirelessly through these multi-day disruptions and still delivered an exceptional product to all of our passengers and partners. While our full-up completion factor was 3 points lower, or 94%, versus the prior year Q1 result of 97%, our controllable completion rate remained exceptional, and we were still able to achieve 80 days, a perfect -- that is to say, 100% controllable completion factor performance in the quarter. I am continually impressed by the professionalism and dedication of our team as they serve our partners and passengers. The second significant milestone is the conclusion of our fleet transition efforts at United. We took delivery of the last 3 new E175 aircraft to conclude our fleet transition by swapping 38 new E175s for the 38 E170s at United. We started this fleet transition program back in November 2022, and we now have all of the new aircraft in position and in service with United. 31 of the 38 E170s removed from service have been redeployed to another partner, either in revenue service or under long-term leases. The last 7 E170s removed from United are currently unallocated, meaning not assigned to any of our partners, and will be used for ad hoc charters and other support. As a reminder, substantially all our revenues are generated from capacity purchase agreements with our 3 airline partners, American, Delta, and United. Our business model also protects us from fuel price increases as our partners are responsible for fuel, ground handling, and managing the passenger ticket pricing and demand management. We are responsible for providing safe, reliable, and cost-efficient operations. Now I'd like to turn the call over to Matt to provide an update on our strategic focus and the ongoing integration efforts related to the merger. Matt? Matthew Koscal: Thank you, David, and good evening, everyone. I want to begin by expressing how deeply humbled and grateful I am for the opportunity to lead our more than 8,400 dedicated Republic associates. It is a tremendous privilege to serve alongside such an exceptional team that shares a steadfast commitment to our culture of excellence, a culture that has defined who we are and enabled our continued success. As we look ahead to our next chapter of growth, I am fully committed to building upon this strong foundation and further strengthening it together. I would also like to sincerely thank our Board of Directors and David for their trust and confidence in me and our executive leadership team as we carry Republic forward. Turning our direction to the demand environment. Despite the uncertainty that persists in the broader market and its effects on oil prices and ultimately jet fuel costs, the demand signals from our partners are cautiously optimistic and focused on smart capacity deployments. As such, the demand for large multi-class regional aircraft remains strong, particularly in the high-value hubs we service, and we don't expect that to change. Historically, our aircraft have actually seen increases in utilization even during uncertain economic conditions. Our aircraft provide our partners the flexibility to deploy a lower seat density aircraft to right-size or match expected passenger demand and still capture business, premium, and basic economy fares. Earlier this month, an FAA order capped daily flights at Chicago O'Hare at 2,700 beginning in June. This presented another example of our agility and how we work closely with our partners. While we expect to see some adjustments to our O'Hare schedule in June, we don't expect any material long-term impacts to our flying, as many of those hours will be redeployed in other areas of our partners' networks. We remain in constant communication with our partners to ensure we are ready to shift flying where they desire and protect the expected block hour production and schedules. Before I move to discuss the status of the integration, I think it's important to acknowledge that while the Northeast bore the brunt of winter weather this year, it was helpful for us to have some new geographic diversity in our network. The addition of Houston to our network as a result of the Mesa merger helped offset some of the lost flying days we had in the Northeast, and we look forward to expanding positively on this trend as we increase utilization at Mesa over the next couple of years. Now let me turn my attention to our integration efforts. We've made substantial progress during the quarter on integration. We remain focused on executing our 4 clear workstreams: consolidation of the back-office functions, IT systems integration, fleet harmonization, and regulatory operating certificate harmonization. Regarding the first 2 workstreams -- consolidation of corporate functions and the integration of our IT systems -- we have made great progress on both fronts in the quarter. We are slightly ahead of plan on the back-office integration, and we expect that work to be substantially complete by Q4 of this year. On the IT front, we continue to make investments across legacy Mesa to further enhance both hardware and software capabilities, and we believe these investments are already providing tangible benefits across the airline. This workstream is a multiyear process that doesn't fully wrap up until we complete the operating certificate harmonization process in 2028. Lastly, we were pleased to receive approval from the FAA to recognize our Carmel training campus as an approved Mesa training facility. This puts us 1 step closer to being able to train all of our crews at our state-of-the-art training campus in Carmel, Indiana. On the fleet side, we are in the early stages of moving the Mesa fleet onto our standard maintenance cycle with full harmonization of our E175 programs. Completion of this process will allow us to drive maximum utilization, compliance consistency, and improved maintenance and inventory management across the combined fleet. In Q1, we achieved our first milestone on reduced heavy maintenance turnaround times, which is an early example of how legacy Republic can leverage planning and supply chain resources to unlock future value across the Mesa operation. This early improvement gives us increased confidence that we will achieve our target of completing the fleet harmonization work in late 2027. The fourth workstream, the process of bringing 2 operations into a single harmonized airline with the FAA, coupled with associated technology and systems alignment, is expected to continue into 2028. The process will involve the filing and approval by the FAA of 5 revision cycles. The first revision cycle addresses the alignment of our safety systems and processes, and we anticipate submission of this in early May. The overall goal of the harmonization process is to create a unified airline from an FAA perspective, with aligned manuals, maintenance programs, training, and operational oversight. Lastly, let me speak to our progress with our labor unions. In December, we reached a joint collective bargaining agreement or JCBA, with the 2 flight attendant labor unions, and the teams have spent considerable time on preparing for implementation of the JCBA throughout the first quarter. I want to acknowledge all the work and support that both the IBT and AFA provided to deliver an agreement. We appreciate the focus and energy those teams demonstrated in achieving the joint collective bargaining agreement. With respect to the pilots of IBT at Republic and ELPA at Mesa, we continue to have productive dialog and negotiations. I would like to thank everyone for their continued hard work in this area, and we look forward to providing you updates on our progress in the future. On the staffing side of the house, we entered this year with slightly elevated staffing levels to ensure that we could deliver an excellent operation to our partners while we work through Mesa's integration. We are well positioned to meet the needs of our partners, both now and in the future, and we are reaffirming our block hour guidance that we will produce more than 865,000 block hours this year. 2026 continues to be a transformational year. Our investments in training infrastructure, technology, and our future aircraft delivery positions with Embraer put us in a position to serve our partners' needs well into the future. To recap, we are on track with our integration targets and remain focused on continuing to deliver an exceptional operation for all of our partners. Once the aircraft maintenance harmonization process concludes, we expect to see an improvement in aircraft availability for schedule as heavy maintenance normalizes. We remain committed to successful execution of these initiatives and look forward to sharing updates with you as we progress throughout the year. We believe the end state will support greater operational efficiency, which will drive stronger margins and shareholder returns. Now I'd like to turn the call over to Joe to walk us through Q1 financial results. Joe? Joe Allman: Thanks, Matt, and good evening, everyone. Total revenue for the quarter was up 34% to $527.4 million due to a 30% increase in block hour production. This was our first full quarter of Mesa's operations. We incurred $9.5 million of merger and integration related costs during the quarter. These are the costs associated with the integration and harmonization efforts that Matt just covered. We will continue to separately report these costs, and as the integration and harmonization activities begin to subside, we also expect the associated costs to subside. Our adjusted pretax income was $47.1 million, up 15% over Q1 2025. And adjusted EBITDAR for the quarter was $100.1 million, up 14% over the prior year period. The improved Q1 2026 financial performance is attributable to the growth in operations from the Mesa transaction, as well as the growth of Republic's fleet following the fleet transition David highlighted earlier. Focusing on cash flows and our balance sheet, we generated $58 million in cash from operations this quarter. Our cash outlay from investments in aircraft, property and equipment, including predelivery deposits, increased to $95 million, driven by the acquisition of the 3 E175 aircraft. We received proceeds from new debt of $64 million and made scheduled principal repayments of $49 million during the quarter. Our adjusted net leverage was flat from year-end 2025 at 2.7x. We expect our net leverage to continue to improve over the balance of 2026 as we remain focused on our initiatives to reduce net leverage below 2.2x by year-end 2026 and with a longer-term target of below 1.5x. We believe it is prudent to continue to strengthen our balance sheet and reduce debt as this will best position our airline for the future. We recently reached an agreement with Embraer to reschedule our aircraft delivery positions. Originally, our next delivery was expected in February of 2027. With the adjustments from Embraer, we now expect our first delivery in April of 2028. This revised delivery skyline timing allows us the opportunity to match deliveries to expected demand from our airline partners. We appreciate the longstanding partnership and relationship with the team at Embraer. Turning our focus to guidance. We issued full year 2026 guidance 8 weeks ago on March 4. At that time, the conflict in the Middle East was 3 or 4 days old. Since that time, we have seen an escalation of hostility and more volatility and uncertainty. Meanwhile, our discussions with our airline partners have been very positive and indicate a strong demand for our products. Therefore, we are reaffirming the guidance we previously issued. We expect revenues in excess of $2 billion and adjusted EBITDAR in excess of $380 million on block hour production of at least 865,000 hours. Capex is anticipated to be $170 million, which is mainly driven by aircraft and engine CapEx, the completion of our campus and training center construction projects, and other general maintenance CapEx. We expect to repay $165 million of principal and receive proceeds of new debt of approximately $75 million. Despite the uncertainties that exist in the broader market, we remain confident in our ability to achieve these targets. Lastly, we are focused on ensuring an efficient integration and harmonization of the Mesa operation and continuing to deliver on our brand promise of industry-leading operational performance and outstanding customer service to our airline partners and their passengers we carry. We are well positioned for the future, and now I'll turn the call over to David. David Grizzle: Thank you, Joe. I'm very proud of the whole Republic team as they've been able to maintain our impeccable operating performance and deliver strong financial performance despite the challenges that come with winter weather. In addition to improving weather, which will allow us to fulfill our flight segments as scheduled, the demand signals from our partners for the remainder of the year remain quite strong. We believe that the headwinds faced this quarter will continue to subside and the company will be in a position to achieve positive momentum and significant growth throughout the rest of 2026. We appreciate the support of our associates, our partners, and our shareholders, and we look forward to continuing to deliver our commitments and promises to all our stakeholders. Thank you again for joining us today and for your interest in Republic. Cara, we are ready to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I know it wasn't controllable factors, but I was curious with these severe weather impacts that you've had this quarter. Was there a notable impact on earnings that maybe is not normal that we should consider as we think about the earnings power here? Matthew Koscal: Savi, it's Matt. Thanks for the question. Thanks for joining the call. You're spot on. The impact was significant over what we saw last year, about 3 -- a little over 3 full points. That's not typical for us in a quarter. We didn't break out the impact. But in a more typical seasonal environment, we would expect the business to perform more robustly. Savanthi Syth: Understood. And maybe on the -- United has shown some creative thinking with the CRJ-550 a few years back and now the CRJ-450. Just wondering if there's an opportunity to do something like that with the E170s or even the E145s that you've operated in the past. Matthew Koscal: Great question. So as you look at it, I think we have a history of being a solution provider for our partners, right? And that has evolved throughout the years. We are positioned incredibly well. We're sitting here today with a strong plan for 2026 going into 2027. It's fully focused on a successful and flawless Mesa integration. Today, as you heard on our prepared remarks, the team is just performing exceptionally well in that regard. We're ahead of schedule on each of our workstreams, and we could not be more proud of their efforts there. As we continue to deliver on that and we strengthen our balance sheet, we believe that positions us incredibly well to continue to have flexibility to respond to our partners' needs, and we'll continue to have those conversations with them and be ready to respond to their needs as they evolve. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just wondering longer term, I appreciate the commentary on the deferrals, but how are you thinking about putting the order book to work? And would you think about those in terms of growth? Or do you expect them to be primarily for fleet replacement by your customers? Matthew Koscal: Duane, thanks for the question. And if you look at our past deployment, I think it's been a combination of both, right? We've found opportunities to deploy certain aircraft in a purely growth positioning. And then we've also found ways to do fleet replacements and then redeployment of other aircraft to other partners, just as we've done in this completion of the E175 order at United. The beauty of the order book that we've had as we've had it for several years now is we've got ultimate flexibility. We've got a great relationship with Embraer, and we continue to be in dialog with our partners to find the best deployment of those assets as opposed to just a deployment in the original order slots. And that's what we think that this deferral allows us to do, is it allows us to find that ultimate best solution with our codeshare partners on a future deployment for them. Duane Pfennigwerth: And then just for my follow-up, the presentation is very clear with the expected debt paydown over the balance of the year. But I wonder, as you look out longer term, do you see opportunities to refinance a portion of that debt as well, now that you have probably a different and improved credit profile? Joe Allman: Duane, this is Joe speaking. It's a great question. Look, our focus right now is on just continuing to strengthen the balance sheet. We have a lot of unencumbered assets, though, as you referenced -- as we referenced in the presentation. 70% of the fleet today is free of financing. Now some of those aircraft come from our partners, but we have a number of E175s and E170s that are debt-free at this stage. So we believe that flexibility as we move forward will put us in the best position to find unique and strategic ways to work with our airline partners and find the solutions that Matt referenced in his response just a second ago. Operator: Your next call comes from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Congrats, Matt, on your promotion. Question here just on the guidance for the year. When you look at what you have for block hours and what you have for EBITDAR, I mean, it looks like despite all the intensity and complexity of the March quarter with the weather, it looks like that you're actually running well ahead of plan. And so the question is, are you ahead of plan? Do you feel like you're ahead of track? Are there things that we need to consider in this year where maybe you take a temporary hit to block hours or maybe there's some seasonality piece, even though I know historically you don't see as much seasonality with the regional carriers? Something for us that maybe I'm not looking at because it does seem like you're well ahead given what was a challenging quarter for everybody. Matthew Koscal: Michael, this is Matt. Thank you very much. Appreciate the congratulations. And it is a great observation, a great question. And look, in any other environment that we're sitting here talking to you today after the quarter that we put together and what we're seeing in our block hour demand going into Q2, Q3, we would be taking up our guidance. Considering the macro uncertainty today, we just think it's prudent to get a little bit further into the year and see how things develop and go from there. But we had an incredibly strong quarter, you're right, a lot of challenges, and we'll provide you updates as we get further into the year. Michael Linenberg: And then just my second question, as we think about the improvement in your leverage, it does look like that the CapEx should come down because of the deferrals or the next airplane coming in the spring of 2028. I realize you're still on the hook for predelivery deposits. How can we think about CapEx, though, as it trends where we are today over the next, I don't know, 3 to 4 quarters? It does seem like it's going to slope down, and maybe it actually hits a bottom sometime in early '27 before starting to pick back up again. Joe Allman: Thanks, Mike. This is Joe speaking. You're correct. We should see CapEx subside as we move throughout the year. The first quarter was our heaviest quarter, predominantly related to the aircraft deliveries. We'll come up on the conclusion of the construction in our Carmel training campus. And just general maintenance CapEx -- and I should say the CapEx associated with the investment that we're making at Mesa. And those opportunities will come and continue to present themselves as we progress throughout the year. But you're right, it's a downward slope from the first quarter. Operator: Your next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I was curious, I think a couple of months ago, when you talked, you were expecting normal levels of attrition versus an abnormal year last year. And I was wondering what you've seen, especially as some of the mainline airlines are cutting capacity here. And just related to that, just what your plan is for the LIFT Academy in terms of how much of your needs that pipeline will deliver? Matthew Koscal: Savi, thanks. This is Matt. I'll answer the second part first. LIFT Academy is positioned to satisfy about 20%, 25% of our hiring needs in a normal hiring year. So nothing changes in the throughput that we're planning to put through LIFT this year. It's been a great program, and the candidates that come through that perform exceptionally well and are incredibly loyal to the airline and their career path. As we look at the attrition trends, very much a status quo to the update we provided to you just a few weeks ago. Attrition remained through the quarter at normalized trends, going back to a pre-COVID standard, healthy level of attrition, going to the [ career ] carriers that we would like to see, healthy captains attriting on to our codeshare partners and the like. We would expect to see, and we're seeing just a little bit of the beginning of a slowdown in the attrition, just a seasonal slowdown as we go into the summer months. So right on plan. Our attrition curve and our hiring curve have been right on plan for us. Operator: We've reached the end of the Q&A session. I will now turn the call back to David Grizzle, Chairman and Chief Executive Officer, for closing remarks. David Grizzle: Thank you, Cara. Thank you all for joining us this afternoon. As you've heard, we are very pleased with how our people are working to execute our plan and achieving results of which we are very proud. We are grateful to all of you for your continuing support. Have a great evening. Thank you very much. Operator: That concludes today's call. Thank you, everyone, for attending. You may now disconnect.