加载中...
共找到 39,029 条相关资讯
Operator: Good day, and thank you for standing by. Welcome to the NXP First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead. Jeff Palmer: Thank you, Lisa. Good afternoon, everyone. Welcome to NXP Semiconductors First Quarter Earnings Call. With me on the call today is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the second quarter of 2026. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and our first quarter 2026 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section. Now I'd like to turn the call over to Rafael. Rafael Sotomayor: Thank you, Jeff, and good afternoon. We appreciate you joining us today. Our first quarter performance exceeded expectations with broad-based improvements across all our focus end markets, led by our company-specific growth drivers and importantly, with momentum now visibly broadening into the core of our business. What we're seeing today is the compounding result of sustained investment, disciplined execution and deepening customer adoption across our differentiated portfolio that is increasingly well positioned for the most durable secular trends in semiconductors, software-defined vehicles, physical AI and now with greater visibility than before, data center infrastructure. The remainder of 2026 is set up to be stronger than we anticipated just 90 days ago. Now I want to walk you through the key drivers behind that improvement. Turning to the quarter. We delivered revenue of $3.18 billion, up 12% year-over-year and seasonally down 5% sequentially. All end markets grew year-over-year. And in aggregate, we outperformed by $31 million, above the midpoint of our guidance. Our company-specific strategic growth drivers across the auto and industrial and IoT end markets grew 18% year-over-year year and represented roughly 1/3 of first quarter revenue, 120 basis points above last year and 40 basis points above the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $3.05, $0.08 above the midpoint of our guidance. Now turning to end market performance. In automotive, revenue was $1.78 billion, up 6% year-over-year and in line with expectations. Adjusted for the sales of the MEMS Sensors business, automotive growth was 10% year-over-year. During the quarter, the growth was driven primarily by accelerating customer software-defined vehicle programs, improved electrification trends and continued momentum in radar and connectivity. Together, the auto accelerated growth drivers contributed nearly 90% of the year-over-year growth. From a customer adoption perspective, we're seeing strong design win traction for our S32N and S32K5 products, platforms that will serve as the backbone of our automotive processing franchise for years to come. We also secured new radar awards for imaging radar solutions, along with wins for our 10-gigabit automotive Ethernet products. These are multiyear platform commitments that expand NXP content per vehicle and deepen the structural relationship with our customers. The automotive opportunity is a long-duration compounding story and our progress reinforces that trajectory. In industrial & IoT, revenue was $628 million, up 24% year-over-year and near the high end of our guidance. Growth was driven by our newer industrial processing solutions, including i.MX, RT and MCX. Together, these products grew about 75% year-over-year and contributed nearly half the end market growth versus Q1 2025. Within the end market, industrial was strong with notable strength in factory automation, data centers and energy storage. Looking ahead, the industrial & IoT market is entering a transformative phase as physical AI moves intelligence into real-world systems and robotics. This is creating significant content growth opportunities for NXP, particularly in processing, connectivity and security. As AI is deployed at the edge, customers need greater processing headroom to future-proof their platforms. As a result, we're seeing customers making deeper multigenerational commitments to NXP because of the strength of our AI-enabled product portfolio. Now I want to take a moment to speak directly about our data center exposure because this is an area that we haven't previously emphasized. In 2025, revenue related to data center applications was about $200 million, and it was reflected evenly in both our industrial & IoT and communication infrastructure end markets. Based on our other programs now ramping, we believe this business will be north of $500 million this year with a similar end market split. We have established meaningful positions in system cooling, power supply, board management and control plane switching applications. Across these subsystems, customers choose NXP for our processing depth and security capabilities. Based on customer engagements, we are reinforcing our i.MX application processor family for this opportunity, creating a durable and expanding revenue presence in data centers. With communications infrastructure, revenue was $380 million, up 21% year-on-year and at the high end of our guidance. Growth was driven by digital networking exposure to data center and continued ramps of our UCODE RFID product. And lastly, mobile revenue was $391 million, up 16% year-over-year and in line with guidance, reflecting continued strength in our secure mobile transactions franchise. Now turning to the second quarter. Our outlook is better than we anticipated 90 days ago. We are guiding second quarter revenue to $3.45 billion, up 18% year-over-year and up 8% sequentially. This sequential growth represents an acceleration of our company-specific drivers. We expect all regions and all end markets to be up year-on-year, a reflection of expanded customer adoption of our differentiated portfolio. At the midpoint, we expect the following trends in our business during Q2. Automotive is expected to be up in the low double-digit percent range year-on-year and up in the high single-digit range sequentially. Adjusted for the sales of the MEMS Sensors business, our guidance implies a high teens percentage growth year-over-year and 10% sequentially. Industrial & IoT is expected to be up in the high 30% range year-over-year and up in the high teens range sequentially, continuing the acceleration we saw in Q1. Mobile is expected to be up in the low single-digit percent range year-over-year and down in the low double-digit percent range on a sequential basis. And finally, communications infrastructure and other is expected to be up in the mid-30% range versus Q2 2025 and up in the mid-teens percent range versus Q1 2026. In summary, our second quarter outlook and our growth trajectory in 2026 reflect the story of breadth, depth and acceleration. Our company-specific growth drivers are performing as designed. Our core business is inflecting. And today, we have made the growth of our data center revenue transparent to support your understanding of our exposure to this important market. Data center revenue is ramping now, and it will more than double in 2026 from a year ago. We remain disciplined in how we invest, how we allocate capital and how we manage the factors we can control. Our framework is unchanged: invest for growth, pursue targeted M&A to strengthen the portfolio and return excess cash through dividends and buybacks, consistent with our long-term model. And now, I would like to pass the call to Bill for a review of our financial performance. Bill Betz: Thank you, Rafael, and good afternoon to everyone on today's call. As Rafael has already covered the revenue drivers, I will turn to the financial highlights. Overall, our Q1 results were solid, which were led by our company-specific growth drivers across our focused end markets, reinforcing the strength of our strategic priorities. We continue to ramp our new products and see strong customer adoption and design win momentum across our latest products and solutions. This momentum reinforces the value of our long-term R&D investments and the strength of our product road map. In summary, revenue, gross profit and operating profit were all better than the midpoint of guidance, and we delivered non-GAAP earnings per share of $3.05 or $0.08 better than the midpoint. Non-GAAP gross profit was $1.82 billion, with a 57.1% non-GAAP gross margin, modestly above guidance, driven by solid fall-through on higher revenues. Non-GAAP operating expenses were $758 million or 23.8% of revenue, favorable to guidance, driven by efficiency gains. Non-GAAP operating profit was $1.05 billion, and non-GAAP operating margin was 33.1%, 40 basis points above guidance. Below the line, non-GAAP interest expense was $90 million and taxes were $173 million. Noncontrolling interest expense was $11 million and results from equity accounted investees were a $4 million loss. Taken together, below-the-line items were $3 million unfavorable to guidance. During the quarter, stock-based compensation was $109 million, and it is excluded from our non-GAAP earnings. Turning to changes in cash, debt and capital returns. Our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q1 with $11.7 billion in total debt and $3.7 billion in cash. Cash usage during the quarter reflected debt repayments, joint venture investments, capital returns and CapEx, partially offset by cash generation, including $878 million of proceeds from the sale of the MEMS Sensors business. Net debt was $8 billion or 1.7x adjusted EBITDA, and our adjusted EBITDA interest coverage ratio was 14.5x. During Q1, we retired the $500 million, 5.35% tranche due in March. And after the end of the quarter, we retired the $750 million, 3.875% tranche due in June. In Q1, we returned $358 million to our owners comprised of $256 million in dividends and $102 million in share repurchases. After quarter end, we repurchased another $32 million under our 10b5-1 program. We remain committed to our long-term capital allocation strategy, balancing returns to shareholders with disciplined investments in the business to support long-term profitable growth. Turning to working capital. Days of inventory were 165 days, including 7 days of prebuilds. Receivables were 34 days and payables were 59 days, resulting in a cash conversion cycle of 140 days. Inventory levels remain aligned to support our future growth and our planned front-end factory consolidation plans. Cash flow from operations was $793 million, and net CapEx was $79 million, resulting in non-GAAP free cash flow of $714 million or 22% of revenue. From a cash deployment perspective, during Q1, we continue to advance our manufacturing strategy, which supports our long-term supply resiliency. Over time, this is expected to contribute approximately 200 basis points of structural gross margin expansion once the facility is fully operational in 2028. In the quarter, we invested $385 million in VSMC, our manufacturing joint venture in Singapore. This is comprised of $189 million in long-term capacity access fees and $196 million in equity contributions. Overall, we are about 67% through the investment cycle for VSMC and about 30% for ESMC. For VSMC, we expect an additional $425 million in 2026. For ESMC, we expect the 2026 investments to be about $50 million. Now turning to our expectations for Q2. We expect Q2 revenue of $3.45 billion, plus or minus $100 million. This is up 18% year-on-year and 8% sequentially. The expected first half results support our view that NXP's growth is increasingly company-specific and reinforces our confidence in achieving our long-term revenue growth targets. We expect non-GAAP gross margin of 58%, plus or minus 50 basis points, up 150 basis points year-on-year and up 90 basis points sequentially. This is driven by higher revenue, product mix and front-end utilization improvements. We expect operating expenses of $800 million, plus or minus $10 million. This reflects the $17 million annual RFID licensing fee and normal annual merit increases. At the midpoint, this results into a non-GAAP operating margin of 34.7%. Below the line, we expect non-GAAP financial expense to be approximately $92 million and our non-GAAP tax rate to be 18%. We expect noncontrolling interest to be $14 million, including $4 million losses in our equity accounted investees. Stock-based compensation is expected to be approximately $107 million and is excluded from our non-GAAP guidance. This implies Q2 non-GAAP earnings per share of $3.50 at the midpoint. Turning to Q2 uses of cash. We expect capital expenditures to be approximately 3% of revenue with a capacity access fee payment to VSMC of $55 million and equity investments into VSMC of $125 million and for ESMC $10 million. Overall, our first half performance and expectations reinforce the durability of our financial model, driven by our company-specific growth drivers finally shining through, gross margin back to expansion mode and improved efficiency in our operating expenses. In closing, we remain confident in delivering our 2027 financial commitments which implies double-digit revenue growth in both 2026 and 2027, gross margin expanding towards 60-plus percent and continued discipline in our operating expenses. I would like to now turn the call back to the operator for your questions. Operator: [Operator Instructions] First question will be coming from the line of Vivek Arya of Bank of America Securities. Vivek Arya: Rafael, I was hoping that you could give us a sense for what is driving the growth in your automotive business, both kind of within China and outside of China. And then how much of a pricing benefit are you seeing because everything appears to be in kind of short supply right now, and I was wondering if NXP is seeing any benefit from the pricing side of the equation? Or do you think this is more just kind of company-specific and these are more unit rather than pricing given growth upside that you're seeing right now in autos? Rafael Sotomayor: Yes. Thank you, Vivek, for the question. I think let me tackle the question on auto. I think that we have right now is a backdrop of constant news of SAAR being down and maybe people getting confused about what does it mean for us in auto business. And I'll say out of the back, while SAAR gives you how many vehicles are produced, it's nothing about semiconductor content per vehicle. Now in this environment, our auto business, NXP is performing well. And you can see from the print in Q1, it grew 10% after you account for the sensor business, and Q2 guide implies a high teens year-over-year growth on the same basis. So you can see that clearly, the momentum is improving. And so that tells you already that this is not necessarily a story about unit growth, this is a story about the transformation, the architecture transformation that is driving content growth. So my answer to you is architecture led. And that's a real story, right? For us, it's a content story that's starting to show in our numbers. The one thing I want to leave you as well is this growth is increasingly structural. What does that mean? Well, our accelerated growth drivers have been growing double digits since Q4. And that also happened in Q1, is going to continue in Q2, and that contributing to 90% or 90-plus percent of the growth of the segment. And that kind of tells you that our growth is increasingly structural. You talk about China, you talk about some of the events that says production is down, but every segment -- I'm sorry, every region in automotive is up year-over-year. Despite the sequential decline a quarter, year-on-year, we're actually growing year-over-year in every segment, and that continues into Q2. Vivek Arya: And for my follow-up, perhaps on the comms infrastructure segment, I think the last call, you kind of broke it out, right, half, I think, in your tagging products and then digital networking and RF power. And back at your Analyst Day, you had said essentially kind of a flattish outlook from '24 to '27. What is the right way to think about this business? How much of this do you still plan to exit? How much of this are you reinvesting in? So what is kind of the true growth rate of your comms infrastructure business in '26 and '27 that we should be looking forward to versus what you thought of at the Analyst Day? Rafael Sotomayor: So let me answer just by stating that we're not going to change the long-term model of comms and infra, but I think your question is very valid with respect to the composition of what's in, in comms and infra. And if you -- if you remember what I said is that this end market was going to be flat -- CAGR, basically flat for the next 3 years between '24 and '27. And we experienced a decline on close to 25% last year. Now we closed the year on this segment with about 50% of this revenue being tied to secure cards, about 1/4 of that was the digital networking and 1/4 of that was RF power. Now you can see that the comms and infra end market is recovering, primarily on the back of the strength of secure cards, RFID is actually going up and our exposure to data centers through our digital networking products is actually rebounding. And so I think the composition of this segment is going to shift a little bit more into -- from RF power, which we are actually deemphasizing and is going to probably start decelerating in 2027. The revenue composition is going to change from RF power more towards digital network and secure cards is likely to stay around 50%. And that's the way you should think about it. Operator: And our next question will be coming from the line of Ross Seymore of Deutsche Bank. Ross Seymore: One of the lines you said in your preamble, Rafael, as well as in your press release was about the momentum accelerating throughout the rest of the year. Can you just talk about what that is? I'm not trying to get you to guide for the back half of the year, but just is your visibility improving? What gives you the confidence in that? How much is cyclical versus secular, those sorts of things? Rafael Sotomayor: No, I think it is a fair question. First of all, I will kind of resonate with you. I'm not going to guide second half today. But I would say the setup has clearly improved. And if you take the Q2 guide, you can probably right estimate at 15% growth in the first half of 2026 versus second half -- sorry, first half of this year versus first half of last year. And actually, it's 18% if you adjust for sensors. So actually, you can see that we're starting the year stronger. What has changed? The visibility has improved. I think what has changed, direct order book continues to strengthen. The distribution backlog continues to improve. So I think we believe the momentum continues. And so we're going to stay disciplined in the way we guide, but the signals that we track gives us confidence that the momentum of our company-specific growth drivers will continue throughout the year and it's going to drive what we believe is going to be growth in the second half. Ross Seymore: I guess for my follow-up, thanks for breaking out the data center side. Talk a little bit about that 200 more than doubling this year. You went through a few of the drivers there. But are these new products? Is this just the rising tide of that CapEx lifting all the boats you included? Or is this a strategic area that you're targeting? Just talk a little bit about what gives you the confidence in that and how NXP is differentiated. Rafael Sotomayor: Yes. Maybe, Ross, I'll start by maybe explaining what is our exposure to data center because that could be confusing. So off the bat, right, I would say we're not claiming exposure to the data plane. So no GPUs, no accelerators, no high-speed AI connectivity. So our domain is in the control plane. So the way to think about it as data center scales, the constraints are not just compute and memory, they're also power, cooling, uptime, secure controls. And I think this is where NXP plays. What are our products? Our products are Layerscape networking processing for control plane networking. We have our i.MX products for board management. We have our MCUs doing root of trust or being part of the cooling system. So the way to think about it is we play in the part of the system where you need high reliability and long life cycle applications. And I think this is where NXP's industrial strength portfolio is differentiated. And so the growth that we anticipated from last year to this year is underpinned. I mean these are products that they're not only designing, but they're ramping. And I think this is just about just making sure the momentum continues into the second half. Operator: And the next question will be coming from the line of Thomas O'Malley of Barclays. Thomas O'Malley: Just on the channel, you guys went from 9 weeks to 10 weeks now, it looks like 10 weeks to 11 weeks. Clearly, the demand profile for the rest of the year is stronger. I was curious if you guys had any additional views on the channel. Do you think that you would expand it just given the stronger demand profile? Are you comfortable with it at that 11 weeks mark that you guys have kind of described in the past? Rafael Sotomayor: Yes. So in this quarter, right, in Q1, we went to 11 weeks. And if you remember, our guide of Q1 last quarter already reflected the 1-week increase in our inventory. And it was primarily to actually service what it was a much stronger demand environment. And if you look at our growth in industrial & IoT in Q1, it grew over 20%, and 80% of that business is serviced through distribution. So you can see that we already had an idea of where the strength is going to come. And then our Q2 guide in industrial & IoT, which is -- but you have to remember, 80% of that comes from the channel is guiding towards high 30% range. So we're clearly servicing the channel. Now Q2 guide is based on inventory channel staying flat, staying at 11 weeks. So we intend to stay in our long-term target, which is 11 weeks. Thomas O'Malley: And then just as a follow-up on the data center side. You guys are obviously seeing gross margin benefit from volume, and you also talked about mix as well. You guys don't give specific gross margin targets on your segments, but could you maybe give us a flavor of are these new products beneficial to corporate gross margins? And as that scales, should you see a tailwind from the data center business as well on the gross margin line? Bill Betz: Yes. Tom, this is Bill. Thanks for your question. Let me address the gross margin in general and specifically your question. Our gross margins continue to expand, driven by the higher revenue, the product mix and the utilization levels. Our utilization on our front end, think about the first half to be in the low 80s and think about the second half to be in the mid-80s. So we will get benefit from that from the utilization levels for our gross margin. Again, all the investments we're making is all about -- and servicing is all about focus on being accretive to our corporate gross margins. So in these areas and when we make investments or provide our broad portfolio into different applications, it's extremely important that we extract value and also create value for our customers. So the way to think about that, to your question is, yes, they are very favorable to the corporate gross margins, but we'll continue to drive and focus there. Operator: And the next question will come from the line of Francois Bouvignies of UBS. Francois-Xavier Bouvignies: I wanted to follow up on the -- maybe on the pricing dynamics. I mean we have seen pricing increase in the industry so far since the beginning of the year. And also we have seen some reports that NXP is also involved in these pricing dynamics. You don't talk much about pricing. So maybe I think that maybe it's not that a big impact yet. But should we impact the pricing move for the rest of the year as an upside potential if it's getting tighter? And Bill, you mentioned [ 85% ] in the second half of the year. So maybe you are reaching a level where maybe you could increase the pricing over time. Is that a scenario possible? Rafael Sotomayor: Francois, let me answer the question here with -- in the way we see. I mean, I think your question relates to inflationary costs and the impact into pricing. And pressure in terms of cost is always a challenge. And this is something that we do that -- we're paid to actually handle. And so we must tackle it. So our first reaction to cost increase is always to mitigate it through operational efficiency. And that for us is our preferred approach. That said, in selected areas, we are seeing high input cost pressure. And so we are taking selectively smart pricing adjustments to protect the economics of the business. The reason we haven't talked about it is because the Q2 impact is immaterial. Now we will continue to be disciplined and protect gross margins when cost inflation requires a response. And so we'll keep you updated if things change. Francois-Xavier Bouvignies: Makes sense. And maybe the second question is on this broad-based recovery across all products and China when you said China is also growing. And of course, when we look at the Q1, the China auto car sales, at least for the domestic part is actually down meaningfully, I mean, mid-teens percentage year-on-year. So do you see as well China still strong year-on-year in Q2 and for the remainder of the year? Or do you see as well some impact from that data we see for the sales of cars in China or the content is higher and offsetting, any color on this China specifically would be great. Rafael Sotomayor: No. Francois, I acknowledge the headlines of China, right? I think it's been very public that the production in China was weak, primarily driven by the weakness on the internal consumption and some of the headlines that the Chinese OEMs are focusing more on export to overcome some of the challenges that are happening with the domestic market. But I think the contradiction is that -- and I continue to say it is that production volatility is very small compared to content growth. And China is no different than the rest of the world. And I tell you for us, China grew year-on-year in Q1. I mean it wasn't necessarily massive, but it grew and it continues to grow into Q2. And so I think that is the story. And if the story doesn't change, content growth overcomes unit volatility. Operator: And our next question is coming from the line of Jim Schneider of Goldman Sachs. James Schneider: Given the commentary you've made and the idiosyncratic growth drivers you're seeing relative to '26 and '27, just wanted to clarify that you are still on track to sort of deliver to your Analyst Day targets from 2024 out into 2027. And maybe you can confirm both the revenue and gross margin side of that. Rafael Sotomayor: Yes. I think the question on 2027, we were specific both in our script, both Bill and I in our prepared remarks that we are confident and we have a conviction on the trajectory that we have with our secular growth drivers that 2027 is achievable. And so I think the answer is yes. We stay put with our 2027 targets. Bill Betz: Yes. And just to add the secular drivers, they continue to perform very, very well. We expect for the auto ones to be above our high end into Q2 and also for industrial & IoT, the growth rates to be above the high end of what we said for our industrial & IoT growth drivers that are company specific. James Schneider: That's helpful. And then relative to the data center disclosure you provided, that by all accounts appears to be at least at or potentially above the rate of data center growth for many of your analog peers. Can you maybe talk about whether there's any specific areas that are growing -- sort of outgrowing the overall envelope there? And whether you plan to deliver or introduce any new products to further apply towards that opportunity? Rafael Sotomayor: Yes. The data center -- so the way to think about data center is that we are just ramping, right? So the growth -- and again, we're going to be focused in the control plane of the data center. The growth of that exposure to that segment is just beginning because we're just ramping. And our SAM, if you look at our SAM on the control plane, it's probably growing about 10% to 11% per year. We are going to outgrow the SAM because we're just ramping and I expect that to continue to happen in '26 and '27. We are doubling down on some of the products to actually seize kind of the opportunity that we have in the current engagements. We are talking to our customers what the next generation of products is going to be. And I'll tell you, the exposure in the data centers has about 20 to 25 products. Obviously, some of the higher ASP products are in the networking side and the i.MX products for management control. And so we're speaking to our customers what the next-generation needs are going to be, and we're developing those products. Operator: And our next question is coming from the line of Matthew Prisco of Cantor. Matthew Prisco: Maybe to kick it off, can you share a little more color on the customer ordering patterns that you've seen, what's changed over kind of the past 90 days? And have you seen any impact from memory dynamics out there or Middle East conflict either in the order patterns today or in customer conversations? Rafael Sotomayor: Well, the visibility on our backlog and then the distributors' backlog has improved significantly. And that's what gives us the confidence that we have going into the second half of the year that the demand is strong. Memory is always a topic, and our customers are doing everything possible to actually secure supply. This is more of a supply issue versus a price issue. We all know what the prices are in the memory. We are -- if you look at our customers on the consumer side, they are very well-funded customers that they have the ability to actually go get the supply they need. So we haven't seen any impact in our orders yet in industrial, IoT and automotive due to memory, even though memory is still a big conversation in every customer meeting that we have. Matthew Prisco: Helpful. And then maybe talking about the supply backdrop a bit. Are you seeing any tightness out there impacting the business as we kind of see those Tier 2 wafer pricing increases and kind of what we're talking about supply, an update on VSMC or ESMC timing? Bill Betz: Sure. Let me take that. Let me take your last question first on the timing of VSMC and ESMC. Both are on schedule. VSMC Navy, I know the tools are installed. They're going to start ramping soon. And hopefully, we get up and running in 2028, where we get the -- expand our structural gross margins by another 200 basis points. Related to other supply factors, yes, supply in different parts of the supply chain are tight. And we do see these inflationary costs that Rafael referred to. And if we can't offset them internally from operational efficiency or productivity, we then unfortunately have to pass them along to our customers. And so we are starting to do that in selective areas, but trying to do that in a controlled way. If things get really tight, we'll do what we did during COVID to do -- to make sure that we protect our gross margins related to it. But we are seeing bottlenecks -- slight bottlenecks in certain parts of the supply chain. Operator: And the next question will come from the line of Joe Moore of Morgan Stanley. Joseph Moore: I wonder if you could talk about the growth drivers in the auto space, and you sort of talked about seeing your business get better from that. Any -- is that kind of an indication of 2027 model year? Or I sort of think of these as 5-year rolling programs. Just anything you can do to help us what's giving you the confidence to sort of call that an inflection rather than something cyclical? Rafael Sotomayor: Yes. So let me talk about the auto growth drivers. They've become a very important part of the business now, and it's really changing the composition of the revenue in auto. The growth drivers -- just to give you a sense, the growth drivers in Q1, they were north of 45% of the revenue composition. And so we continue to see growth. And just to give you a sense, this is now coming from a 39% composition. I think we're going to end up the year in 2026 closer to the 50% range as opposed to the mid-40s. And because they are growing strongly, right, and they are growing double digits. And it's driven by the software-defined vehicle portfolio that we have. That is the strength of NXP and automotive is we have products in the processing portfolio that today don't have equivalents in the market, and they are really well positioned for zonal architectures and central compute architectures. So we expect this transition into SDV to really be a very, very strong tailwind and position NXP as the leadership in automotive. But it's all driven by our SDV platform. Joseph Moore: Great. And is there anything different about that in the China market? I'm sort of thinking when you build the car architecture from scratch, it's probably easier to build around software-defined vehicles than it is if you're sort of in an entrenched architecture. On the other hand, there's local suppliers and things like that. Just is the China market any different in terms of those growth drivers? Rafael Sotomayor: It is not necessarily different in terms of the adoption of the growth drivers. I think what is different is in the speed in which they adopt the products. And for instance, I would say that -- let me just take an example, the S32K5, which is our 60-nanometer -- latest 60-nanometer zonal product, a product with a lot of performance. We expect the K5 to go to production in China despite the fact that this product has been sampled to Western customers first. So the speed in which they adopt the next-generation architectures is what is different. Now you made a comment with respect to local competitors. I think the shift in architecture is also benefiting us because at the end of the day, you will see local competitors emerge in the automotive market, and they are likely to emerge in the low end. But this architectural shift to zonal and central compute, it favors higher processing capabilities, it favors higher redundancy. The other thing that you have to take into account, China is moving fast to automation to Level 3, Level 4 ADAS. So that also requires more redundancy, a better security, better safety. And so this is where I think innovation and MCUs and MPUs is going to be key to actually win in the market. So we are quite excited about the transformative move that Chinese are making in architectures and the speed in which we're doing it because we have the right road map for them. Operator: And the next question will be coming from the line of Chris Caso of Wolfe Research. Christopher Caso: First question is coming back to some of the comments you made about input costs rising. And if you could talk to us about what you're seeing with regard to foundry wafer pricing now? And how that gets affected as you -- as VSMC starts to ramp next year? What impact is that on you? And perhaps does that provide you with some sort of an advantage if pricing does go up as VSMC ramps? Bill Betz: Yes. Let me take that one. The way to think about the supply, VSMC services is one sort of supply which we kind of have a little bit more control over and why we're paying additional capacity access fees to get additional supply. But that's probably more linked to some of our technologies that are mostly in-house from part of our consolidation rationalization project that we're doing. The other capacity, what we're seeing is when you want additional, so if you have surprises above what the agreement that you kind of entered in the beginning of the year, we're seeing additional charges because they may need to obviously, capacity gets tight, so they also may need to add new tools and so forth to help you supply. But we're not -- from the current agreement, it's probably more upside that they charge and then can we offset that internally? If we can't, then we pass it along to our customers. Christopher Caso: Right. Understood. As a follow-up, you mentioned in your opening remarks that the -- I guess you were confident still in the Analyst Day targets and that implied double-digit growth for '26 and '27. Obviously, '27 is far away. I'm not sure what we should read into that. Is there any particular visibility that you have? Or is this just some confidence that perhaps we finally turned the corner? And if that's the case, we get a good growth year next year. I'm not sure how much we should read into those comments. Rafael Sotomayor: Well, let me address that because I think it's a question on the model and why we're doubling down on basically our commitments in 2027, which will imply just doing the math, a particular growth rate in 2026 and 2027. And that conviction, our revenue targets emanate from the traction that we have in our accelerated growth drivers and the traction that we have now with data center and the traction that we show you in both industrial & IoT. And I think you can get there through different contributions by the different end markets and some segments are going to be in the low end of the range, some segments are going to be in the high end of the range. But our targets for us in 2027, they seem to be within reach. Now just to be honest, I don't -- internally in NXP, we don't see 2027 as a destination, of course, just a milestone. And if you were to look into 2027, getting -- what's important, obviously, for you from a revenue perspective is why we have the conviction, but for us internally is how we close the year and enter 2028 with momentum in our focus markets. The progress we make in our portfolio, the traction that we have on becoming mission-critical to our customers. And I think the conviction that we have is the progress we're making right now in 2026 and last year with the adoption of our customers and our new products, I think makes our view on this path towards 2027 very, very constructive. Bill Betz: Yes. And maybe I'd just add just on the secular growth drivers. Obviously, we have visibility next quarter, the quarter after and the following quarter. And the order intake on those secular growth drivers for the company specific are all at high end or above what we said during Investor Day. So really a lot of company-specific growth that's given us confidence behind it because, again, it's a content, it's a ramp of products, design wins that have won and they're ramping now. And so since they're tracking to at the high end or above the high end of the model that we provided, we feel very confident that this will continue because of the adoption of our solutions. Operator: And our next question is coming from the line of Gary Mobley of Loop Capital. Gary Mobley: I was hoping that you can give us an update on the integration of Kinara, Aviva, TTTech, how that's progressing, whether it relates to enhancements to existing road maps or full commercialization on an independent basis? Any update there would be helpful. Rafael Sotomayor: Yes. I'll give you an update. This is Rafael. So I think let's start with TTTech. I think great engineering organization. They have been redeployed now to our internal efforts to do S32 CoreRide. This is a very important kind of initiative that we have. We expect to sample with customers in Q3, the zonal reference design, the zonal K5 reference design that involves not only the K5, but other MCUs and our 48-volt architecture, and we're doing it both in the East and the West. I think we have high single-digit number of customers engaged in POCs. So it's quite exciting. And we do expect that this effort is going to accelerate the K5 adoption into 2027. Aviva Links, I think, is a great platform that we got on SerDes platform. This is an open standard, very important for SDVs given the fact that the sensors and displays are multiplying in next-generation vehicles and all these are connected to SerDes. And I think companies are looking for an open platform versus the proprietary solutions they have today. We have customer awards now, and we expect to be in production with them in 2028. So this is a new SAM for us. This is a new market that we haven't entered. And in the past, there were 2 very entrenched, obviously, competitors there. But now with this open standard allows NXP to come and compete and compete with great technology. And the last one on Kinara. Kinara was a great acquisition directly in the middle of our North Star, which is becoming intelligent systems at the edge. And Kinara is -- it's been a perfect combination for our i.MX platform that is our application processor. It allows us to really engage with customers in ways that we couldn't have done in the past just because we didn't have the capability, we didn't even have the credibility on it. And so today, sales funnel is quite large and literally over $1 billion of sales funnel. So obviously, a lot of things to go and go and chase. Our customer reaction is really good. We have I think we have like more than 30 POCs going on, and we expect -- again, we are on track to have some revenue of combination of the Kinara asset with i.MX in the second half of 2027 and 2028. The other important thing is that we're starting to integrate the Kinara IP already into our industrial processors and our auto processors. This is monolithic integration of the IP. So this is also going to be part of our next-generation processing for our auto and industrial products. Gary Mobley: Appreciate it, Rafael. I want to ask really more of a direct question on your comfort to the 2027 targets. We all know what the revenue would materialize to at $15.8 billion if you hit the growth targets as laid out in November 2024. But we've had, of course, the divestiture of the MEMS Sensors business. So should we think about the endpoint or I guess, the milestone for 2027 is about $15.4 billion in revenue? Jeff Palmer: So Gary, let me take that modeling question. So first, in your calculation, remember, you've got to back off the sale of the MEMS business. So that's just a housekeeping item. But I think that what you've heard from both Rafael and Bill today is we are standing solidly behind our long-term growth rates. At the total company level, that means we're going to hit 6% to 10% total company. And I know you guys know how to do modeling better than anybody. You can kind of back into what that means for '26 and '27, and we're going to leave that exercise to you. But we are not backing away from those targets. And I would say the thing to take away from maybe some of the comments from both Bill and Rafael is the design wins we have, and they are starting to go into production. So our clarity and our belief in achieving those targets is increasing daily. Operator: And the next question will be coming from the line of Quinn Bolton of Needham & Company. Quinn Bolton: I guess I wanted to come back to the IIoT business. And if I've got my numbers right, it looks like that business will hit a record revenue level in the second quarter. How much of that is just broad-based industrial end market recovery versus your company-specific growth drivers? And then I've got a quick follow-up for Bill. Rafael Sotomayor: Yes. Let me jump on that one. I think you're right. I think the strength -- IoT, industrial and IoT for us started showing strength in Q3 last year. We started to grow year-over-year, and that growth continued in Q4, continue in Q1 with a 20-plus percent range, and now we're guiding to the high 30s. So we said it clearly, the strength is broad-based. It's all geographical regions in all markets. We have certain products right now that are driving the growth. We said that half of that growth came from new industrial processing portfolio. That is on -- that is the accelerated secular growth drivers. What is also very encouraging is that we're seeing the core part of industrial IoT also growing. This is a part of the revenue of the last year decline now is back into growth. In Q1, it grew 15% year-on-year. And so you can see that the rest of the portfolio is also recovering. So it's very -- it's broad-based now. It's also not only the accelerated growth drivers performing, but the core part of our business in industrial and IoT is coming back. And so that kind of tells you hopefully a little bit of flavor of the strength of the momentum that we have going into Q2 and likely carry in the second half of the year. Bill Betz: Yes. Maybe I'll just put a number there. The way to think about industrial IoT, the secular growth drivers are representing about 37%, and they're growing north of 40%, 50% kind of range, just to give you a feel. Quinn Bolton: Great. And then for Bill, you've talked about the 200 basis points that you get from the ramp of VSMC and in-sourcing or moving production from 200-millimeter to 300-millimeter. Can you give us a sense as that facility comes online, how quickly do you get that benefit? Does it -- can you see it all in 1 year? Or does it take several years to achieve the full 200 basis points? Bill Betz: Yes, it's a great question. Typically, we should start to see it when the factory is fully utilized, which is probably a good utilization number for that type of factory runs 90%, 95%. And so it will take several quarters to get that full benefit, depending on the ramp, of course. So my guess is you'll probably get a partial of it for sure in 2028. Will you get the full amount? Not sure. It all depends on the timing of the ramp, but we're pushing strong, and we want to get it as well and drive it. Jeff Palmer: Lisa, I think that will be our last question, and I think we'll pass it back to Rafael to conclude the call today. Rafael Sotomayor: Thank you, everyone, for joining us today and for your thoughtful questions. In closing, I would like to leave you with three takeaways. First, NXP growth is driven by leadership in SDV and physical AI and industrial & IoT. Second, our company-specific growth drivers are performing as designed. Lastly, we're reaffirming our Analyst Day commitments, which implies double-digit growth in both 2026 and 2027. This quarter reaffirms the strength of the execution to our strategy. We remain committed to disciplined investment, margin expansion and portfolio optimization to deliver sustainable long-term value for our shareholders. Thank you. Operator: Thank you. This does conclude today's program. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bloom Energy First Quarter 2026 Conference Call. [Operator Instructions] And I would now like to turn the conference over to Michael Tierney, Vice President, Investor Relations. You may begin. Michael Tierney: Thank you, and good afternoon, everybody. Thank you for joining us for Bloom Energy's First Quarter 2026 Earnings Call. To supplement this conference call, we furnished our first quarter 2026 earnings press release and supplemental financial information with the SEC on Form 8-K and have posted these materials, which we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company's business results, products, technology, customers, new markets, strategy, financial and competitive position, investments, liquidity and full year outlook for 2026. These statements, which relate to matters including time to both power and market with standard for on-site power cost efficiency, capacity expansion, innovation, affordability and community acceptance as we look to keep pace with the rapid evolution of our markets are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties, as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our first quarter 2026 earnings press release and supplemental financial information, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in these materials, which are available on our Investor Relations website. Joining me today are K.R. Sridhar, Founder, Chairman and Chief Executive Officer; and Simon Edwards, our Chief Financial Officer. K.R. will begin with an overview of our progress, and then Simon will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I now turn the call over to K.R. K. Sridhar: Good afternoon, and thank you for joining us today. Bloom delivered a record first quarter. Revenue, gross margin and operating income all came in materially above our prior outlook based on what we are seeing across the business, we are also raising our full year guidance and raising it materially. We will walk through the numbers in a few minutes but first, I want to talk about what is happening in our market because the headline numbers as strong as they are, are a lagging indicator and don't convey the whole story. Fee at Bloom are ushering in the era of digital power for the digital age. Now the marketplace is recognizing and embracing our proposition of clean, reliable on-site power that is community-friendly and deployed at the speed of AI. Bloom is rapidly becoming the standard and go-to choice for on-site power. Last night, Oracle announced a new power paradigm for Project Jupiter, a multi-gigawatt AI factory to be built in New Mexico. We are thrilled to partner with Oracle and applaud them for their visionary leadership. This up to 2.45 gigawatt power block will replace Project Jupiter's previously planned gas turbines and backup diesel generators with Bloom Energy Servers. It will be 100% bloom. When completed, it will be one of the largest islanded microgrid power facilities in the world. Oracle pivoted to Bloom only solution for 2 main reasons: first, be a responsible corporate citizen and partner by being responsive to resident concerns about air quality, water use, noise and increasing electricity rates. Second, to stand up their grid independent and clean AI factory with even greater reliability and speed. Bloom is the cleanest commercially available on-site power generation option for such data centers and the most water efficient. Even Blooms community-friendly attributes, Oracle should be able to energize the campus materially faster than any other available alternative solution in the market. At a time where every quarter of delay translates into hundreds of millions in foregone AI revenue and loss of competitive advantage. Speed of powered infrastructure development is the difference between leading and following. Becoming the sole power provider for Project Jupiter is a milestone for Bloom, but it's not going to be a one-off project, where Oracle is going is where the broader market is headed. On our Q3 call, I described our playbook for becoming the standard. In each vertical, we established credibility with the lighthouse customer then build on that success with other Tier 1 customers. 2 quarters later, that's exactly what's happening across the AI ecosystem. Oracle is rightfully getting headline attention today. But well more than half of our current data center backlog comes from other hyperscalers, neo clouds and colocation providers. just like the Oracle Jupiter project, these microgrid installations will use no grid, no dirty diesel generators for backup. No battery banks for load following. No engines, no turbines, just bloom and Bloom alone. We are continuing to engage with more hyperscalers and new clouds by signing new contracts and slot reservations and working with them to evaluate many new opportunities. Our pipeline today is diverse and robust in the AI segment. Parenthetically, let me also remind you that this is a recent repeat of our C&I business playbook. That segment is also experiencing strong demand is diverse and continuing to grow. I want to give you a perspective on why we are experiencing the hyper growth because it will shape how you think of Bloom going forward? For over 25 years, we built this company around the conviction that clean, reliable, affordable on-site power would become essential to a digital world. The market is now validating that vision at scale and AI power demand is simply accelerating it. Time to power has gone from a procurement consideration to an existential necessity. The company is driving the AI transformation are raising against each other on the one hand. And on the other, bumping into the bottlenecks comment to building conventional infrastructure such as permissions, permits and community acceptance. The winner will be the one who can grow and deploy faster and on the schedule, the market demands. You see that's a different game than the one the legacy power industry is set up to play. Their model is industrial. Long cycle times, capital heavy capacity additions, product improvement measured over decades rather than quarters, our model is different at every layer we innovate and improve continuously, be it in our technology, in our product in how we manufacture in our capital intensity in how we deploy in how we operate and service our systems and in time to market. That is what allows us to deliver double-digit cost reductions year after year expand capacity with materially less capital than industrial era players and meet our customers' schedule needs. Our differentiated and unique operating rhythm and mindset will be obvious to you if you visited our factory floor. It's a state-of-the-art production facility a busy construction zone and a buzzing innovation hub. We are manufacturing product on schedule to meet customer needs, adding lines and expanding capacity to meet growing demand and innovating to reduce cycle times, space needs and costs. Product manufacturing, capacity expansions and innovation, all occurring concurrently all the time, all under the same roof and all with factory floor team members and engineers working as 1 team for 1 common purpose. To be better tomorrow than we are today and keep marching towards the north star of maximum entitlement. This is an example of our operating model. We call it the Bloom way. As a result of this approach, the contrast and outcomes is simple. Their supply to current orders arrive only in 2029 or later, irrespective of the customers' needs. Hours arrived this year or the next or whenever the customer is ready. Based on demand profile, we have now shifted to adding capacity continuously. Hundreds of megawatts a quarter as opposed to lumpy one-off additions to be completed in a year's time. How we think about and execute on capacity addition is one of the clearest ways to see what makes Bloom different. The traditional power industry has been the past 2 years, celebrating its backlog that is 4 and 5 years out. Backlog at that scale and time frame in the age of AI is a result of their constrained supply. At Bloom, we see it differently. Our ability to expand capacity is our competitive advantage. We want to rapidly build capacity, build product help build productive AI factories to help build commercial and industrial facilities and help build our economy, not just be satisfied with simply building backlog. Our current manufacturing footprint will allow us to deliver 5 gigawatts of product annually. We will expand to that capacity and meet the delivery dates needed by our customers. In other words, today, we are not order constrained and not capacity constrained. The pace of our revenue growth is decided by how fast our customers can build their greenfield sites, not how fast we can power them. We will never be a bottleneck to our customers. We built our business around that promise. Going beyond the 5 gigawatt capacity, our supply chain and manufacturing strategy and planning allows us to build that capacity significantly faster than any other option in the market using our copy exact model. We will strive to bring power to our customers faster than they can stand up their greenfield facilities. We were able to make that promise because we invested deliberately ahead of demand. We expanded manufacturing capacity, built inventory, diversified our supply chain, strengthened our balance sheet and assembled an ecosystem of long-term supply partners that scales with us. Given our low capital intensity, those investments carried materially lower risk for shareholders than they would have for an industrial or a supplier. They were disciplined decisions made with conviction that this market shift was coming. While our new orders that we are telling you today are news to you, we have advanced visibility and anticipated such wins for months. So we planned out our capacity expansions accordingly. Our strategy and judicious investments have positioned us to become the standard for both on-site power and time to power. Beyond speed, our architecture creates real flexibility for our customers. Our modular copy exact systems are portable and fungible and meet air quality requirements in virtually all jurisdictions. If a customer needs to shift deployment from 1 site to another, our master services agreement is structured to enable that. With the master service agreement, our hyperscale customers have the geographic flexibility to move a bloom deployment from 1 site to another based on a speed up at 1 site or a delay in another. Bloom moves with the customer to the location where the GPUs are ready to convert the power to tokens of intelligence and revenue dollars. Unlike a traditional power plant, our platform is also a different kind of neighbor in a community. We are community friendly. As more on-site generation gets deployed to support AI and industrial growth, communities care deeply about what kind of infrastructure shows up next door. Bloom preserves local air quality, we do not combust and pollute the air like conventional technologies. We use minimal water edge startup and none during normal operations. we acquired compact and efficient with land use. We integrate well with environments rather than disrupt them and become an ISR. As permits and permissions become the gating factor for AI infrastructure, community acceptance matters increasingly. Our fully landed grid-independent one-stop full stack power solution does not raise the monthly electricity bill for community residents and brings them economic development without compromises. The cost equation has also shifted in our favor. We have spent years driving down product cost while improving performance. That work is meeting the market at exactly the right time. our energy servers are now cost competitive with grid power in most U.S. markets and with off-grid alternatives in nearly all markets. With over a decade of double-digit cost reductions, we remain the only on-site generation solution with a sustained downward sloping cost curve. As affordability of power becomes a national issue, we expect to become the solution of choice from that perspective also. Bloom delivers a value proposition built on the principle of and not all, customers can have the power that is clean and reliable and fast and affordable. Now to our outlook for the year. To say that the commercial landscape is fluid and dynamic would be a massive understatement. The strength of the quarter and the commercial momentum we see across the board gives us conviction and confidence to raise guidance materially. We are raising 2026 revenue guidance of $3.1 billion to $3.3 billion to $3.4 billion to $3.8 billion. At the midpoint, that takes growth from 60% year-over-year to 80%. We are also raising our gross margin outlook from 32% to 34% barring any global shock or exogenous factors. You can see, we are prioritizing growth and profitability in equal measure. Now I want to introduce Simon Edwards, who recently joined Bloom as our Chief Financial Officer. Over the past year, we have been deliberate in our search. It was important to us that we not only find the right CFO for Bloom today, but the right leader and business partner to help bloom scale for the future. Simon brings a rare combination of capabilities. With the systems engineering background, he has built disciplined operating models and scaled manufacturing operations for complex systems as CFO of leading software franchises, he has applied a digitally native approach to building businesses, leveraging data and analytics as competitive advantage and employed automation for speed and efficiency. His time at Grok has given him a front-row seat to the explosive growth occurring across AI. All of that translates directly to where Bloom is headed. I also want to thank [indiscernible] and the finance team for their outstanding work in supporting the business without missing a beat during last year. Their performance speaks to the depth of the bloom talent at all levels. I'm proud. Finally, to the Bloom team, thank you. What you've built over more than 2 decades is meeting the market at exactly the right moment. You believed and always knew that an inflection point would come. None of what we see today would be possible, but for your faith, dedication, diligence and discipline, much gratitude. With that, Simon, a very warm welcome, and the mic is yours. Simon Edwards: Thank you, K.R. I appreciate the kind words today and the warm welcome that I've received here at Bloom over the past couple of weeks. I'm excited to be part of the Bloom team and to be speaking for the first time on a Bloom earnings call. I chose to join Bloom for a few reasons. First, K.R. talked about the architectural shift driving a large TAM with increasing momentum. Having seen the powerful tailwinds around AI infrastructure and electrification, I recognize very real bottlenecks in power availability. Bloom is uniquely positioned to address that challenge with a long-term opportunity that extends well beyond AI. Second, Bloom is a Silicon Valley innovator, solving an industrial problem. I was drawn to balloons visionary leadership and the depth and quality of the leadership team. There is a clear strategy, strong alignment and a mindset focused on building something enduring that starts with K.R. and permeate through the entire organization. And third, this is a chance to help build a truly generational company, one that can capitalize on long runway for growth and create long-term value for customers and shareholders. Since joining 2 weeks ago, I have already been impressed by what I have seen. The team is highly engaged and motivated. The demand environment and pipeline are exceptionally strong, and there is a clear bias towards the results. turning that demand into delivered systems, cash flow and sustainable performance. In addition, the sense of mission is clearly apparent among Bloom's employees. Many of our employees have been here for 10 to 15 years, long before AI was a common phrase. These employees stayed here because they believe in the Bloom mission. To make clean, reliable energy affordable for everyone in the world. This is a driving force behind everything we do here at Bloom and the mission I'm excited to be part of. Moving to our numbers. I will discuss our Q1 financial performance and make a few comments about what we expect in 2026. Highlights include record Q1 revenue with year-over-year growth of more than 100%, continued year-over-year gross margin expansion and record Q1 cash flow. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter was $751.1 million up 13.4% year-over-year. This is the first quarter of greater than 100% year-over-year growth in Bloom's history as a public company. Product revenue was up both year-over-year and sequentially. The reaching an all-time high of $653.3 million for the quarter. Service revenue for the quarter was $61.9 million, up 15.6% year-over-year. Gross margin for the quarter was 31.5%, up approximately 280 basis points versus last year. Product margins were 35.3%, up 22 basis points from Q1 last year. As we grow, we should see incremental progress on product margins through scale, better absorption of manufacturing overhead and from the continued cost-out efforts across engineering and supply chain. Services margins were 18%, up 13 points from Q1 last year, achieving a double-digit gross margin for the fourth consecutive quarter and profitability for the ninth consecutive quarter. We expect margins for the services business to continue to benefit from both growth and scale and field performance improvements. Operating income for the quarter was $129.7 million, compared to $13.2 million last year, an increase of $116.5 million with operating margins reaching 17.3%, up more than 1,300 basis points year-over-year. Adjusted EBITDA for the quarter was $143 million compared to $25.2 million last year, an increase of $117.8 million with EBITDA margin expanding by more than 1,100 basis points to approximately 19%. This margin expansion highlights the significant operating leverage in the model as revenue growth continues to outpace cost growth. Non-GAAP fully diluted EPS for the quarter was $0.44 versus $0.03 a year ago. While we will continue to invest to support the growth ahead of us, I'm impressed so far with Bloom's ability to deliver at an increasing scale while managing costs through both operational efficiency and gaining leverage through technology adoption. As K.R. mentioned earlier, we are rapidly expanding capacity through our innovative manufacturing model, which allows us to scale in months, not years. That growth requires upfront working capital to support higher production and deliveries. Even with those investments, cash flow from operating activities was an inflow of $73.6 million, positive for the first time in the first quarter of the year, which is typically a seasonally weaker period. This was driven by a step change in profitability, strong collections and customer prepayments to reserve capacity. We ended Q1 with $2.52 billion in total cash on the balance sheet. Turning to guidance. After a strong start to the year, and anticipating that Q2 revenue should be at least as good as Q1, we are raising our fiscal 2026 guidance to new levels. We are increasing our revenue projections from the previous range of $3.1 billion to $3.3 billion up to a range of $3.4 billion to $3.8 billion, with the lower end of the updated range sitting above the upper bound of the prior range. This updated guidance represents 80% year-over-year growth at the midpoint and reflects the progress we have made in adding manufacturing capacity, the strength and velocity of our pipeline and the opportunity to continue to prosecute a healthy backlog. We now expect our non-GAAP gross margin to increase from 30% in 2025 to approximately 34% in 2026. We representing about a 4-point improvement year-over-year to 2 points above our original guidance as we realized the impact of ongoing cost optimization and productivity initiatives. Our non-GAAP operating income expectation is now $600 million to $750 million, acknowledging the higher revenue and margin flow through, but also recognizing that we plan to invest to support the growth for this year and the future. Our non-GAAP fully diluted EPS expectation is now $1.85 to $2.25. To conclude, we delivered record Q1 financial results, and we are optimistic in our full year 2026 financials being the best in Bloom history. I'm looking forward to working with KR and the entire Bloom team and spending time with our analysts and shareholders. Operator, we are now happy to take questions Operator: [Operator Instructions] And our first question comes from the line of Mark Strouse with JPMorgan. Mark W. Strouse: Maybe starting with Simon. So first of all, congrats on the new role, and welcome to the fray here. You mentioned kind of how you're impressed with the operating leverage in the business. I'm just curious, I fully appreciate you haven't been there very long, but kind of your initial take... K. Sridhar: Go-to-market. There's a number of growth factors that we're exploring. Obviously, from a technology standpoint, growth is highly innovative, and we're investing in innovative areas. And then on top of all of that, I think KR has mentioned in the past, cost reduction is in the DNA of Bloom. And so I think really what we're focused on is, a, how do we execute on the projects in the plan right now that deliver on the gross margin expansion that we've highlighted. Second is, as you look at our updated guide, you'll see there's incremental operating margin expansion baked into the revised guidance. And then finally, as it relates to longer-term guidance here, I don't think that's something we'll provide right now, but continuing to execute on these vectors is something that I know everyone here is very focused on. Mark W. Strouse: Got it. If I could ask one more follow-up to K.R. Clearly, your orders are accelerating here. I'm curious if you can comment on what you're seeing with your service contracts, particularly the duration of those contracts is I think in the past, you've said some of these data center contracts have been somewhere around 6 or 7 years in duration. I'm curious if you're seeing any change there potentially longer than 10 years or so somewhat similar to your C&I business. K. Sridhar: Mark, thank you. And look, I think it's important because some people may be coming in new into the story, we have a 100% attach rate between our product sales and our service. That's the first place to start. There is not a single deal that we do without an attach rate to our service. Even with the data center opportunities, on average, it's 10 to 15 years, somewhere in that range. And so it's a tremendous source of annuity revenue that we see. And you can see us executing on the margin targets that we have provided. So it's going to be a phenomenally great business for us going forward, along with our product business. Operator: And our next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: Congratulations on the results here, and a warm welcome to Simon as well from me. But maybe I was wondering if you could touch on the pricing backdrop that you're seeing. I'm wondering if you're seeing opportunities to hold pricing or potentially seeing projects with increased price opportunities in the current environment just where we're seeing -- it seems like all other alternatives are increasing cost to the customer. K. Sridhar: So we completely distinguish and think differently about this. at the end of the day, we don't compare our pricing with engines and turbines. It's apples and oranges. We are creating a completely different value for our customer. be it 800 old DC being eliminating all the paraphernalia, the Band-Aids as I've called them to a mechanical solution going to a digital age, be it the amount of overbuild that you need to have when it comes to getting the reliability that you need because it's very obvious, these big projects are not going to have grid backing it up. . The local rate payer is not going to be providing that reliability for free. And so you bake all that in, we just always focus not on cost, not on price. Obviously, we are going to create margin for the business. And as the first question was asked to Simon, we will focus on that. But at the end of the day, we're going to build our business with our partners. By creating value for them and creating value for us. So we don't look at anybody else's pricing and what they do. Thank you. David Arcaro: Understood. Yes, that's helpful. I appreciate you characterizing that. And I was wondering as you look to ramp up your scale significantly here, could you also speak to how you're seeing the supply chain and its ability to ramp with you? We've seen labor as an example, become a constraint elsewhere. I'm wondering pressure there or in upstream materials? K. Sridhar: That's a great question, David. Thanks for asking. And because that's a significant distinguisher between what we do and what other people do. So if you had come to our factory and seen the few hundred people that we have manufacturing our stacks than we were doing 200 megawatts a year. And if you came at the end of this year when we will be doing almost 10x that amount, the number of employees on the shop store will be the same not almost equal, will be the same. And that is the innovation we bring into the field, knowing that for us, automation and figuring out how to train our existing employees, upskill them as they grow. And by the way, most of them happen to be the same employees, too. They are upskilled from doing that manual labor to automation. That's why with their hub, as you heard in my script, in the shop floor, we don't talk in harsh stones about bringing automation to remove a particular manual process out because our team members are actively involved in it. And this is the same philosophy with which we are approaching our supply, we have approached our supply chain and are approaching our supply chain because these were custom suppliers built for us in whom we expected that same Bloom way mentality, and we're enforcing it. So the ramps you're talking about are [ pre-seed ] brands. Can you hit some speed bumps along the way, maybe, but are we worried about it or lose sleep or think that we cannot get over those bumps? Absolutely not. We are confident in being able to deliver the promises we make to our customers, not just because we have a very good manufacturing shop. For us, that manufacturing extends to our supply chain partners, and they adopt the same philosophy. Thank you. Operator: Our next question comes from the line of Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: Just echoing the congratulations on the strong quarter and welcome to Simon. I guess my question here is, if I go back last quarter, you had talked about scaling capacity as your customers call in to order that. Now you're talking about continuous capacity increases. So I'm just wondering if you could provide a bit more color sort of on what's changed here in the past months that changes that approach? And what are you seeing from your conversations with customers to give you confidence to continue to expand here? K. Sridhar: Chris, thank you for that question. Look, to say that business is accelerating as an understatement. Okay? We are very, very clearly seeing that demand. And we just don't look at the demand is coming to us at any point in time in isolation. VRA power company embedded in Silicon Valley, and we understand the end-user technology extremely well. We can get into the basics of what is happening in the field of AI and understand why that demand is going to be there and I can tell you, this is a secular demand that's going to last for many, many years to come. It is with that conviction when we draw to that conviction and we understand. We talked -- if you remember a couple of calls ago, about people just grasping on the crumbs of utility capacity being available. Those comps have been eaten up. So we clearly see where this is going to go. And we see what we fundamentally see is the following: the amount of demand that is being generated and the rate at which that's growing is significantly faster than what alternative providers of power can create. That creates a beautiful opportunity for us that we see over many, many years, and it gives us the confidence to be able to say we are now going to continuously grow. So think of Bloom's capacity increase as an analog dial that constantly keep increasing as opposed to some digital step function that happens once in a while. Christopher Dendrinos: Got it. And I guess maybe just as a follow-up to that, and that step function comment. I mean is there a step function between going to 5 gigawatts and then maybe going beyond 5 gigawatts. Do you need to see something different from like a customer commitment schedule to add physical footprint? Or do you think about absolutely adding an extra facility the same way. K. Sridhar: Yes. That's a valid question. Absolutely. So the answer would be the following, right? As we said there, whenever we made that statement to you, their existing facility was 5 gigawatts. In my script, I talked about we are constantly innovating. I don't know how much more we can milk out of it. But no matter what we do, we are going to need new factories as we go forward. Bloom was built on the vision of lighting up the planet. Okay? 5 gigawatts a year or 6 gigawatts a year is not going to light up the planet. So we are going to build factories as needed. And that's just going to be a normal course of operation for us and the step functions at which we grow will purely depend on where the market is and where the market needs us. Operator: And our next question comes from the line of Nick Amicucci with Evercore ISI. Nicholas Amicucci: Great. and welcome, Simon, look forward to working with you in the future. Quick question for you, K.R. Just kind of piggybacking on Chris' question. So when we're kind of seeing that -- seeing demand and it's not coming through an isolation. Is it fair to say, too, that the vast majority, if not all, of the backlog currently is probably tethered towards your towards like AI training. And then there's conceivably an incremental leg of growth when we kind of think about inference and just the lack of need for air permits and kind of the ease of siting and permitting and so on? K. Sridhar: You're absolutely right. Let me tweak your statement in the following way. influence is going to be much bigger than training in terms of total gigawatt need. But it is going to be not concentrated in the multi-gigawatt data centers that you're looking at. And think about this influence by definition, is at the edge, a lot closer to highly dense populations of people and processes. If you're seeing the resistance you're seeing today to a conventional power plant being built in the backyard of a large training data center that happens to be in a small remote town. Just think about what that resistance would be in a city if you don't have clean solutions. Let me put this in perspective for you, okay? You just heard about the Oracle announcement of up to 2.45 gigawatts. I'm going to use that as an example, not that particular site, take that number. think about a 2.5 gigawatt power block that needs to power a large training data center somewhere. The obvious example that you would go to would be a large CCGT, a bunch of large CCGT with gas to be able to provide the power. To put it in perspective for the people listening on this call, that is the capacity of the state of Rhode Island in one single data center. And that happens to be, if you use CCGT you will use all the water that all residents used to shower a day in Rhode Island just to power that power plant close to 1 million showers a day. And it will create not from it, air pollution that is the equivalent of all the cars in Rhode Island almost in that one location. So even in a remote town, you can understand why there's a pushback and why clean is going to be important. If that's how important it is for a large data center, Imagine now for influence where it's going to go. So we see that as a huge opportunity coming our way as we go forward. Nicholas Amicucci: Great. No, that's definitely helpful. And then , as we think about -- obviously, there are certain kind of other, I guess, product on competitors kind of coming out with kind of solutions that are more of a bridge power type of solution. Are there any conversations that you guys are having with kind of your hyperscaler customers or the neo class where it's kind of -- we want to leverage the fuel cell to get up and running speed to power is paramount, but ultimately still feel the need to be grid tied or just given the reliability attributes of your fuel cell offering, is that kind of a moot point? K. Sridhar: Earlier in this conversation, they used to bring up the concept of Bridge power with us. And I would smile and always say we're happy to sell you a bridge to a bridge because Superman coming, okay? So today, that conversation is nonexisting. Operator: And our next question comes from the line of Manav Gupta with UBS. Manav Gupta: Had somewhat of 2 technical questions and ask them together. While there are other solutions, but they do depend very heavily on battery packs, for load balancing and backup, batteries are expensive, they decay they take place and they generate heat. Your solution with ultracapacitor and high reliability needs minimal battery backup. In some cases, no battery backup. So can you talk about that? And the second question is, as it is getting clear that cyber and Rubin are the future those building those hyperscalers are looking for conversion parts that can help them go from you have [ 415-volt DC ] to 800-volt DC. Now based on the channel checks we have done, large power transformers, medium board switch gears, centralized rectifiers are all seeing long queues and delays in shipment again, your solution avoids those costs and those delays. So can you talk a little about these 2 factors? K. Sridhar: Manav, thank you. Do you want to come work for us? You're making a very good sales pitch here for Bloom. Obviously. Look, this is what you're saying is very true. Here are the 2 things. Number 1 we are purpose-built and purpose designed to provide digital part or digital age. . Now it is fully understandable as I see it for large data centers to be extremely cautious about introducing any new technology, until it's proven out because the stakes are very high for them. So we had to pay our deals and slowly get in and become a pull the solution out, using AC, using all their backup generation, everything. But today and the most important point I want to highlight to you from like today's script that you saw from me. It's not just the deal we did with Orca, but we talked about several other projects we're working on, where there is no grid connectivity. There is no diesel backup generators. There are no turbines and there are no occasions. And like you correctly pointed out, there are no batteries because 100% bloom one-stop solution can solve that for them in our combined solution between our fuel cells and our ultra cats, okay? So that has to start resonating and it started resonating. Now the next step is for them to go straight to that 800-volt DC. It is -- as I see it, it's self-evident to me that, that is going to come. It's inevitable that they're going to switch to that. because the world does not have enough copper like you pointed out, the world does not have enough transformers. So necessity is going to force them there. And once they try it, they will not go back on it. Operator: And our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Congrats and welcome, Simon. K.R., I wanted to talk just maybe on the demand front and just the different channels, we saw your largest utility deal, and you've had utility deals before. . Now, obviously, with Oracle and hyperscalers you have repeat customers there. How do you think it evolves where the growth comes from additional hyperscalers? Is there a new channel like midstream gas companies, something like that? And then how do we think about the international side of the business? Like is that kind of a delayed growth area, just kind of lagging what the U.S. is doing here? And then I have a follow-up. K. Sridhar: Great questions. So let me be quick and answer those questions in the following way. You're absolutely right. What we are doing in AI right now is truly a rinse and repeat of what we have done in the commercial and industrial space, right? Work hard, get a pilot with a lighthouse customer delight them, scale out with them. use them as a reference, sign on brand-new customers and continue to build and 70% to 80% of our business kept coming from repeat customers who are very, very happy. . That's exactly what we set out to do in AI, and we are doing this. Now with the utility scale customers, for the first time, I think they are seeing favorable regulation that allows them to rate base and offer better solutions to their customers. So we see a strong interest coming from both gas utilities and electric utilities to say in the face of that favorable regulatory and price design, rate design environment, can we partner with you. We're always happy to partner with them. right? And our commercial industrial business is robust, strong and growing just the size of these big AI deals make us focus there. But trust me, we have a very active group prosecuting these orders. And think about the reshoring of big factories to America. How are they going to get the power -- we see that as a huge opportunity for us. So we are fully engaged in it. Our team is fully engaged in it. We just don't seem to talk more about it because of the size and scale of the AI opportunity right now. On the international front, look, it's very similar to what you're seeing everywhere else. -- on an 80-20 rule, pretty much the action today on AI and therefore, the huge power needs seem to be in the U.S., and that's what us and everybody else is focused on. However, we will continue to develop them. We are continuing to develop them. And we believe that there will be a pause before it takes off very clearly what happened with Russia and Europe with natural gas followed up with what's now happening with Qatar and natural gas. Those things have an impact of slowing down development in those other countries. But we all know it's not if it will happen, when it will happen. So there is going to be a delay, and we are going to be prepared for it when that opportunity comes. Thank you. Ben Kallo: And just my follow-up is on the cost front. With everything you have going on just with demand, could you just talk to us about your focus and kind of what you've done and what you plan to do on the stack life and just the total cost of the systems and kind of your pathway forward. K. Sridhar: Ben, thank you. If you walk around the floors of gloom, there will be one thing anybody and everybody will tell you, gloom is about the genius of and. It's not about or, okay? So we don't accept false choices. It's not about growing demand only. It's not just about increasing capacity. It's not just about reducing cost -- it's not about continuously not only about continuously innovating. It's about all of the above all the time. And people are sick of hearing me talk about the Genius of end. But that is really what's -- how we think or it's not in our recovery. So -- are we continuing to do that? Absolutely. Should you expect a double-digit cost reduction like we have over the last decade, answer is absolutely yes. We will still focus on that. And in terms of field performance, we continue to improve field performance, and that's the reason you're seeing our service margins to what they are. I'm very proud of our dedicated team. Thank you. Operator: [Operator Instructions] our next question comes from the line of Colin Rusch with Oppenheimer. Colin Rusch: Could you talk about the cadence of your installation times and how we should think about that trending into the balance of the year? And then just a little bit about the potential to leverage some of your available capacity into participation in project level economics for some of your customers? K. Sridhar: Yes, that's a great question. So look, we have because we saw this [indiscernible] of demand coming our way and we understood that the primary driver there is going to be time to power. And we also understood that these large data centers prosecute on multiple projects. . Just like any construction project, some are going to get delayed, some are going to be on do, some may speed up and they need that total flexibility. For all those reasons, we shifted from a have somebody big dirt for concrete, lay the conduits, get the trades people to come there and do all the work to a solution on a skid. That will just show up and get connected with the least amount of work that can happen. What is the result of that? We have closed an order of magnitude reduction in the field time that it takes for us to be able to install our systems. That's a huge innovation. We have not talked about it at all. now that you're bringing it up, I'm just mentioning it to you. But that's again the genes of and. We just continue to innovate on every single area every single day. So that's what we see. So I can assure you that we can get a 100-megawatt project up and running faster and with the least amount of field hours than any competing technology out there. So this is this is innovation and all. So thank you for asking that question. Operator: Our next question comes from the line of Maheep Mandloi with Mizuho Securities. Maheep Mandloi: And maybe just quick to first. First, just on the operating leverage. How should we think about that with the volumes to 5 gigawatts here? And separately on the service mix, how much of that 5 gigawatt would be for the service needs in the future here. K. Sridhar: Thank you. I'm going to be very quick with that answer. The answer is very simple. We only talk about commercial product capacity. We always bake in our service requirements on its own that skip separately. So when we give you a number that is our commercial product revenue capacity. Operator: And our final question comes from the line of Vikram Bagri with Citi. Vikram Bagri: Good evening, everyone, and welcome Simon to the team. We clearly are a better stock because that a lot of us on Wall Street. The first question I had here was you highlighted the culture of continuous innovation and improvement that leads to double-digit cost reduction which appears to be a significant advantage, as you highlighted throughout the call versus the competition. I wanted to ask if there is price elasticity to demand. And I understand you benchmark our pricing against competition, it's apples and oranges, fully understand the benefits of the technology, whether it's speed to power, air quality, water backup and so forth. We're still seeing premium being paid for CCGT, pricing being up 10% to 20% year-to-date this year. Is pricing something that if it goes down over time, we'll see more pronounced market share gains for Bloom from CCGT and the premium for CCGT getting eroded over time. better understanding of the product? Is it seeing the product work at a significantly larger scale at Toreo [indiscernible] of like leads to more market share gains I'm just trying to understand what's the tipping point where you see pronounced market share gains from CCGT and that premium sort of like getting eroded over time. K. Sridhar: Thanks, Vikram. You're absolutely right on the cost reduction part. I'm going to indulge you and try to see if you would think about this differently. You're talking about some future tipping point. The rate of our growth is faster than what any energy technology ever has done in the past, and that's what we see in our pathway. So this is -- for us, it's not a tipping point. Gone are the days , if you just go back to the traditional energy analysts from even a decade ago, just dedicated to 2015, 2016, the utility industries [indiscernible] Institute and all you analysts were talking about a downward spiral for electricity. This is not a zero-sum game. We don't care about what anybody else in the business does and who buys what from anybody else. We are going to make sure that we are continuously improving our product to offer the best value to our customers, the best neighborly solution to our communities where they operate and create new demand and capture new demand because that new demand is going to be significantly larger than the industrial age demand. The digital age demand is going to be significantly larger, and we are the digital solution to that digital demand. So we don't think about price. We don't think about cost. We don't think about elasticity. We think about meeting the needs and making sure that we win the AI race. We don't -- or doesn't become an impediment to reassuring factories. Power doesn't become an impediment to electrification or doesn't become an impediment to digitization first in the United States and then use that model across the world, the power of the planet. That is really what this company is about, and I'm going to use your question as also my closing remarks since we are on the hour and simply state that what Hopefully, what you all understand is the following. Let me make a few statements and ask you to think about would you agree with it or not okay? The use of AI and the amount of power that AI is going to use is going to go up and up over the next few years. The rate at which that growth has happened is not going to be met just by transmission and distribution upgrades. That means on-site power is absolutely essential. If on-site power is absolutely essential, in no neighborhood, would a community willingly want a power plant in their backyard that pollutes noisy and an is. Bloom offers a no-compromise solution to both the digital customer and any community and neighborhood. If you bet against any one of the statements that I made you can bet against loan. Otherwise, you've got a great ride with us. Thank you for your attention. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
John Campbell: Good afternoon, and thank you for participating in Porch Group's First Quarter 2026 Conference Call. Earlier today, we issued our earnings release and filed our related Form 8-K with SEC. The earnings release and today's presentation are available on our Investor Relations website at ir.porchgroup.com. Before we begin, I'd like to review the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, April 28, 2026. We undertake no obligation to update or revise these remarks. We will make forward-looking statements that involve risks and uncertainties, and actual results may differ materially. Please refer to the information on this slide and our SEC filings for additional detail. We will also reference certain non-GAAP financial measures. Reconciliations are included in today's earnings release. And also, a replay of this webcast is going to be available shortly after the call on our Investor Relations site. So joining me here today are Matt Ehrlichman, Porch's CEO, Chairman and Founder; Shawn Tabak, Porch's CFO; and Matthew Neagle, Porch's COO. With that, I'll turn the call over to Matt for his key updates. Matt Ehrlichman: Thank you, John. Good afternoon, everyone. We are pleased to report a strong start to 2026. Q1 results exceeded expectations, and we're raising our full year guidance for Porch shareholder interest revenue, gross profit and adjusted EBITDA. Porch has been a vas simpler, higher-margin fee and commission-based business, one that's built to compound premium and cash flow over time without the earnings volatility, often associated with risk-bearing insurance carriers. Last year, we proved out the profitability of our business model. 2026 is the first year with tangible year-over-year comparables for Porch shareholder interest results, and we demonstrated significant and sustainable growth, especially in Insurance Services, which delivered 50% year-over-year revenue growth in the quarter. From here, our strategy is straightforward, scale rapidly and with discipline and continue to invest in the differentiated assets that strengthen our moat, our data advantage, our underwriting and pricing capabilities and our differentiated products for consumers. Okay. So for the first quarter, we delivered results for Porch shareholder interest that reflected continued strength in Insurance Services and continued discipline across the business. Specifically, you can see here, reciprocal written premium, or RWP, was $114 million, up 18% year-over-year. Revenue was $109 million, up 29% year-over-year. Q1 gross profit was $91 million, resulting in an 83% gross margin. Q1 adjusted EBITDA was $20 million, an 18% margin. Earlier, I said, we intend to scale rapidly and with discipline. The clearest way to see that is through our insurance growth engine, capacity, top-of-funnel and conversion as well as the latest underwriting results. Over the next 4 slides, you'll see the progress we've made. And importantly, after seeing these drivers in sequence, I think it becomes clear why we're confident in continued RWP growth acceleration. So first, here, capacity. Statutory surplus is the key guidepost and you can see the progress over the last year, growth of 59% and $61 million year-over-year. The takeaway is that the capital foundation is far stronger today and supports our growth plans not just this year but well into the future. Q1 statutory surplus of $165 million supports north of $800 million in premiums, well above our $600 million RWP target for this year. When including incremental non-admitted assets of a little north of $100 million, the reciprocal -- then has the ability to support more than $1.25 billion of premium. The Reciprocal's reinsurance program is in place to protect this capital across cycles. On April 1st, the reciprocal wrapped up a very successful renewal of its reinsurance program. Similar to prior years, this included a panel of 40-plus A-rated partners, offering catastrophic weather protection. We're happy to report that the reciprocal will benefit from an approximately 20% decline in costs for excess of loss reinsurance, driven by strong underwriting results and improved risk performance which further bolsters its surplus and overall margin in the system. To have capacity in place, the next driver is distribution, and this starts with agency growth. Think of this as a land and expand strategy. We're growing our agency footprint and expanding production across our existing partners' locations. That's why we highlight producing agency branch locations. It's a metric we use internally to gauge distribution depth as we expand our reach in existing agencies, this translates to quote volumes. For Q1, you can see here producing agency branch locations increased 181% year-over-year, while quote volumes grew 69% year-over-year and improved on an absolute basis for the sixth straight quarter. All in, the funnel is expanding, and we're increasing the pool of potential new customers. Moving down the funnel, conversion is the lever that turns quote volumes into new customers and premium. The Reciprocal's stellar pricing and underwriting results means we have more margin in the system than other carriers. Given that and our understanding of the elasticity of the conversion rate curve, we can take targeted actions like those we started in November to bring in more low-risk consumers and grow premium at our targeted rates while maintaining the Reciprocal's exceptional underwriting outcomes and profitability. In the chart here, you can see the clear step-up in conversion that began in Q4 following the activation actions. That improvement continued into Q1 and year-over-year conversion rates have almost doubled. Note that we've only seen a 5% year-over-year decline in premium per new customer, while producing these Q1 gains. At the start of 2026, we launched Porch Insurance in Texas. Over time, Porch Insurance will serve as another tailwind for conversion as its product differentiation helps open us up to new segments of consumers. All right. So now the results. And this is probably the most important message today, when capacity top-of-funnel and conversion improved together, it shows up in new customer growth. As this chart shows, RWP, from new customers stepped up meaningfully, approximately tripling year-over-year, which is the clearest proof that the growth engine is working. We're certainly excited about continuing this momentum. We've reached an inflection point for growth. But what's notable is the way we are driving this growth. In Q1, total policies written across new and renewal grew 33% year-over-year, another clear proof point that the growth engine is on track. Matthew will cover this in more detail later in the call. All right. So we just walked through the premium drivers and now -- and how the system is designed to deliver rapid growth, and now we move into the discipline and sustainability side of it, which you can see through the Reciprocal's underwriting results. These charts depict the 2025 AM Best Annual Market Share data. The takeaway is simple. The Reciprocal continues to perform among the best in its peer set, top quartile nationally and in Texas for the combined ratios. Here's what's so exciting about these combined ratios. This includes all of the margin paid via fees to Porch Group as part of the Reciprocal's expenses. In 2025, Porch Insurance Services segment saw a margin of adjusted EBITDA to RWP of 21%. So you can do the math. If you were to reduce the expenses, and thus the combined ratio, by this amount, it truly is exceptional combined ratio results. Putting all this together, our goal is simple. We aim to drive compounded Porch shareholder interest earnings growth while maintaining strong health at The Reciprocal. As we deliver on those two key objectives, we can scale this business rapidly and profitably for decades to come. With that, I'll turn it over to Shawn to cover the financials and guidance. Shawn Tabak: Thank you, Matt. Good afternoon, everyone. I'll start off with a high-level summary of our financials. Overall, we're pleased with our first quarter results. which exceeded expectations across Reciprocal written premium, revenue, gross profit and adjusted EBITDA. We raised our outlook for the year, driven by our Insurance Services segment. Insurance Services delivered strong Q1 results, particularly in RWP, driven by new customer additions. The team continues to add agencies and quotes and we saw higher quote-to-bind conversion rates, as Matt noted. Two quick housekeeping items before we dive deeper into the results. First, as a reminder, we launched the Reciprocal on January 1, 2025, and we updated our segment reporting at that time. As a result, this Q1 2026 represents the first period with tangible year-over-year comps for RWP, as well as port shareholder interest and insurance services financials. And second, related to that, Q1 2025 was the final quarter of the legacy captive reinsurance terms that benefited the prior year quarter by $16 million. So while adjusted EBITDA still grew nicely this quarter, Q1 2025 is our last tough comp. Okay. Similar to Matt's remarks, my comments focus on Porch shareholder interest since generating cash for shareholders remains our ultimate objective. Under GAAP, we consolidate the Reciprocal exchange financials, which are included in the press release and our 10-Q. Q1 2026 Porch shareholder interest revenue was $109 million. Insurance Services contributed 68%, software and data 20% with the remainder from Consumer Services. Associated gross profit was $91 million with an 83% gross margin, driven by Insurance Services 85% gross margin. Adjusted EBITDA was $20 million, ahead of expectations with Insurance Services, delivering a 37% adjusted EBITDA margin. Okay, now let's move a little deeper into the segment results, starting with Insurance Services. Insurance Services revenue was $75 million, growth of 50% over the prior year and exceeding expectations, driven by higher fee-based revenue with higher RWP volume and new customer additions. As Matt highlighted, premium from new customers almost tripled year-over-year, and we saw a 33% increase in total reciprocal policies written. Gross profit was $64 million, delivering a strong 85% gross margin. Adjusted EBITDA was $27 million, or a 37% margin. While we continue to see strong incremental EBITDA margins from revenue growth, particularly the fee revenue that has a relatively fixed cost base, the year-over-year margin decline simply reflects the changes to our captive reinsurance terms that I mentioned. Overall adjusted EBITDA as a percentage of RWP, was 24% in Q1, reflecting a strong margin as we scale RWP, and continued operating leverage in insurance services. On a trailing 12-month basis, adjusted EBITDA as a percentage of RWP, was 20%. Okay, shifting to software and data. As a reminder, most of our Vertical Software businesses charge per transaction. So results do remain tied to U.S. housing activity, which continues to be at near cyclical trough levels. And we do expect tailwinds as housing recovers. In the first quarter of 2026, results were relatively flat year-over-year. Software and data revenue was $22 million. Gross profit was $17 million with a 75% gross margin. Adjusted EBITDA was $4.6 million. Consumer Services also reflects softer housing conditions. Segment revenue was $15 million, increasing slightly over the prior year. Gross profit was $13 million, an 87% gross margin and up 390 basis points year-over-year, driven by mix shift to higher quality revenue. And finally, adjusted EBITDA was approximately breakeven. Moving now to the balance sheet. We ended Q1 with cash plus investments of $134 million, up $13 million from December 31, 2025. Porch shareholder interest cash flow from operations was $20 million in the quarter. As a reminder, cash flow timing is seasonal, we pay interest on our notes in the second and fourth quarters of each year. In March, we exhausted the share repurchase authorized by the Board and repurchased 334,000 shares for $2.5 million or an average of $7.48 per share. And as a reminder, this was the maximum amount allowed by our 2028 notes indenture. Our 2026 notes have a remaining balance of $7.8 million, which we expect to settle at maturity on September 15, 2026, with cash from the balance sheet. Okay. And shifting to our 2026 guidance for Porch shareholder interest. Our 2026 target of $600 million organic RWP represents 25% year-over-year growth. Given the strong start to the year, we are raising our guidance for revenue, gross profit and adjusted EBITDA. We are raising our revenue guidance to a range of $495 million to $507 million, representing 20% year-over-year growth at the midpoint, up 400 basis points versus prior guidance. We are raising our gross profit guidance to a range of $401 million to $413 million, still with an 81% gross margin at the midpoint. We are raising our adjusted EBITDA guidance to a range of $103 million to $109 million, still a 21% adjusted EBITDA margin at the midpoint. From a modeling perspective, we continue to expect trough-like U.S. housing conditions and thus, flattish year-over-year results in Software and Data and Consumer Services, with the guidance increase attributable to strength in insurance services. And I'll now hand over to Matthew to provide a strategic update and the KPI review. Matthew Neagle: Thank you, Shawn. I'll start by giving a brief business update, and then dig into our KPIs. I first want to touch briefly on AI, both how we're using it and why we believe it strengthens rather than threatens our position. Across Porch, AI is meaningfully improving our engineering velocity and our operations. Our engineers are shipping faster and with higher quality, and we are seeing productivity gains that are fundamentally changing how we build software. In customer support, AI is now handling a significant share of initial customer contacts, reducing costs and improving response times. We are seeing real productivity gains across the business. On the disruption question, let me be clear. In insurance, AI does not change the fundamental nature of what we do. Insurance is a balance sheet promise. It is regulated, capital-intensive and requires real financial backing. AI will make underwriting claims and customer interaction more efficient, and we are investing aggressively to lead there, but it does not alter the structure of the industry or eliminate the need for the product. We think we are well positioned here. So why do we think our Vertical Software businesses are well positioned in an AI world? Well, these are systems of records built on decades of real transaction data inside regulated industries where compliance audit trails and security are nonnegotiable. They are the bones of a home purchase or a refinance transaction and are not optional tools. Our customers rely on them deeply, which shows up in high NPS scores, and we wrap meaningful services around the software itself. For inspectors, that includes payment processing, warranties, recall check monitoring and a call center, making us much harder to displace in a stand-alone SaaS product, and we are not standing still. We are investing and innovating faster than we ever have. In our inspection software, we're using AI to improve report quality and speed, defect detection, narrative assistance embedded directly into the workflow inspectors already use. In Rynoh, our title insurance software, we're applying AI to high-stakes workflows like reconciliation, verification and fraud monitoring, where accuracy and auditability are everything. In Floify, our mortgage point-of-sale platform, we're moving towards letting a borrower generate a preapproval letter from their phone in just a few clicks. Lender customers are expressing real excitement and willingness to pay for this as a premium feature. Finally, we believe AI will disproportionately benefit companies with unique data assets like ours. Underlying our entire business is our data platform with proprietary data covering approximately 90% of U.S. residential properties and early insight into 90% of homebuyers each month. Simply put, AI is additive to Porch's long-term position. Let's move to Q1 insurance KPIs. Reciprocal written premium was $114 million, ahead of expectations, and up 18% versus prior year. Reciprocal policies written was nearly 48,000 policies, up 33% year-over-year and continuing the momentum we saw in Q4. RWP per policy written was $2,386. This was down on a year-over-year basis, but I want to be clear on what's driving this. It is largely a function of mix shift, not competition or price. The premium per new customer is always less than premium per renewing customer. As new customer growth has accelerated, they represent a larger share of the mix, which pulls the average down. To put a number on it, premium per new customer was only 5% lower on a year-over-year basis, meaning that we have been able to increase conversion rates without meaningful decreases in price or profitability. In total, when you pair the top-of-funnel strength, with the conversion rate improvements we've put in place, you arrive at a very strong outcome in new customer RWP, which was 3x higher versus the prior year. Moving to Software and Data. The housing market remains challenging, but that's not slowing our pace of innovations. At the start of the new year, we launched Rynoh product hub, the new central home for all Rynoh products and services. In March, Floify released Dynamic Apps 2.0 to allow mortgage teams to tailor borrower applications. We continue to see strong interest in home factors and compelling new data customers, and we'll share more here when we are able to. In terms of Software and Data KPIs. In Q1, we served approximately 22,000 companies with annualized revenue per company of $3,918. As a reminder, as part of our strategy to focus on larger customers, we sunset certain legacy software products that serve very small contractors, which is expected to lead to a few million dollar revenue headwind, but a slight positive effect to segment profitability. For Q1, the wind-down resulted in roughly 1,800 less companies in the quarter, however, as you can see from the 8% year-over-year increase in annualized average revenue per company, there was a fairly limited effect on segment revenue. In Consumer Services, our moving group focus is twofold: drive better monetization per move today and build a scalable demand engine for the next leg of growth. In Q1, moving group's upsell and cross-sell efforts drove a 9% year-over-year increase in average revenue per move. On the demand side, we're investing in exciting new partnerships, direct-to-consumer expansion and the moving Place platform. Like Software and Data, we feel our targeted investments and lean cost structure positions us well for when the housing cycle turns. As for the KPIs, in Q1, we had 69,000 monetized services with annualized revenue per monetized service of $220. I'll now pass it back to Matt to wrap us up. Matt Ehrlichman: Thank you, Matthew. For closing the call, I do want to comment briefly on the macro environment. It's useful to re-anchor on why the homeowners insurance industry remains durable across cycles and why our operating model is built for the long term. First, demand is structurally embedded. The majority of U.S. households have a mortgage where homeowners insurance is required by the lender, regardless of the economy. More broadly, homeowners insurance is carried by nearly 90% of U.S. homes on an annual basis, not surprising, given the home is often a family's largest financial asset. Second, the homeowners insurance premium pool has grown through cycles. You can see on the chart on the left, it makes it clear, and it has natural tailwinds. Inflation tends to scale premiums over time. And if the weather gets worse, it only means the homeowners' insurance industry will grow faster. In the current environment, there's talk of a softening market and competition, but we're really not seeing that in any meaningful way in our Q1 results and strengthening funnel demonstrate that. Third, what's important for Porch is our model. We're able to participate in that growing industry premium pool, while separating Porch's financial results and profitability from weather volatility and risk. And lastly, like Matthew just talked about, we don't see AI disruption risk as it relates to the foundational elements of the insurance industry. Again, insurance is a balance sheet promise, not a workflow while regulation and capital requirements create real moats. We see AI enhancing the advantages for companies with unique data, and we've built our entire business around our data platform. I want to wrap up by briefly reinforcing the most important messages from today. First, we're off to a strong start in 2026. There's no doubt. Second, we've raised our outlook meaningfully for the year. Third, we're seeing momentum because the insurance growth engine is working. Capacity, distribution, conversion are all moving in concert and in the right direction. Overall policy count is growing rapidly as is premium from new customers, and we're accomplishing this while maintaining some of the top underwriting results in the entire homeowners insurance industry. This creates differentiated margins and as a result, a stronger growth engine as we look ahead. Thanks, everybody, for your time today. I just want to thank, in particular, my fellow shareholders for their support and belief in our organization. We can't control market volatility, but we can -- we will control our focus, strategy and execution. In just a little over a year, we've transformed Porch into a simpler high-margin cash-generative business. We've built the foundation, and now we scale profitably and fast. With that, John, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Dan Kurnos with StoneX. Daniel Kurnos: The results obviously speak for themselves, guys. It's a hell of a quarter. I guess the kind of question, I just want to anchor to, Matt, a little bit either Matt or Matthew, is there any thoughts on kind of the RWP guide for the year? Is that a little bit higher now just given the increase in revenue and given what you guys put up in Q1? And to sort of unpack what you guys are talking about, and I appreciate the color on the premium per new policy written. Obviously, we've all been excited for Porch Insurance to kind of get launched into the market. But if your blended policy, premium per policy is down because of mix and Porch Insurance is kind of a higher price point, and obviously, you guys can correct me if I'm wrong on that. Do we think that like the initial start to this year is actually driven by real strength in the legacy products even across agents as you turn them back on and Porch Insurance is then going to be incrementally on top of that, and we should see the premium per policy start to blend up as that comes into the market, or am I thinking about that wrong? Matt Ehrlichman: Yes, I'll just take the second one first. It's a good question. Porch Insurance will make a bigger, bigger impact as we go throughout the year and it is ongoing as we have more and more agencies activated and turned on using it. I do think as you look forward, yes, the Porch Insurance products designed to be, give or take, 10% higher all-up price than the homeowners of America product and that includes a lot more value for the consumer, right? The warranty, the moving services, and then actually higher commission as well for the agencies to have additional incentive. And so -- and as an aside, it does also create more margin. So you're right, as Porch insurance becomes -- just continues really through its journey, and we're very excited about what's ahead there. Yes, I think that can create tailwinds to your question, Dan, on the premium per new policy. Overall, though, obviously, you heard us emphasize it, we are very pleased with the gains in conversion rates, and how we've been able to just drive premium growth without meaningful decreases in the premium per new customer, that's a big deal. And again, it just emphasizes that we're going to be able to continue to grow margin across the system in really attractive ways, second question. On the first one, Shawn, maybe you can take the RWP guide question. Shawn Tabak: Yes. I mean, I'd say a couple of things. First of all, Dan, thanks for the remarks. I'd say a couple of things. One, it's early in the year, so I'll just note that. Two, I'd say we were quite pleased with the funnel performance in the first quarter. I think as we talked about throughout each of the metrics, agents, quotes, conversion, we saw outperformance. And so that gives us confidence. Now we did today, increase the revenue guidance 4 percentage points of growth at the midpoint. So now the revenue guidance is a 20% year-over-year growth. And again, that's all driven by just adding -- continuing to add in new customers and the increased confidence that we see there. And sorry, maybe I'll just leave it there. And... Matt Ehrlichman: Thanks, Dan. Daniel Kurnos: That's fine, Shawn. Thanks. Yes. I appreciate it. And Matt, I think the point I was trying to make is that you guys did this without really Porch Insurance filtering into the market yet. So obviously, stellar results at the start of the year. Operator: Our next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Jason Kreyer: And I'll echo congrats on an excellent quarter here. Wondering if you could talk about loss ratios or combined ratio trends for Q1, and just how that compares to historic quarters? Matt Ehrlichman: Yes. I mean, we continue just to perform exceptionally well. Gross loss ratios in Q1 was 24%. Attritional loss ratios, which, as a reminder, for those on the call, is losses not including catastrophic weather. That was 19%. And -- so just exceptional results. Actually, the team have gone looked, we're in the top handful across the country and Texas in terms of top performers as it relates to loss ratios. Actually a little titbit, Jason, that was interesting to us. Some of the areas carries attractive loss ratios, and then we'll have really bad loss ratios the next year as it bounced around with some volatility. We are the only company in the homeowners insurance industry that's been in the top handful each of the last several years. We think that's really telling. Just there's that consistency of having just exceptional loss ratio and attritional loss ratio results. Jason Kreyer: Impressive stuff. When you look at the levers that you can pull, just in terms of price and promotion, agency commission, and stuff like that. I wanted to ask about those levers in terms of existing customers. Any changes to the strategy of the existing customer base and any changes to the trend as far as retention or attrition rates. Matthew Neagle: I can speak to that. We've taken a number of steps across our distribution strategy and our product strategy to position ourselves for growth. And as Matt said in his remarks, we think we have a growth engine built and now it's time to scale. We are still early in building out our distribution when you consider the number of agents that we have and the number of agents that are available. We always have the lever to tweak price to drive up conversion rate. And I do think there is room there when you look at our cost and our margin structure. We haven't had to be that aggressive so far to be able to hit our growth numbers. And then as Dan mentioned earlier, we are excited about what Porch Insurance could do. So in terms of the biggest product strategy, being able to have a premium product in the market that has higher commissions that has the wraparound value of a warranty and moving services and other things to the consumer, we think gives us another lever to drive growth. Matt Ehrlichman: Let me just layer one thing on just to make sure that it landed clearly just on this topic. Fundamentally, what the whole advantage comes down to is that we have more margin across the entire system than other carriers do. And it's because we have unique insights about properties, which allow us to be able to win more low-risk customers and not win higher-risk customers, they're going to have lots of losses. Fundamentally, those insights allow us to create more margin. And you can see that showing up in both the private margins at Porch Group plus how much surplus is growing at the Reciprocal because the margin is the combination of those two things. And that's a big deal because like Matthew just noted, because you have more margin in the system, if we wanted to, we could tweak pricing down, still create tremendous margin and be able to grow conversion rate and premium faster. Right now, we're very pleased with the outputs that we're seeing in terms of premium growth, but it is certainly nice to be in that position and have those controls. Operator: Our next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: I guess two questions. Just when -- to start with the less exciting one. But -- so like the Reciprocal looks like you burned, I guess, cash flow from operations like about $7 million in the quarter. How do you think about like where that comment potentially shakes out, I guess, annually? And just like broadly, I guess the point is like over time, right? Obviously, you have a cushion, but that should number become positive over time? And then any update on home factors, we kind of haven't really heard you talk about it in a little while. Is it still a business opportunity, or are you more focused on using the data for first-party underwriting? Matt Ehrlichman: Why don't, Shawn, you take the first one, and Matthew, maybe the second? Shawn Tabak: Yes, cash flow timing for the Reciprocal is just seasonal. It's just working capital inflows and outflows. The thing I would point to there is the statutory surplus at the Reciprocal increased $10 million from the end of Q4 to the end of Q1. And that's with the value of the Porch shares coming down. So the operating profit from the Reciprocal was in the mid-teens there in terms of millions of dollars. That's a big deal in Q1 for the Reciprocal. Typically, we're a little -- we're around breakeven in the first quarter. And then obviously, Q2 is when many of the claims come. So to generate incremental statutory surplus in Q1 is a great result for the Reciprocal. It means that the statutory surplus is even stronger to support growth in future years. And so we feel well positioned from that perspective. As a reminder, since I'm talking about the Reciprocal surplus, Q2 is typically when we see most of the weather, just as a reminder, and that results in more claims and put some pressure on statutory. We do expect that, and we plan for it. And if it doesn't come, that's great. But we do diligently plan for it and expect that. Matt Ehrlichman: Ongoing, I'd be more focused on that, the stat surplus and there's lots of cash in the Reciprocal. But really, we are focused on that stat surplus number that Shawn is noting there. Shawn Tabak: Yes, over $300 million of cash and investments at the Reciprocals. So it's definitely cash, I would say. Matthew Neagle: And then on home factors, you pointed out two opportunities for us. One is how we leverage it internally, and then be able to commercialize it externally. Just firstly on internally, we are using it and do see a significant impact, and you're seeing that showing up in our results. And we are bullish on the midterm opportunity. The thing that I would point to that gives us confidence we have a very active and increasing pipeline of carriers, who are in the testing process. And the test results are showing in ROI. And I think what we're seeing, which is what we expected is just that the sales cycle because you have to go through testing and procurement in some of these carriers that it will take time to be able to bring those into a formal contract and revenue. With all that said, we remain optimistic that we can build up a business, tied to home factors. What we've said in the past remains true, which is we do expect modest early-stage revenue contribution in 2026 back on track, and then we expect it to build over time. The last thing that I would just mention is there are faster ways we could go to market, so we could partner with certain providers in the space. We've intentionally chosen not to take that route because we're convicted in the long-term opportunity of being able to go direct, and we want to make sure we maintain kind of control over how the data is distributed in the market. Operator: Our next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: Matt or Shawn, I would love to just go back to price. Matt, I know you took some pricing action, I think, late last year and possibly again in the beginning of this year. Obviously, the conversion rates have improved. Could you maybe parse out for us how much of the conversion rate improvement was things like agency branch location increases in the 181% year-over-year increase that you showed versus the pricing action? And maybe just any learnings from the pricing action itself and in the sort of visibility that gives you to the conversion curve. That would be helpful. Matt Ehrlichman: Yes. I mean the growth in agencies really doesn't impact the conversion rate. I mean, certainly, as you build and deepen your relationships with those agencies, yes, they will lead with you more or -- and so it does have influence, but I would say the largest impact in terms of conversion rate is being able to take certain actions to be able to be more attractive for the right customers. And that's really the key is through our data, and through our insights into where the conversion rate curve is steep, and where are those attractive sets of customers. You can be surgical with being able to increase conversion rate for the right customers that we want and you saw the results, which is -- and we can do that without having meaningful changes in the price per new customer overall. Again, like you highlight, it's a big deal because the system is going to be very, very healthy, very, very profitable, and we doubled conversion rate year-over-year. But yes, those actions that we've taken have been the primary drivers, I would say, tied to conversion rate, but all the work that the distribution team has done with agencies certainly has been a tailwind in health there. Adam Hotchkiss: Okay. Yes, that's really helpful color. And then, Shawn, just on RWP seasonality, I think the $600 million does imply that things do accelerate a bit year-over-year into the last three quarters, sort of what gives you confidence there? And then when we think about just premium seasonality through the last three quarters. Should we expect that curve to look a lot like last year, or any changes that you would expect? I appreciate it. Shawn Tabak: Yes. The seasonality of RWP, some of that is -- a lot of that was driven by when customer homeowners buy their homes and therefore, either buy homeowners insurance or in subsequent years, renew their homeowners insurance. And so obviously, most folks are buying their homes, therefore, owners insurance and renewals in Q2 and in Q3. And then I'd say from there, probably Q4, and then lease them out in Q1, actually. So I guess, seasonally adjusted, this is the lowest quarter Q1 is. What gives us confidence in the ramp is the funnel. We talked about in Q1, we were pleased that really, we exceeded expectations -- our own expectations even throughout each metric in the funnel. So we -- agency additions was really strong, not driving quotes and the conversion. And so all of those things also bolster future quarters, RWP. And so that's the key thing that we saw in Q1. Operator: Our next question comes from the line of Ryan Tomasello with KBW. Unknown Analyst: This is Juan on for Ryan. Congrats again on the print. Thanks for walking through the productivity gains from AI earlier, and how the insurance itself is insulated from AI disruption. But what do you think about that potential top-of-funnel disruption from AI on the insurance side. On the one hand, these tools could affect that great high-intent funnel that you have at closing. But on the other, it also could expand distribution to a broader audience. So do you see Porch is like a net AI beneficiary here? Matt Ehrlichman: So yes, for us, it doesn't really matter where the consumer is buying homeowners insurance. We want to be plugged into those channels. And so if digital agencies or our existing agency partners as they will get integrated into the various AI systems, that's great. We're just one of the options that's there for the consumers and because we have more insights about that consumer's home. If it's a lower-risk consumer, we're going to be a very attractive option for them. And so we are focused on partnering with all of these different great agencies that are out there, having really deep relationships and partnerships with them being a great partner for them in helping these agencies to grow their business. And we believe insurance as a product that is a complex product to buy and that consumers need and want a licensed agent to work with them. And if consumer behavior changes, we're going to be where those consumers are, whether it's digital agencies or other. But being the actual insurance product for us in this role is a great place to be and being an insurance product that has differentiated data and therefore, differentiated pricing is a really great place to be because at the end of the day, insurance -- consumers need insurance, and we're going to be a really good option for them. Unknown Analyst: Got it. Yes, that makes a lot of sense. And are there any changes in your appetite to deploy the excess surplus at the Reciprocal for M&A? Matt Ehrlichman: Perhaps. I mean, we mentioned last quarter that -- actually, we really mentioned several quarters ago that we're turning on the M&A engine and starting to build the pipeline. And so certainly, we're executing against that part of the strategy. We do expect over time that when there is the right opportunity, that we will take advantage of it. Certainly, the capital exists, as we talked about today, at the Reciprocal to be able to execute against the right opportunities. We're excited about that. We're excited about our capabilities to do some really good things there. But we're going to be very disciplined and pragmatic about it and make sure that the first things we do are right down the middle of the fairway. So but yes, I do -- it's certainly an opportunity, and we'll share more when it's the right time. Operator: Our next question comes from the line of Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Congrats on the quarter. Do you want to touch back on the rollout of the Porch Insurance product? And you all have provided really helpful commentary. But I guess, at the start of 2Q, so in the sample time line, compared to January when it originally rolled out, could you maybe provide some more color to us on are you seeing more agents interact with it? Are you getting better feedback just overall just color, as we enter the second quarter with this product, what agents are saying and maybe what homeowners you're saying? That would be great color. Matthew Neagle: Sure. We remain excited about the Porch Insurance offering that we just rolled out here a little while ago to agents. And what I would say is, there's a lot of excitement from the agents. We're learning a lot from having the product in market. And we do expect it to ramp over time, both as we get new policies in, and then we get renewal policies there. Some of what agents are excited about, it is the only product in the market that has a warranty attached to it. It is also a product that is designed for home buyers, in that we provide free moving services and a moving concierge. Agents are also excited about the premium commission that we can afford to pay as part of the Porch Insurance product. And so all of that has generated energy and excitement in the industry. And I think it will just take time as we build up our book. The HOA book, we've built up over 15 years now. And so we're going to start building and that has already started to happen. Timothy D'Agostino: Okay. Great. And then I just wanted to turn to software and data and consumer services. I know there was some color about kind of the go-forward plan there. But I guess, when we do start to see an unthawing in the housing market, should we expect like the annualized average revenue per company and revenue per monetized transaction to continue to increase? Just kind of getting a better understanding of how we should think about these KPIs when we get to a point when the housing market starts to unfold a little bit. Matthew Neagle: Sure. The -- so I'll separate from software and data KPIs versus consumer services. The software and data is more closely tied to transaction volumes in the housing market. As Shawn mentioned in the comments, most of those software services are priced on a per-transaction basis. And so we do expect that as housing market activity picks up, you would see an increase in the average revenue per company because each of those -- on average, those companies will do more transactions. We have taken steps over the last couple of years as the market has been slow to position those companies for growth. And so we've invested in innovation. We've invested in pricing. And so we do believe that as the marketing -- or the housing activity picks up, we will see top line growth and that most of that top line growth can flow to the bottom. On the consumer services side, there are some parts of that business that are tied to housing market activity, most notably our moving group. And so you would see some tailwind in moving as housing activity picks up? And we see that in a number of transactions, not necessarily in the revenue per transaction. Operator: Our next question comes from the line of Matt VanVliet with Cantor. Matthew VanVliet: Maybe I wanted to narrow in on the forward trajectory of the metric around agency branch locations. I know that was a big driver over the last several quarters to build that number, but where are we in terms of saturation in your key markets? How much more room does that have to grow as a near-term driver? Matthew Neagle: Yes. So the -- I'll take that, and Matt, you can add on if there's anything there. I would say we're still relatively early. We have invested in building out the distribution team. It's only been fairly recently that we've been at kind of the full capacity as we've built up that team. We've also invested in senior leadership there. And we can foresee several years of runway with the team that we have. Some of that is still in our core market of Texas, but there's a lot of room in the geographies outside Texas. And then you also have to think that over time, we can expand into additional geographies beyond the ones where we are today. And so I don't see any near-term constraints on our ability to grow agent distribution. Matt Ehrlichman: I'm going to just delve down on the last point to make sure it stuck, which is Texas, our largest most mature market, still has a long way to go, like we have just a fraction of the total agencies. The other states that are newer as very early in the number of agencies versus the total. And then like Matthew just talked about, there's lots of other states we want to expand into. And we're getting to that point where we can start to be able to reopen more states, and that will be an exciting time, certainly for us because that just opens up big new pools of opportunities. But there's give or take, almost 40,000, I think it is independent agents. And so there's a lot of opportunity out there. Matthew VanVliet: All right. Very helpful. And you drove very nice growth in the conversion rates, and it sounds like that was a big driver in the quarter, but you mentioned to one of the questions earlier that you really haven't necessarily used some of the levers you have there to drive maybe even greater quote, and then conversion rates. So what would you want to see in the market? What would you want to hear from maybe the agents to start using that lever a little bit more aggressively, whether that's through commission rates or just pure pricing or policies? Curious on what you're watching and when or if that might be a greater lever to pull? Matt Ehrlichman: Yes. I mean, I think, the key thing there -- it's a really good question. The key thing there is that we and just personally me, I just want to do this for a long, long time. This is the last thing I'm going to do. And so to your question, it's a good one. Could we grow much, much faster this year? Yes. I mean there's plenty of capital, there's plenty of quote volume, plenty of margin in the system. We could grow much faster this year. But we really want to be able to stack year after year after year after year of really attractive growth, expanding margins each year at Porch Group for shareholders, and then also continuing to grow statutory surplus. And so for us to be able to grow like we are, while also growing statutory surplus and seeing the margin expansion that we're going to be demonstrating here this year, that combination, we believe, if you just stack those years, it becomes really, really valuable here over time, and we'll just prove through the results, that we're able to go and deliver that. But for us, we think that turns into a really exceptional and very sustainable outcome over time. And so that's really what we're trying to solve to. Yes, we could grow much faster. Yes, there may be opportunities in the market where we would pull that lever harder. But right now, I mean, you can see we're certainly pleased with kind of the type of growth. Without really having to move the price per new customer that much and be able to get the kind of results that we are. Operator: And at this time, we have no further questions. That concludes our Q&A session. I will now turn the call back over to Matt Ehrlichman, for closing remarks. Matt Ehrlichman: I'll just say I appreciate first of all the questions. Thank you all. I appreciate those that are along in this journey with us. This is an exciting time for the company. The feel of the company is fantastic. The energy is great. I do think the teams are executing really well and are excited about where we're going. It's clear to us these next several years are going to be really fun years, and I appreciate those that are with us on that ride. Have a great day, everybody. Talk to you soon. Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.
Operator: Good afternoon, and welcome to the F5, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin. Suzanne DuLong: Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We are here to discuss our second quarter fiscal year 2026 financial results. Francois Locoh-Donou, F5's Chairman, President and CEO, and Cooper Werner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q&A session. Today's press release is available on our website at f5.com, where an archived version of today's audio will be available through July 27, 2026. We will post a slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone, dial (800) 770-2030 or (609) 800-9909 and use meeting ID 6076834. The telephonic replay will be available through midnight Pacific Time, April 29, 2026. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. Before I pass the call to Francois, I am pleased to announce that F5 will be hosting an Analyst and Investor event in New York on Thursday, May 28, 2026. Details about the event will be provided in a press release soon. I'll now turn the call over to Francois. François Locoh-Donou: Thank you, Suzanne, and hello, everyone. Our team delivered another robust quarter with 11% revenue growth. Product revenue grew 22%, marking our seventh consecutive quarter of double-digit product growth. This includes strong 26% systems revenue growth and 17% software revenue growth. Hybrid multicloud has become a strategic architecture, and it is increasing demand across F5's core markets. Customers are rapidly scaling their digital infrastructures to improve resiliency, meet data sovereignty requirements and get ready for AI. Our strong Q2 performance reflects those dynamics and F5's alignment with where customers are headed. We captured robust international demand for digital sovereignty initiatives. We also converted hybrid multicloud adoption into meaningful systems and software growth. We capitalized on heightened demand for best-in-class security solutions, and we built on AI momentum with another standout quarter for AI wins. As a result of our strong growth and our proven operating model, we delivered 14% non-GAAP earnings growth and a record $348 million in free cash flow. The powerful combination of secular and cyclical demand trends is providing strong Q3 visibility and a growing pipeline. As a result, we are raising our fiscal year 2026 outlook to reflect revenue growth of 7% to 8%, up from 5% to 6% previously. Cooper will elaborate on our outlook in his remarks. Our outlook for stronger growth is reinforced by what we are seeing in the market. We see three forces significantly reshaping how our customers operate, hybrid multicloud adoption, threat landscape expansion and AI inference inflection. First, hybrid multicloud adoption. Workloads now span on-premises, private cloud and multiple public clouds. Our research shows more than 90% of enterprises run hybrid multicloud today across an average of 19 locations. Organizations need flexibility, resiliency and digital sovereignty in every environment, and they are investing to support these demands. Second, threat landscape expansion. As AI models become more capable, attackers are using them to launch attacks against production applications at higher volumes and with greater variation than traditional defenses were designed for. Our customers see this and they are responding. They are deploying more application security and prioritizing best-in-class defenses. The era of checkbox security is over. AI applications require best-in-class security to match both the volume and the sophistication of AI-driven attacks. Third, the AI inference inflection. Organizations are connecting their applications and APIs to AI models and inference calls are becoming a regular part of how applications run. Our research shows 78% of enterprises run inference themselves using more than seven models on average. Organizations are standardizing on a new architecture with models distributed across the data center, the cloud and the edge. And the next shift is already underway. AI agents are moving into production and enterprises are adapting their applications for agent interaction. This is driving more compute, more data delivery and more security to protect inference. These three market forces are driving demand across our business. Because of accelerating hybrid multicloud adoption, we are taking an already strong refresh cycle and leveraging it into significant opportunities for expansion, competitive displacement and platform consolidation. I will double-click on each of these, spotlighting customer examples from the quarter. With this refresh, we are seeing a Refresh plus dynamic that is different from prior cycles. Customers are deploying higher performance, higher capacity F5 systems as they upgrade their data centers to support modern applications, digital resilience and sovereignty and AI. And as customers refresh, we are capitalizing on that moment to attach new use cases, expanding our footprint and growing overall wallet share. For example, this quarter, a large healthcare services organization started with a life cycle refresh across hundreds of legacy systems. As the project progressed, they expanded the scope to support an AI-driven consumer engagement platform. F5 became the control point for secure, low-latency traffic and data movement across applications, storage and their GPU server environment. That gave the customer a more resilient foundation for both sensitive internal workloads and new AI interactions at scale. Our deliberate investment in hybrid multicloud solutions is translating into market share gains. We are winning customers from competitors who did not build the same breadth and depth of capabilities across on-premises, software and SaaS. In Q2, we displaced a long-standing incumbent at a Fortune 100 energy company whose environment had hit scalability limits. The customer needed a platform that could scale into cloud while maintaining strong on-premises performance. Their incumbent provider was unable to serve workloads in hybrid multicloud environments. F5 modernized traffic management and simplified operations, improving reliability and creating a clean path for long-term cloud adoption. Hybrid multicloud customers require stronger performance and security with fewer tools and simpler operations. We are replacing point products with a unified approach that improves performance and security and is easier to operate at scale. For example, during Q2, an energy and utilities provider, an existing BIG-IP customer needed to secure APIs with better visibility and automation across their data center, cloud and edge environments. They selected F5 Distributed Cloud Services to simplify their approach and standardize API protection across their full footprint with simpler management. Moving on to threat landscape expansion. The pace and scope with which the threat landscape is expanding is driving demand for best-in-class application and API security, both on-premises and across cloud environments. For example, this quarter, a software and managed service provider needed to standardize application and API security across a rapidly expanding hybrid multicloud estate built through acquisitions. They lacked a consistent way to enforce front-door and API protections across their multiple public cloud environments and on-premises. With F5, they deployed a single policy and management layer with security enforced locally in every environment, supporting strict privacy, audit and healthcare requirements. F5 enabled faster regional expansion with stronger security and improved data sovereignty alignment. Finally, the AI inference inflection is driving demand for F5. We are seeing this indirectly through hybrid multicloud adoption and the requirements that come with it. We are also seeing it directly through our three primary AI use cases. With our industry-leading traffic management, we are winning new AI insertion points, including AI data delivery and AI factory load balancing. And we are capturing AI runtime security wins, protecting AI applications, APIs and models from emerging threats such as model abuse, data leakage and prompt injection. In an AI data delivery win, a global payments company needed a more resilient way to move rapidly growing AI data between storage and compute as they scale the training and retrieval workloads. F5 improved performance and resiliency while displacing both an in-house solution and a competitor, positioning us at the center of the customers' AI infrastructure strategy. In an AI runtime security win, an industrial automation firm needed a scalable way to assess risk and govern a growing number of AI applications and models. They chose F5 based on the depth of our red teaming insights and strong integration with their existing security stack. In an AI factory load balancing win, a major manufacturer an existing F5 customer needed to support operations and established a digital twin of their manufacturing environment for simulation and optimization. They deployed BIG-IP as the production traffic layer across their GPU server environment, improving availability and offloading encryption. Taken together, these wins underscore two things. The forces reshaping our customers' environments are real and F5 is well positioned to capture them. Staying ahead of the pace of change requires relentless innovation. In Q2, we brought multiple new capabilities to market, strengthening our leadership in application delivery and security for the AI era and driving greater value for customers. We introduced AI-powered capabilities in Distributed Cloud WAF, replacing manual policy tuning with automated outcome-based threat blocking. Our F5 training model helps customers stay ahead of increasingly sophisticated AI-driven attacks that are growing in both speed and complexity. We launched Agentic Bot Defense, extending our industry-leading Bot Defense to autonomous AI agents, a new and fast-growing category of traffic. The result is that customers can confidently adopt Agentic AI while ensuring only verified trusted agents reach their applications. We released F5 AI Remediate, which closes the loop between our AI Red Team and AI Guardrails products. It collapses the path from vulnerability discovery to runtime protection from days or weeks into minutes. And finally, we launched F5 Insight for ADSP, providing deeper visibility across application estates. The result is that customers can identify and resolve issues faster with less guesswork. We are innovating so customers can run faster, stay protected and simplify their hybrid multicloud and AI environment. And we are accelerating that innovation by rapidly integrating AI into our solutions to create practical capabilities customers can deploy quickly. That innovation engine is also sharpening our view of what's next. As we look ahead, we have conviction in the power and durability of hybrid multicloud, the expanding threat landscape and inflecting AI inference as demand drivers for F5. We look forward to digging deeper into these drivers and our expectations for how they will shape F5's longer-term growth outlook at our May Analyst and Investor event. Now I will turn the call over to Cooper, who will walk through our Q2 results and our outlook. Cooper? Cooper Werner: Thank you, Francois, and hello, everyone. I will review our Q2 results before I provide our guidance for Q3 and update our outlook for FY '26. We delivered a strong Q2, growing revenue 11% to $812 million with a mix of 51% product revenue and 49% services revenue. Product revenue totaled $411 million, increasing 22% year-over-year, while services revenue of $401 million grew 2% year-over-year. Systems revenue totaled $226 million, up 26% over Q2 FY '25. Our software revenue of $184 million grew 17% year-over-year. Subscription-based software revenue totaled $165 million, up 20% year-on-year, representing 90% of our Q2 software revenue. Perpetual license software totaled $19 million, down 4% year-over-year. Revenue from recurring sources contributed 70% of our Q2 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our services revenue. Shifting to revenue distribution by region. Revenue from the Americas grew 3% year-over-year, representing 50% of total revenue. Both our EMEA and APAC regions delivered very strong quarters. EMEA grew 22%, representing 32% of revenue. APAC grew 19%, representing 18% of revenue. Looking at our major verticals, enterprise customers contributed 66% of Q2's product bookings. Government customers represented a strong 24% of product bookings, including 8% from U.S. Federal. Finally, service providers contributed 9% of Q2 product bookings. Our continued financial discipline contributed to our strong Q2 operating results. GAAP gross margin was 81.4%. Non-GAAP gross margin was 83.7%. Our GAAP operating expenses were $482 million. Our non-GAAP operating expenses were $406 million. Our GAAP operating margin was 22.1%. Our non-GAAP operating margin was 33.8%. Our GAAP effective tax rate for the quarter was 21.9%. Our non-GAAP effective tax rate was 21.5%. Our GAAP net income for the quarter was $148 million or $2.58 per share. Our non-GAAP net income was $223 million or $3.90 per share, reflecting 14% EPS growth from the year ago period. I will now turn to cash flow and balance sheet metrics. We generated $366 million in cash flow from operations in Q2 and free cash flow of $348 million, both records, highlighting the strength of our operating model. CapEx was $18 million. DSO for the quarter was 47 days. Cash and investments totaled $1.46 billion at quarter end. Deferred revenue was $2.12 billion, up 10% from the year ago period. In Q2, we repurchased $100 million worth of F5 shares at an average price of $269 per share. We had $522 million remaining on our authorized share repurchase program as of the end of the quarter. Finally, we ended the quarter with approximately 6,500 employees. I will now speak to our outlook and guidance, beginning with Q3, followed by our full year view. We expect the market trends we've outlined, hybrid multicloud adoption, threat landscape expansion and AI inference inflection to drive strong demand for our products and services in the second half of FY '26. We expect Q3 revenue in a range of $820 million to $840 million, reflecting approximately 6.5% growth at the midpoint. We expect non-GAAP gross margin in the range of 82.5% to 83.5%. We estimate Q3 non-GAAP operating expenses of $406 million to $418 million. We expect Q3 share-based compensation expense of approximately $68 million to $70 million. We anticipate Q3 non-GAAP EPS in the range of $3.91 to $4.03 per share. Turning to our fiscal year 2026 outlook. With continued strong close rates in Q2 and strong pipeline creation into the second half, we are raising our FY '26 outlook. We now expect FY '26 revenue growth of 7% to 8%, up from our prior outlook of 5% to 6%. We continue to expect mid-single-digit software revenue growth, double-digit systems revenue growth and low single-digit services revenue growth for the year. Our gross and operating margin outlook for FY '26 is unchanged. We expect FY '26 non-GAAP gross margin in a range of 82.5% to 83.5%. On a modeling note, we expect higher component costs, primarily related to memory will cause gross margin to step down sequentially from Q3 into Q4. We expect non-GAAP operating margin in a range of 34% to 35%. We now expect our FY '26 non-GAAP effective tax rate will be in the range of 20% to 21%. Reflecting the strength of our second quarter and our increased revenue outlook, we now expect FY '26 non-GAAP EPS in a range of $16.25 to $16.55, up from the prior range of $15.65 to $16.05. Finally, we expect our full year share repurchase to be at least 50% of our free cash flow. I will now pass the call back to Francois. François Locoh-Donou: Thank you, Cooper. Looking ahead, our strengths are well matched to the secular shifts transforming IT infrastructure, hybrid multicloud adoption, threat landscape expansion and AI inference inflection. We expect these trends to support continued growth for F5 in fiscal 2026 and beyond. F5 is built for hybrid multicloud and the AI era. We deliver and secure every app and API anywhere with one unified platform across on-premises, multiple public clouds and the edge. Our application delivery and security platform reduces complexity. Customers get centralized security, high-performance delivery and consistent policy without stitching together point products. And we provide a control point for traffic, APIs and data flows as applications and AI become more distributed. Operator, please open the call to questions. Operator: [Operator Instructions] We'll take our first question from Tim Long at Barclays. Timothy Long: Yes, one question and one clarification. On the software side, it looks like it was a pretty good quarter and you're keeping the mid-single-digit for the year. So I know sometimes these are on 3-year cycles given the term. So maybe just touch a little bit on why not a little bit more of a raise there after a pretty solid growth quarter. And are you still looking at potential acceleration on that number into next year? And then after that, I'll come back with a follow-up. Cooper Werner: Thanks, Tim. This is Cooper. Yes, I'll take that. So we did have a good growth quarter in Q2. I would say it was right where we expected it to be for the quarter. You're right, we do caution against kind of over rotating on any individual quarter's reported revenue growth rate. The second half of the year is where we have a more balanced growth expectation for the year. And just based on where we're at with the renewal base, we continue to expect to perform as we had seen it shaping up for the year. And so that's where we're still at the mid-single-digit growth rate for the year, but all trends look very healthy. And then, yes, as we look ahead to next year, we do expect to see an inflection in the growth rate. We're continuing to see strong trends around consumption rates across that renewal base, and we have a larger base coming up for renewal next year. And so with the expansion we would anticipate against that larger renewal base, we feel pretty confident about a higher growth rate into FY '27. Timothy Long: Okay. Great. And then if I could, on the AI front, a lot of different applications, a lot of activity. Maybe you could help us a little bit with some benchmarks or some metrics, how do we frame the success revenues, orders, customers? How should we look at it? Any data points you can give us as far as the scale and the traction you guys are seeing on the customer side? François Locoh-Donou: Yes, Tim, it's Francois here. The -- so what we're seeing in AI, Tim, is that enterprises are now putting AI into production. And what the term we use is inferencing. And that's creating substantial opportunity for F5. We've talked about three big areas where we see opportunity. The first one is in hardening data pipelines between data stores and AI models, a use case we call data delivery, and we're seeing growing demand for F5 in these use cases. We're also seeing growing demand in securing AI in runtime. So both AI applications and AI models increasingly require security that is tailored for AI models that traditional security solutions do not address. And we also address load balancing, AI factory load balancing, which is a third area where we're starting to see growing demand. If you look at all that, we -- if you look at the first half of the year, -- we had approximately $50 million in sales in the first half of the year on these use cases. That's up more than 200% year-on-year. And we're now approaching about 100 customers that are using F5 for their AI use cases. That's why we have a bit of a conservative estimate because those are our customers from whom we absolutely know that they are using F5 for these AI use cases. We believe there are other parts of the business where we're getting indirect benefits from customers getting ready for their AI infrastructure, but those are harder to quantify, harder to count. So the ones I'm sharing with you are ones where we actually have the data and can attribute it directly to these use cases. So enterprise AI is one of the big trends that's fueling some tailwinds in our business. And hybrid multicloud and an expanding threat landscape are the other two very significant trends we're seeing. Operator: We'll move next to Samik Chatterjee at JPMorgan. Samik Chatterjee: Francois, pretty strong quarter. You're raising the guide for the year as well and getting ready, it seems to give us a more longer-term view of the business. Just trying to get sort of how you're thinking about sustainability of the high single-digit growth as you look forward given that you did sort of have a softer year in software this year, but you also have the hardware sort of tailwinds in relation to end of support for some of your products. Like how should we think about sustainability of these growth rates as you look forward beyond this year? How are you thinking about that, if you can help us? And then I have a follow-up. François Locoh-Donou: Yes, Samik. The -- I mean, as it relates specifically to software, I think Cooper touched on it, where we expect stronger -- even stronger software growth next year than this year. But let me step back a little bit and talk about the overall business, Samik. We are seeing a couple of things. One, of course, is we are seeing a very strong refresh cycle and the refresh cycle, by definition, is cyclical. But we are also seeing three secular trends that we think are very durable and that are just growing and accelerating our business. The first one is hybrid multicloud. We went -- we've been talking at F5 about hybrid multicloud for several years. If you look at the past few years, hybrid multicloud was by default. Customers needed the flexibility to put their application in different environments. But now we're seeing it being more of a strategic architecture that is by design and customers are implementing that for digital sovereignty reasons to be able to rely not just on big public clouds, but local cloud alternatives or on-premise environments. And they're also implementing digital hybrid multicloud architectures for resilience reasons. And increasingly, AI is also pushing customers towards these hybrid multicloud architectures. That is a secular trend, Samik, that is there for the long term, and that is providing substantial tailwinds for the business that we believe are durable. And then the other trend that we're seeing is the threat landscape is expanding. And so what we're seeing is customers are having more frequent attacks that are more sophisticated attacks because of AI. There was a report published recently that showed the increase in web attack year-on-year was up 77%. The increase in bot attacks were up 150% year-on-year. And all of that means that our customers have more apps to protect because they're apps, they're APIs, they're now AI models, both on-premise and in the cloud. And with the frequency and the sophistication of attacks increasing, there is a need for best-in-class application security solutions. And that is right where F5 has been focused, and we are seeing that demand in our business. To give you a couple of data points, in our distributed cloud services platform, for example, we saw this quarter, the number of customers choosing F5 for web application firewalls are up 62% year-on-year. The number of customers choosing F5 for API security is up 54% year-on-year. And for bot defense, it's up 33% year-on-year. So you can see these trends of increasing attacks, our customers responding, needing more application security solution that are best-in-class and coming to F5. So these are important trends. We think they are durable, Samik. And therefore, we think the inflection we're seeing in our business is likely to continue. Samik Chatterjee: Got it. Got it. And Francois, maybe I'll follow up on that aspect itself on sort of the attacks that customers have to be ready for. Have you seen any change in engagement or even a step-up in engagement following all the discussion that enterprises have to deal with in relation to Anthropic's Mythos model and sort of the vulnerabilities that they've highlighted. Are you seeing any step change in your engagement with customers on the security front? How are you sort of looking for -- looking to your customers trying to address some of those issues? François Locoh-Donou: Thank you, Samik, for the second one -- the second question. Yes, we are seeing a step change, Samik. We've had a number of conversations over the last several weeks with customers. If you think about it, we are now in an era where the window of time for an enterprise to patch their applications has closed as we have AI models that are very powerful and can now find and exploit vulnerabilities in any application almost in real time. And so there are a couple of implications for that. The first is given if you don't have a significant window of time to patch your applications, you are going to rely more on runtime security and specifically runtime security that is protecting the front-door of your applications. That's precisely where F5 has focused. And we're having conversations with customers who are sharing with us that they're going to have to rely on us even more than they had in the past. The second implication is that we believe that all security is going to be AI-powered. Static security, static signatures are really not going to be able to cope with the power and the speed that these new models have in terms of creating exploits. And so this is a shift that we saw coming. We have been investing in AI-powered security for a while now. Just this quarter, you may have seen this, we released our AI-powered web application firewall. We also released our Agentic Bot Defense solution. And so over time, our entire portfolio is going to be AI-powered. But we are basically already fighting AI with AI, and that, we think, is a significant shift to our customers. And probably the other step change for our customers, it's a trend that has been happening, but I think the new era really accelerates this is the consolidation towards platforms. If you're a customer that's operating in multiple environments and 95% of our customers are operating into hybrid and multicloud environment, the era of having a point product solution in any one of these environments really just creates complexity that you don't want to have to deal with if you have to try and really patch your systems very quickly. And so I think we're going to see more customers move towards platform and the breadth of our portfolio can really help them simplify their operations. So those are three of the implications that we see with this change, and we're seeing that in our conversations with customers already over the last several weeks. Operator: We'll go next to Simon Leopold at Raymond James. Simon Leopold: I wanted to ask about, I guess, a phenomenon that may be occurring. And what we've heard is that some customers may be showing a preference for your hardware solutions based on the performance, the relative performance that perhaps the total cost of ownership of implementing software is actually more expensive than the relative hardware. I'm wondering if you're seeing this shift and that might explain some of the relative growth between your hardware and software. François Locoh-Donou: Well -- Simon, there is -- first of all, we are seeing, in fact, a number of customers that are recommitting to hardware. I wouldn't say that it's just about performance. Performance is a factor. There are a number of reasons for customers to want to be doing that. I think one of those reasons is a lot of customers are modernizing their data centers and wanting to have strong on-prem infrastructure with strong performance in their data centers. And we have seen over the -- in the first half, just to give you a data point, we generated about $60 million in sales from customers who had previously kind of stopped buying hardware and recommitted to hardware. So we are seeing this phenomenon of customers recommitting to hardware. But if you expand from that, what we -- because we delivered 22% growth on hardware this quarter and 17% growth on software. The broader trend we're seeing, Simon, is that the hybrid multicloud is really what's driving customers to both modernize their data center and continue to invest in software to have the flexibility to be able to deploy the same solution, the same software stack from F5, either on-prem or in public clouds. And so yes, at this moment, there is a very strong momentum on hardware, but we continue to see customers wanting to have the flexibility of software or subscription-based software to be able to deploy license across their environment. Simon Leopold: And just as a quick follow-up, please. Could you update us on any progress around the engagement and discussions you've had with NVIDIA? You've talked about that on earlier calls. I'm not sure that you've updated us on the prepared remarks. So any updates you can offer? François Locoh-Donou: Yes, of course. So yes, we have -- as you know, we have developed an integration with NVIDIA where we have been able to basically refactor our software to work in ARM architectures and specifically work on NVIDIA BlueField technology. We've done a lot of work with NVIDIA over the last 18 months. As of December, we have now been formally put into NVIDIA's reference architecture. Since then, there have been a number of tests, including third-party tests to test the efficiency gains from this integration. Those tests have validated that basically the integration of F5 software on these NVIDIA DPUs helps AI factories generate 30% to 40% more token for a certain amount of GPUs. And we are now taking that value proposition to market, and we are involved in a number of proof of concepts and trials around this technology and this integration. I would say that what we are seeing is that a number of customers who are building AI factories are early in terms of sophistication in that their first priority is to get these AI factories, these GPU farms up and running, get them running -- get them working, get these Kubernetes clusters to work. That takes quite a bit of technical sophistication and customers are really focused on that. And for those who are really providing GPUs as a service, really, the goal initially is to get these GPUs to work and to be able to provide that to their customers. I think the issue of making those GPUs more efficient is the issue that comes next. And I think as more and more customers go to inferencing, we think that this value proposition is going to resonate. Operator: We'll go next to Matt Hedberg at RBC Capital Markets. Matthew Hedberg: Based on a lot of our conversations with partners and customers, we think F5 sits at really a critical junction in really this hybrid cloud infrastructure build-out and increasing AI app traffic. In your prepared remarks, you talked about sort of your role in this evolving threat landscape. And I'm curious, you have a lot of security solutions now, but are you hearing customers pull you into additional use cases? Or you're in such a unique spot of the traffic flow with the lens that you see. Are there other opportunities for you to add either further security capabilities in this kind of this new AI era? François Locoh-Donou: Well, absolutely. We -- so a couple of things. I shared earlier that in this new era, runtime security and specifically securing the front-door of applications is going to be even more important than it was in the past and especially for folks who have invested like us in best-in-class application and API security. So the first thing we're seeing is really strong growth in web application security, in API security and in bot security. We're also seeing API discovery and whether on-prem or in the cloud being a growing use case with more and more customers really now worried about knowing where all their APIs are and being able to protect them. Now when you go to AI, we also have now a new attack surface, which is these AI models and these agents both of which will be using more APIs and our customers, of course, will need help discovering and securing them. But we've also introduced in the last few months, AI Guardrails, which is AI Red Team and AI Guardrails. So technologies that help our customers both detect vulnerabilities in their AI models and mitigate these vulnerabilities. And we have introduced a product called AI Remediate that automates the process of creating mitigation for these vulnerabilities. All of these are new use cases in security that are going to grow as our customers deploy more AI models in production. So we are seeing new use cases and new opportunities to insert F5. Security, I think, is a very significant opportunity. But as I said earlier, we're also seeing that opportunity in delivery, specifically in data delivery for AI. Matthew Hedberg: That's great. That's great. And then Francois, the other thing you touched on in your prepared remarks was you're starting to see AI inferencing inflect with your customer base, which is -- it makes sense given some of the AI models, the innovation that we're seeing. And I guess it feels to me like the broader sort of non-AI native cohort of customers are becoming increasingly AI-leaning. Is there a way to talk about how early we are in that? And is this part of a multiyear really inflection? Could we be talking about this inferencing inflection 2 years from now, for instance? François Locoh-Donou: Yes. So Matt, I think the customers who are today really focused on -- have already started worrying about AI security and protecting AI models and AI applications that have new types of vulnerabilities like prompt injections, model abuse, et cetera. Those customers are a small minority, typically the largest customers in any vertical, the customers perhaps have a lot of sophistication in security, financial services companies, very large technology companies. But today, it's a small minority of the universe of customers we serve. And I think that number of customers is only going to grow over the next couple of years as more and more customers actually implement AI in inference. So I think we are just at the very start of this trend and the number of models for inference and agents will dramatically increase over the next couple of years. Operator: We'll go next to George Notter at Wolfe Research. George Notter: If I look back, you guys have been raising prices pretty conservatively, I think, once per year. Obviously, there's some more memory costs here. You mentioned in the context of gross margins. But any thoughts about raising prices a bit more aggressively or a bit more frequently? And I think if I look back historically, you guys also talked about kind of balancing price increases with the opportunity to gain share. And I'm just curious like on the share side of things, are you making progress there? Are there any metrics you can give us in terms of logos or incremental revenue or share that you can point to that kind of reinforce the idea that you guys are winning share? Cooper Werner: Yes, George, thanks. This is Cooper. I'll start on the pricing. So we do have kind of an annual pricing review that we do. Typically, it's in our Q2 where we make price adjustments to factor in the innovation we've been bringing to market, and that's part of our ongoing playbook. We've also been closely monitoring what's been going on with memory and SSD pricing, which has just been accelerating through the year and really kind of had a big step-up in Q2. And that's something that we continue to look at price adjustments to pass through some of that impact through to offset the impact on our gross profits. It's a combination of price adjustments and discount discipline. And that's something that we have to stay really agile with, and we'll continue to kind of monitor that and make those adjustments on more of a one-off basis tied specifically to the rising cost of memory. But then long term, as we think about share, what we've seen, particularly recently is our competitive takeout rate has gone up pretty materially. And I think that really speaks to the hybrid multicloud adoption that our customers are seeing where we're really the only vendor in the space that can support the customers' applications in any environment. And that's really been resonating, particularly recently with the evolving threat landscape as customers are looking for a platform approach to resolve a number of complexities in their environment, and they've been coming to F5. And so we've been seeing a lot of share gain in that regard. Operator: Our next question comes from James Fish at Piper Sandler. James Fish: Great quarter. Maybe to give Francois a bit of a break on especially the AI side, Cooper for you. I'm going to get asked this tomorrow. So on the 2-point raise to guide here for the year, it looks about 1 point is from this past quarter's upside. Are you actually passing through memory much at this point? And what are you guys assuming from memory prices kind of in the back half of the year? Do you have enough supply still lined up given the outperformance of hardware? And how far along with, you are on migrating the DDR5 from DDR4 in particular? Cooper Werner: Yes. Okay. I'll try to make sure I hit all three. But if I forget, please let me know. So in terms of our revenue guide for the year, that doesn't really contemplate new pricing adjustments. I just referenced the work that we're doing around that. But any pricing adjustments that we did are more likely going to flow through into FY '27 just based on where we are with the cycle. So it is something that we continue to look at, but it's not really a significant component to our back half revenue guide for the year. In terms of supply availability, yes, we feel pretty good about our near-term visibility. We've really been out in front of this, and I'm really proud of our manufacturing team for identifying this as an issue going back to kind of mid-FY '25, where we increased our build forecast. We extended the length of our build forecast, and we took on additional supply on components that we thought might have more constraints. And so that's allowed us to secure the memory that we need not just for the revenue outlook that we had at the time, but for the upside we've been delivering over the last 6 quarters or so. And so we feel pretty good, at least for the near term. Now you get it longer term into FY '27, the build forecast we have out there are within our needs for what we would expect to do on the high side for our systems business. Obviously, the visibility 4 or 5 quarters out is not as strong as it is in the near term. But right now, we feel pretty good with where we sit. And then the last question -- DDR4. So yes, so the current appliance lineup that we have leverages DDR4. Future appliance cycles will be on newer technology. We haven't discussed the timing of those, the next generation of appliances. James Fish: Fair enough. If I could follow up, just because if I look at your billings, you had a really strong deferred here, especially on the current side. What are you guys seeing with any net pull-in of demand or buildup of product backlog here as a lot of us here will kind of be reminiscent of the supply chain crisis just a few years ago and that -- this would be about the time you guys would start to see a buildup in product backlog. Cooper Werner: Yes. So just to be clear, backlog does not show up in our deferred revenue. So our deferred revenue strength is almost entirely tied to our services business where we have maintenance renewals. And we saw the strength both on short-term and long-term deferred maintenance is actually a little bit higher on the long term. And we did see some customers that were doing multi-year renewals. I'm certain that some of them are getting in front of perceived risk around price increases as they're working with other vendors. And so that is playing out to an extent, I would imagine, on the maintenance side. But the growth is not tied to product orders. Operator: Next, we'll move to Meta Marshall at Morgan Stanley. Meta Marshall: A couple of questions for me. One, just on the continued strength that you're seeing in EMEA and particularly around data sovereignty, just how much further or kind of are there initiatives that you guys are taking to kind of capitalize on that opportunity? And then maybe second, a very clean competitive landscape kind of on the ADC front, just as a lot of those vendors have kind of fallen by the wayside. But just as you move more on to the security space, just what are you seeing in terms of the competitive landscape there or the chance to gain mind share there? François Locoh-Donou: Thank you, Meta. On EMEA we think the trend that we're seeing there is durable. In fact, we saw an acceleration in that trend this quarter. A lot of the customers, whether it's government agencies, the defense sector, of course, all regulated industries, including financial services, all have a strong push for digital sovereignty. That implies in a lot of cases, modernization, reinvestment in data centers and also creating consistency of security and delivery across their hybrid multicloud environments. We're seeing an interesting trend there where when customers went to the public cloud, they created a separate team between public cloud and on-premise environment. And now that they're kind of coming back and creating true hybrid multicloud architectures, they are merging those teams together, and it's creating more opportunities for the provider that can cover their needs across on-prem and public cloud with a single platform. That trend, we think, is going to continue in EMEA. We're leveraging it more. We have increased our coverage -- our field coverage in EMEA, and we'll probably continue to do that in the future and probably accentuate our focus there on the defense sector because we're seeing significant spend in defense in EMEA. As it relates to the landscape -- the competitive landscape in security, we are focused, as you know, on runtime application and API security. And in that space, we are seeing substantial growth, both for on-premises requirements and cloud requirements. Our differentiation is really the ability to serve both environments with an extensive security portfolio that includes application firewall, securing APIs, securing against bot, securing against DoS attacks. And frankly, none of our competitors, whether it's for application security or AI security are really hybrid multicloud. And so the more we see customers embracing these architectures and needing a solution for both on-prem and public cloud, we are alone in that category and have a very, very strong value proposition. There are a few examples that I mentioned in my prepared remarks where customers needed to secure APIs or they need to secure their applications for a solution that worked both on-prem and in the cloud, and they came to F5. That consistency is more important than ever, and that's where we are focused. And we're going to continue to invest there. One of the highlights of the quarter for me, and I'm really proud of our product team for the work that we did this quarter was incredible innovation in security. We released our AI-powered WAF. We have already a significant interest for that, a new solution for Agentic Bot Defense, which is really important now to understand which agents are authorized to access a model and which agents are not. We innovated on our AI security solutions with F5 AI Remediate, a new solution. We introduced new solution that is AI-powered F5 Insights. We brought API Discovery on-premise with our BIG-IP solution. So a lot of innovation that is accelerating, is in part -- by the way, because we're also leveraging AI to do that. But I'm excited about the place we're at as the company that invested in hybrid multicloud architectures, I think, ahead of everybody else and is now starting to reap the reward of that and now doubling down on our innovation, accelerating the pace of our innovation to capture a growing landscape of opportunities in front of us. Operator: We'll move next to Jeffrey Hopson at Needham. John Jeffrey Hopson: I just wanted to follow up on the memory situation and the gross margin implications. You gave guidance for the last quarter to have a step down from 3Q to 4Q. Just curious if there's any more color on the magnitude of that step down. I think I had like around 150 basis points. And is this just a function of memory bought today takes about 2 quarters to flow through, and that's kind of dynamics at play? Cooper Werner: Yes. Thank you. So yes, that's the dynamic. So we've -- as I referenced earlier, we had taken a pretty extensive position early. And so we've been able to kind of mitigate any impact up through the first half of this year, but we're now starting to see some of the later purchases that we have been doing at higher price points is -- are going to start to flow through into the model. And it will start to flow in, in Q3, but it will be kind of more at full run rate in Q4. It's an incredibly dynamic situation with memory pricing. It's -- we're trying to get the signals on what it could look like in the next few quarters. Our expectation is that there will be relief several quarters out. But right now, for at least through the better part of FY '27, we would expect memory prices to stay elevated. John Jeffrey Hopson: Got it. And maybe just on the U.S. Federal side. It's been a couple of really nice quarters. Maybe just any additional information on the dynamics that are going on in U.S. Fed? François Locoh-Donou: Yes. Generally, the dynamics are strong. We had a strong Fed quarter. And I would actually expand that beyond U.S. Fed to the global government sector in the first half was really strong. I think you're seeing that. That's not, I would say, just an F5 trend. I think you're seeing that generally defense spending across the globe has been growing, and we are a beneficiary of that trend, in part because generally, defense customers are investing more in security, in part also because those customers are very hybrid multicloud. We have a number of customers in the defense sectors that want air-gapped environment. Sometimes they want to leverage cloud as well, but a lot of them want air-gapped environment in their own data centers. We have been making investments for that opportunity, and we're seeing the benefit of that today. So I think the Fed has been strong for us. But globally, government spending has been strong, and I think will continue to be for the next several quarters. Operator: We'll move next to Amit Daryanani at Evercore ISI. Unknown Analyst: This is Ketan on for Amit. I guess services growth at 2% was fairly muted. Can you maybe just touch on what's happening there and maybe your updated thoughts on how to think about it in the long term? Cooper Werner: Yes. I'll start. I would say, ironically, I think this is tied to a good news story, which is the strength that we're seeing with the refresh, and this is kind of the dynamic that we've seen with past refresh cycles. When you see a strong refresh in the very near term, it has a little bit of a headwind to the services business. And part of that has to do with you're replacing legacy appliances that have been carrying service for a number of years. And as those come out of the system, and then you backfill with the new appliances, there's a little bit of a lag on the maintenance revenue stream. Conversely, when we've had periods where customers are sweating assets, that's where you saw some strength in the maintenance revenue. So the longer-term picture is that the refresh has been very strong, and it's a refresh plus expansion story. And what we're seeing is that we're getting better retention of that footprint than we had in prior cycles. Ultimately, that's going to be a great story for services because with the larger footprint that you get maintenance revenue against, you're going to see a better revenue outcome. But in the very immediate term, as customers are making the transition, it's a bit of a headwind on the maintenance revenue. Operator: Next, we'll move to Tal Liani at Bank of America. Tal Liani: I think everyone is trying to basically get to the same question, whether this is finally a sign that AI is showing its impact on the company's growth or whether this is just a refresh story that is temporary. And the question I have is why are we seeing -- I think you touched on some of it, but why are we seeing the growth only outside of the U.S. or less in the U.S.? Meaning U.S. is leading AI. Out of $80 million growth year-over-year, U.S. was only $11 million growth. And last year out of $56 million, it was $7 million. So the majority of the growth is outside of the U.S. And what I'm trying to understand is to link the story of AI uplift to the fact that the growth is coming only from outside of the U.S. Why don't we see more U.S.? That's number one. And number two, why do we see a lag between system growth that is consistently growing every quarter. You went from $160 million to $226 million in 5 quarters, but software is back to Q1 level of '25, so $160 million, give or take, $164 million. So why do we see a lag between software? And at the time of refresh, don't companies upgrade their software package as well and then we should see growth in software? François Locoh-Donou: Okay. Tal, thank you. I will start and then Cooper may complement me on a couple of aspects you've raised. So let me start with the U.S. First of all, the trends of our business in the U.S. are very healthy. I would not read too much into a given quarter's performance of this or that region. Some of it is the timing of what was able to ship to which customers in the quarter. But generally, the trends that we're seeing around the expanding threat landscape that's creating more opportunity. We had a very strong security quarter, as I shared. That trend around expanding threat landscape, driving more security opportunity for F5 is a global trend. The trend of AI that -- and I shared some numbers earlier, I shared we did -- we are approaching 100 customers in AI. We did about $50 million in sales in the first half of the year in AI. That is a global trend that obviously includes the U.S. and the U.S. is actually pretty strong in that trend. The hybrid multicloud trend is also global and including, of course, in the U.S., where we are seeing more customers want resiliency. But that particular trend is, in fact, very pronounced in Europe, Middle East and Africa because of digital sovereignty requirements there, and we are seeing extra growth coming from there. So I would say when you're trying to dissect, you said you're trying to dissect what's the refresh versus what are secular trends. The three trends that I've mentioned are secular and they are global. In addition, of course, we have a strong refresh cycle. Cooper mentioned the attributes of the refresh. It is stronger than usual because we have an even higher retention rate than we've had in the past, and we have more customers expanding at the time of refresh. That is also a global trend. But what I would take away is that the three big trends that I've talked about are cyclical -- sorry, they are secular and they are global, and they are at play in the U.S. as well. Cooper Werner: Yes. And then just to touch on the software and systems dynamic, just a couple of dynamics that I would point you to is, one, the software business is largely a subscription business. We said this quarter, 90% of our software business was subscription. And of that subscription business, the majority does come through in a renewal motion. And so we are seeing strong attach of software at the time of refresh, but it's still a relatively small component of the overall software number. The majority of the software number is this base that we continue to expand over time. And we referenced this year that because the renewal cycle is coming off of our flat software year from FY '23 that there would be a bit of a slower growth rate this year, followed by a much stronger growth rate next year. So don't mistake that the slower growth rate this year is having to do with expansion in attach rates at that time of refresh because those trends are actually pretty healthy. Operator: And next, we'll move to Michael Ng at Goldman Sachs. Michael Ng: I just have two. First, this is just on systems revenue growth in fiscal '27. Obviously, you guys have had two strong back-to-back years in systems revenue. Could you just talk about your early expectations around whether fiscal '27 systems can grow just given the strong refresh that we've had in the last couple of years? And then a related question, it's been about, I think, 4, 5 years since the launch of rSeries and BIG-IP VELOS. Are you expecting a new kind of ADC form factor system to drive another refresh cycle, particularly given all the incremental demand from AI? Just wondering how you guys think about new products on the ADC side. Cooper Werner: Yes. Okay. So I'll start with the growth question. It's a little bit early to be guiding for next year. But yes, we do expect there to be a growth opportunity for the systems business, just where we're at with the refresh cycle right now and the strong trends we've been seeing both in expansion at the time of refresh, but also new use cases. And we haven't spent as much time on that, but we really have been seeing new growth, pretty healthy growth outside of the refresh. So some of it's the AI use cases that we've talked about. We've been seeing higher takeout rates from competitors. Some of the data sovereignty -- digital sovereignty dynamics are coming through as new business in addition to expansion at the time of refresh. So all of that's kind of giving us pretty good visibility 2 quarters out into next year, and we feel pretty good about the growth opportunity in that regard. As far as the next range of appliances and systems offerings. We wouldn't get into specifics at this point. But yes, of course, we are well down the path of planning. We think there are some pretty interesting growth opportunities further downstream as we start thinking about things like PQC. And so continuous investment and innovation on our systems as well as our software has been something that's been critically important. And I think we're really kind of the only player in the space that has stayed steadfast in investing in systems. And I think that's really paying off right now. We've always felt like customers are going to need choice and that their environments are dynamic and how they architect can change over time. And so giving that flexibility for customers to deploy how they need to is going to be important, and that's really coming through right now with the business that we're seeing. Operator: And that concludes our Q&A session. I will now turn the conference back over to Suzanne for closing remarks. Suzanne DuLong: Thank you, Audra. We look forward to seeing many of you during the quarter and especially at our Analyst and Investor Day in May. Watch for more details in the press release about the event coming soon. And thank you all for joining us. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to Enphase Energy's First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead. Zachary Freedman: Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2026 results. On today's call are Badrinarayanan Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2026. During the conference call, Enphase management will be making forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply demand anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs and supply chain matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badrinarayanan Kothandaraman, our President and Chief Executive Officer. Badrinarayanan Kothandaraman: Good afternoon, and thanks for joining us today. to discuss our first quarter 2026 financial results. We reported quarterly revenue of $282.9 million, shipped 1.41 million microinverters and 103-megawatt hours of batteries and generated free cash flow of $83 million. Q1 revenue included $34.5 million of safe harbor revenue. We exited the quarter with channel inventory above normal levels for both microinverters and batteries. On a non-GAAP basis, we delivered gross margin of 44% and operating expenses of 27% and operating income of 17%, all as a percentage of revenue. Gross margin was above the midpoint of our guidance range. Mandy will cover the financials in more detail later in the call. Our customer service NPS, Net Promoter Score was 82% in Q1, a record for Enphase compared to 79% in Q4. We are laser focused on customer experience for the last few years, and our average call wait time in the first quarter was approximately 1.4 minutes. We have also begun a soft rollout of our Enphase AI assistant in the homeowner app to approximately 100,000 homeowners, and we expect this to expand over time. The AI assistant is trained on Enphase product knowledge, historical service cases and relevant customer support data with access to sales force information, to help answer specific system-specific questions more accurately. It also supports multiple languages, helping homeowners get faster, more intuitive health wherever they are. We expect to pilot a similar AI assistant for installers during this quarter to help them do fleet management in a much more efficient manner. Let's cover operations. In Q1, we shipped approximately 1.39 million microinverters from our Texas and South Carolina manufacturing facilities and booked the associated 45x production tax credits. These U.S.-made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the holiday for the 10% domestic content ITC added. We shipped 49.5 megawatt hours of IQ batteries from our Texas manufacturing facility in Q1. We offer IQ batteries that meet domestic content and [ FEOC ] requirements, helping lease PPA customers qualify for ITC bonuses. Let's cover to the regions. Our U.S. and international revenue mix in Q1 was 83% and 17%, respectively. In the U.S., our revenue declined 23% sequentially, primarily due to lower residential solar and battery demand following the expiration of '25 [indiscernible] tax credits and typical seasonality. Safe harbor revenue increased to $34.5 million in Q1 compared to $20.3 million in Q4. Our overall sell-through declined 48% sequentially as Q4 was elevated by significant demand pull forward ahead of the tax credit expiration. On a year-over-year basis, which better reflects the underlying impact of the policy change. Q1 '26 sell-through declined 18% compared to Q1 2025. Our U.S. commercial microinverter sales more than doubled in Q1 as compared to Q4, driven by positive market reception for IQ9 microinverters. We now serve both major U.S. pre-phase commercial grid types, the 480 volts as well as 208 volts. In Q3, we expect to begin shipping our high-power 548 watts IQ9s microinverter for 480 volts 3-phase systems, which can support solar panels up to 770 watts DC. We also expect to see near-term safe harbor demand from customers placing orders between now and early July. With U.S. manufacturing, domestic content eligibility and [ FEOC ] compliant products, how we believe our commercial business is well positioned for continued growth. In Europe, our revenue increased 36% in Q1 compared to Q4, primarily because selling levels rose towards sell-through levels after we undershipped the European channel in Q4. We are beginning to see green shoots in April with solar and battery activations, up healthy double digits across multiple European markets compared with the monthly averages in Q1. This is being driven by rising power prices and increasing battery adoption. Europe is increasingly becoming a battery critical market. As self-consumption dynamic tariffs and VPP become more important, the company that wins the battery relationship is well positioned to win the broader home energy system over time, including solar, software and VPP. In the Netherlands, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1, as rising export penalties and the planned phaseout of net metering by the end of 2026, strengthened the case for self consumption. In France, the reduction of feed-in tariff is also shifting the market towards self-consumption and increasing the interest in batteries, especially for new solar installations. Our battery activations in France increased approximately 20% in April from the monthly run rate in Q1, a more modest but positive trend. In Germany, our battery activations rose approximately 27% in April, compared to Q1's monthly average. We have approximately 475,000 in phase residential solar system in Netherlands and approximately 400,000 in France, creating a meaningful retrofit opportunity in both markets. We are increasing homeowner events, doing direct marketing to consumers and working with the retail energy providers, along with strong support by our technologies such as power match technology and our upcoming fifth generation battery. We have also built strong inside sales teams and the lead management platform across France and Netherlands in the last 3 months, and we are hoping to convert this demand into revenue with a much higher throughput. Competition remains intense across Europe, particularly from low-cost string inverters and battery providers. In response, we are reducing our distributor list prices for batteries by approximately 10% in May, which follows a 20% reduction for microinverters already implemented from December last year. In addition to this sharper pricing, we are instituting a stronger homeowner demand engine and a more competitive product road map, which includes IQ9 and our fifth generation battery, which is coming very soon. Together, these actions improve our competitiveness today and position us for stronger growth as Europe shifts towards self-consumption, VPP and flexible storage. In Australia, we are bullish on the battery opportunity. Australia is one of the world's most mature rooftop solar market with more than 4 million rooftop solar systems in start which is roughly one in every three homes is already using solar. Battery adoption is now accelerating, supported by the federal cheaper home batteries program, which provides an upfront discount for eligible small scale batteries connected in new or existing rooftop solar. The program is evolving on May 1 to better support rightsized systems and reduce incentives for oversized batteries. We believe this plays directly to our advantages, including our upcoming fifth generation battery which has a stackable and scalable architecture that gives homeowners flexible capacity and the ability to add more over time. Let's now discuss our Q2 outlook. On the last earnings call, we said we expected Q2 revenue to be higher than Q1, driven in part by strong safe harbor demand. In line with those comments, our Q2 revenue guidance is $280 million to $310 million, including approximately $85 million of safe harbor revenue. Since we exited the channel with a high inventory in Q1, we are under shipping approximately $25 million compared to the real demand. At this point, we are approximately 85% booked to the midpoint of our guidance. We expect modest underlying sell-through growth in Q2 as compared to Q1. That said, our Q1 sell-through results and Q2 sell-through expectations are roughly 10% to 15% below our prior view, a weaker start to the year, primarily due to unfavorable weather conditions and TPO financing challenges. We expect to offset some of these pressures in the second half of this year through prepaid lease adoption, which I'll talk about soon, U.S. commercial growth and potential international recovery. For batteries, our guidance is 100 to 110-megawatt hours. We recently lowered our battery list prices to distributors in the U.S. by approximately 12% to 14% in March, supported by the recently reduced reciprocal tariff rates. Combined with our pricing changes in Europe, we expect higher battery sales volumes in the second half of this year. And just to repeat our Q2 revenue guidance anticipates us under shipping end market demand by $25 million in order to correct for Q1's over shipment. Let's talk about safe harbor. We have executed new agreements year-to-date with third-party owners for approximately $843.6 million of product. $89.6 million under the ITC 5% safe harbor method and $754 million under the physical work test method. This is in addition to the 67.7 million physical work test orders secured in Q4. These microinverter orders create two important benefits for in Enphase. First, they secured a significant multiyear volume for our microinverter business. And second, they position us very well for future battery attached sales from 2027 to 2030 when these systems are expected to be installed. These also underscores our strength with the TPO providers. Moving to financing. Prepaid lease adoption continues to build momentum. Prepaid leases give homeowners an upfront -- lower upfront cost today and the option to own the system after 5 years. The TPO initially owns the system, claims the [ 480 ] tax credit and share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. This lowers the homeowners' effective cost and helps restore the economics closer to the 30% 25 day tax credit era. We continue to support [ Propel ], a TPO led prepaid lease program that exclusively uses Enphase equipment and is being field tested with our loan and distribution partners. The pilot is designed to service the long tail of installers and has expanded from 40 installers at the time of our February earnings call to more than 200 installers to date, across four states. We are now seeing a run rate of approximately 200 net originations per week and are encouraged by early customer adoption trends. It must be noted that the battery attached to those originations is approximately 84%. That's not very surprising because one of the states [ Propel ] is now being piloted is in California. We expect to complete the pilot this quarter and expand the program more broadly beginning in July after validating customer experience, installed execution, which is happening now and financing performance at scale. Let's talk about products, starting with IQ batteries. Our fourth generation IQ battery [indiscernible], delivers a smaller footprint, higher energy density and simpler installation with the IQ meter color. The meter color is now approved by 64 U.S. utilities and growing, covering approximately 34 million customer accounts. In California, the color is approved by all three major investor-owned utilities and the largest customer-owned utility. We believe this gives Enphase the broadest utility approval for print of any major battery provider today. Our fifth generation AC [ corporate ] battery is built from stackable 5-kilowatt hour modular blocks, that can scale up to 30-kilowatt hour. This battery uses 100-amp prismatic cells and target roughly 50% higher energy density than the fourth generation battery and about 40% lower cost. Paired with our power match software we believe it will deliver a compelling combination of performance, flexibility and value for installers and homeowners. We expect to begin pilots in Q3 and begin shipping in Q4. We are also making strong progress on IQ Board, our commercial badly. The first product here is an 80-kilowatt hour AC-coupled commercial battery designed for small and medium commercial markets in the U.S. Our internal estimates indicate that this small commercial market represents an annual opportunity of approximately 1 gigawatt hour. The IQ Board uses 314-amp of prismatic cells in a compact building block architecture and will be even more cost effective. It can scale up by stringing up to 25 units together for approximately 2-megawatt hours of capacity. The platform is designed to support backup, self-consumption shaving time of use optimization as well as VPP participation all managed through Enphase software. We believe IQ Board brings our distributed architecture, our electronics expertise and system level intelligence into commercial storage, giving customers a flexible, high-quality platform for resilience and cost savings. We expect to begin pilots in Q1 '27. Turning to microinverters. We began shipping our IQ9 3-phase commercial microinverter in December, built on our GaN architecture. IQ9 opens up the 480 3-phase U.S. commercial segment for Enphase for the first time, representing a new TAM of approximately $400 million annually. The installer feedback has been strong with customers valuing Enphase quality, our panel monitoring, simpler system design, lower installations, cost and balance of system costs and higher system efficiency. We expect to introduce the higher power IQ9s 3-phase product in Q3, supporting 548 watts of AC power and pairing with this -- pairing with solar panels up to 770 watch DC. We also expect to introduce IQ9 for global residential markets this quarter. Moving on EV charging. We are making excellent progress on our IQ bidirectional EV charger, which is built on our 650 Volt GaN power platform and engineered to work with Model 800 work DC EV architectures. This is a clear example of our ability to move power efficiently and bidirectionally between grid phasing AC and high-voltage DC systems with tight control and protection. The product is especially compelling because it simply pairs with the meter color in the U.S. or a backup switch in Europe, enabling streamlined home backup and VPP participation. We are in advanced discussion with multiple auto OEMs, including two partnership opportunities that are progressing well. We will share more as these discussions mature. We are targeting initial availability in Q4, starting with limited deployments as we complete the certifications, utility coordination and vehicle compatibility validation. So finally, we are excited to announce today the development of our IQ solid state transformer product for AI data centers. AI is driving [ rack ] power from roughly 150 kilowatts to more than 1 megawatt. The industry is moving towards higher voltage DC architectures, including 800 volt DC, as outlined in NVIDIA's white paper last September. We estimate the initial annual U.S. addressable opportunity for IQ SST in AI data centers to exceed 11 gigawatts by 2021, a creating a significant new market for a high-efficiency medium-voltage power conversion. The IQ SST product is designed to convert medium voltage AC directly to low-voltage DC in a single stage, creating the potential to eliminate site car batteries and [ rack ] level backup while improving efficiency, reducing cost and complexity. IQ SST will be built as a distributed modular architecture. It is expected to deliver approximately 1.25 megawatts through a super cluster of 342 power modules with 800 volt DC output for next-generation AI racks. At the core of each power module will be our custom silicon, [ testolasic ] and a high-frequency GaN-based about the power platform which enables precise control, high efficiency and fast response of the order of 1 to 3 milliseconds. This fast response will enable advanced grid functions, improved handling of load and grid transient and support centralized energy storage at the facility level. IQ SST is designed for reliability and serviceability. It is modular includes built-in redundancy and support hot swapping without shutdown. It is also expected to deliver cost and supply chain advantages through fewer components, standard high-volume parts, automated manufacturing and U.S.-based production. Our SST platform will be able to scale from a single 1.25-megawatt [ rack ] to multi-megawatt systems. Supporting multiple grid voltages and extends beyond data centers into other adjacent high-power markets as well. We are now engaged with more than 20 prospective customers and are expanding our partner ecosystem. We have completed product feasibility, built working power modules and converged on the system design. In Q1, we restructured the company to fund SST within our existing operating framework and create room for the strategic program. More than 80 engineers are now working on SST across power electronics, ASICs, software, mechanical design, manufacturing and reliability. As we continue to drive productivity with AI across the company, we are targeting to fund the SST program within our current operating expense structure. We expect a full system demo later this year pilots with customers in 2027 and volume shipments in 2028. We also expect revenue to build over time. but the strategic logic is clear. IQ SST is a direct extension of our core strength in distributed power electronics, custom silicon software-defined control and high-volume U.S. manufacturing. We believe this architecture is the right way to power the next gen of AI infrastructure and our positioning Enphase to lead in this transition. Let me conclude. The market is going through a transition, especially in the U.S. residential sure, but we are focused on what we can control: execution, cost, innovation, financing solutions and customer experience. We are seeing early traction in several important areas. Prepaid leases are gaining momentum in the U.S. Europe is beginning to show signs of recovery. With batteries becoming increasingly critical to the customer decision. In the U.S., commercial solar is starting to ramp, supported by IQ 9 microinverters and our domestic manufacturing position. Our road map is also strengthening. Our fifth generation battery bidirectional EV charger, our IQ volt commercial battery and the IQ9 family of microinverters all expand what Enphase can deliver to homeowners, installers and commercial customers. These products strengthen the core and open new growth opportunities. Finally, we believe IQ SST can give Enphase access to significantly larger end markets. It is a natural extension of what we have built over the last 20 years, reliable power electronics, semiconductor innovation, software intelligence and distributed system design. We believe Enphase is well positioned for the next phase of growth. With that, I will turn the call over to Mandy for her review of our financial results. Mandy? Mandy Yang: Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2026 financial results, as well as our business outlook for the second quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $282.9 million. We shipped approximately 627.6 megawatts DC of micro inverters, and 103.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included $34.5 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year. Non-GAAP gross margin was 43.9% in Q1 compared to 46.1% in Q4. The gross margin was 35.5% in Q1 compared to 44.3% in Q4. The gross margin was negatively impacted by 6.7 percentage points from the sale of our 2025 PTCs, which totaled $235 million and were sold at 93% of its value. This resulted in a discount of approximately $16.5 million, plus approximately $2.5 million of transaction-related fees. [ Reciprocal ] tariffs also impacted our gross margin by 4.3 percentage points in Q1. Non-GAAP operating expenses were $77 million for Q1 compared to $78.8 million for Q4. [indiscernible] operating expenses were $130 million for Q1 compared to $129.6 million for Q4. Safe operating expenses for Q1 included $45.4 million of stock-based compensation expenses, $3.8 million of acquisition-related expenses and amortization and $3.8 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $47.3 million compared to $79.4 million for Q4. On a GAAP basis, loss from operations was $29.6 million for Q1 compared to income from operations of $22.4 million for Q4. On a non-GAAP basis, net income for Q1 was $62.3 million compared to $93.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.47 for Q1 compared to $0.71 for Q4. [indiscernible] net loss for Q1 was $7.4 million compared to [indiscernible] net income of $38.7 million for Q4. This resulted in GAAP diluted loss per share of $0.06 for Q1 compared to earnings per share of $0.29 for Q4. We exited Q1 with a total cash, cash equivalents and marketable securities balance of $930.6 million compared to $1.51 billion at the end of Q4. The 5-year convertible notes we raised in 2021 were due on March 1, 2026, and we settled all the outstanding principal amount of $632.5 million with our cash on hand. As part of our anti-dilution point, we spent approximately $18.7 million in Q1 with holding shares to cover taxes on employees divesting, reducing diluted shares by 441,448 shares. We did not repurchase common stock during the quarter as we are prioritizing disciplined cash allocation and preserving flexibility for strategic investments and potential acquisition opportunities. We had approximately $269 million remaining under our share repurchase authorization and remain confident in our long-term business outlook. In Q1, we generated $102.9 million in cash flow from operations and $83 million in free cash flow, including proceeds from the sale of the 2025 PTCs. Capital expenditure was $19.9 million for Q1 compared to $9.7 million for Q4. The increase was primarily due to continued investment in U.S. manufacturing. As of March 31, 2026, after monetizing the PTCs generated in 2025, we had approximately $162.9 million of PTCs on our balance sheet. This includes $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $54.6 million related to shipments in Q1 2026. We elected the rate pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to extended IRS processing time lines. In March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business. And the intel of this approach is included in our quarterly gross margin guidance. In addition, on February 20, 2026 the U.S. Supreme Court issued a ruling embedded in certain tariffs previously imposed under the International Emergency Economic Powers Act or IEPA. On April 20, 2026 U.S. customs and border protection launched an online portal for companies to submit IEPA tariff refund requests. As of today, we have submitted approximately $50 million of refund claims through the portal. Subject to approval, we currently expect to receive the refund within the next 90 to 120 days. Now let's discuss our outlook for the second quarter of 2026. We saw our revenue for Q2 to be within a range of $280 million to $310 million, which includes shipments of 100 to 110-megawatt hours of IQ batteries. The revenue guidance includes approximately $85 million of safe harbor revenue. We see gross margin to be within a range of 42% to 45%, including approximately 3 percentage points of reciprocal tariff impact. We spend non-GAAP gross margin to be within a range of 44% to 47%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million to $124 million, including approximately $45 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $75 million to $79 million. With that, I'll open the line for questions. Operator: [Operator Instructions] The first question will come from Brian Lee with Goldman Sachs. Brian Lee: First one, just on the safe harbor as it's so lumpy here. Can you kind of give us any sense on what the safe harbor expectations are 3Q and then I know you said, Badri, 10% to 15% below run rate you originally expected due to the start of your weakness you kind of give us a sense of where you think core revenue trends are into 3Q and 4Q? Are you going to recapture that kind of volume in the back half of year? Are you any sense on payments from here ex the safe harbor? And then I had a follow-up on the [ FET ]. Badrinarayanan Kothandaraman: So Brian, our safe harbor revenue for Q2, the estimate is $85 million. That's what we said. Your question is safe harbor estimate for Q3. It is difficult for us to estimate right now. But if I were to give you a number that between $40 million and $50 million is what I expect, safe harbor revenue for Q3. And that's my opinion there. Then, yes, I talked about we expect modest underlying sell-through growth in Q2, the current quarter we are in compared to Q1. That said, like what I said, Q1 and Q2 sell-through expectations are roughly 10% to 15% below our view. Weaker start is basically due to the challenges we are seeing in general, [ EPO ] financing and unfavorable weather for us. But what we are very excited about is [ Propel ], which is our prepaid leads offering through our partners. And I gave you some color on the prepaid lease offering. Basically, the last earnings call, I told you we had 40 installers from [ Propel ], now we have, as of last week, we have 200 installers. We still have the same four states because we are disciplined in not entering additional states until we finish the pilot. But our originations have increased at a very, very healthy rate. 200 net originations a week. In fact, I mean, that is a very nice number. That amounts to roughly 90 to 100-megawatt annual run rate if I freeze that 200 as of today -- 200 per week as of today. So extraordinary reception for [ Propel ], and we have to thank our partners to make that happen. So for us, [ Propel ] is something we are very excited about. The other one that I'm excited about is in [ Propel ], our battery attach is 84%. Obviously, California drives a lot of battery attached. So when we expand it to other states, it might be a little bit lesser than that. So we are excited about that because that means for us more megawatt hours very soon. And we expect that in the second half of the year, for sure. Then the other one we talked about is what we are seeing in Europe. We gave you color. In fact, we gave you a lot of color on Europe, saying that what we are seeing in April compared to monthly run rate in Q1. For example, we are seeing our double-digit increases for most of the Europe regions, double-digit percentage increases for most European markets compared with the monthly average that we saw in Europe in Q1. And that's being driven by the rising power prices and increasing battery adoption. In Netherlands alone, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1. In France, that number was 20% in April from the monthly run rate in Q1. In Germany, 27% in April compared to the monthly run rate in Q1. So a long answer to your question is basically we are very encouraged by [ Propel ]. We are very encouraged by the fact that we are seeing some green shoots in Europe. But having said that, the market is fickle right now. You're seeing a lot of dynamics in the market. We don't want to [ answer ] a guess for Q3 and Q4, but this is what we are doing from our side. And I haven't talked about the new products, but we are actively working on four new products. And to be brief, that's the fifth gen battery, the bidirectional charger, the commercial battery as well as the IQ 9 high-power version for commercial. And of course, the big announcement we made is the SST and that one is more a 2028 revenue opportunity. Brian Lee: Yes. No, I appreciate all that color. Maybe just on that last point, the timing for IQ SST 2028, that's helpful. I know you gave a bigger lot sizing for that opportunity. Can you give us a sense of kind of the revenue dollar opportunity for Enphase? And then also, how does the Enphase offering differ from what you're seeing from peers for those that you know actually have the product? Raghuveer Belur: Let me take the second one first. This is Raghu. Brian, so I think we are fundamentally different from at least some of the announcements that we have seen in the market, in that we leverage our 20 years of experience in developing a distributed architecture product. So think about it in a single-stage resident converter, which is what is our core technology that we have dropped since the inception of the company, high frequency design, soft switching, custom [ ASIC ] new band gap devices. We were the first guys in 2008 to deploy white band silicon carbide diodes as an example, now we are doing GaN. So when you are a completely distributed or a decentralized architecture, it enable 342 power modules that ranged in the supercluster really brings a tremendous amount of value. What it does is, for example, you get sub-millisecond response types. And when you have sub-millisecond response time, now you can target how to get rid of the site car completely. So no [ BBU ] or no storage anywhere in the low-voltage system. You can now move all your storage to the medium voltage section via [ BFF ]. We all know this. When you're a completely distributed architecture, you get very, very high reliability. When you have 342 of these devices, we have built in 10% redundancy. So you can achieve very high uptime, and our target there is [ Five9 ] which is very good and serviceability of that device without having to take the entire rack down. We talked about U.S. supply chain and volume manufacturing. It leverages the same platform that already -- that we already have in -- from a manufacturing point of view. And then on the cost, again, people don't appreciate this very much is the technology that we have, the single-stage resident converter we do what's called soft switching, which means that electromagnetic interference or EMI signature is extremely low. We don't have to build big metal and closures to enclose these devices to reduce your EMI. That's why this device is the power module is in a part of polymeric enclosure. So we really drive the cost down. The single-stage power conversion means very few components. We drive the cost down. Of course, we'll price to value, but our costs are going to be very, very low. So very good response time, which means we can target completely eliminating the site card, eliminating the site card means you can replace that with a compute rack, more compute rack means more tokens, more tokens means more revenue. We talked about rail and you have a super cluster of 342 of these power modules, you get architecturally correct redundancy and you get very high reliability, and you can target [ Five9 ] uptime, supply chain, volume manufacturing and, of course, cost. Operator: The next question will come from Praneeth Satish with Wells Fargo. Praneeth Satish: So we've seen some changes on the installer landscape recently, [ Sunrun ] exiting their affiliate channel, Freedom forever, filing for bankruptcy. From what I can tell, neither were really major Enphase users. So I guess do you see an opportunity for Enphase to pick up share as that demand kind of reallocates? And are you seeing any early indications of that today? Or is that something that could play out over the next quarter or 2? Badrinarayanan Kothandaraman: We are not going to talk about our customers. Today [ Sunrun ] as our customer. We have a very good relationship with them. We're not going to talk about that. But on Freedom, we do 0 business with them. So we view that the market will redistribute itself amongst the existing installed base, and we do expect to get our fair share of it. Praneeth Satish: Got it. And then maybe shifting gears to C&I. So I think for Q1, you previously indicated potentially generating around $5 million or so of revenue for C&I. Maybe I missed it, but is that -- can you share where C&I revenue landed in Q1? And then what is your -- what's embedded in the Q2 guide for C&I? And should we expect C&I revenue to increase every quarter this year based on the pipeline that you're seeing? Badrinarayanan Kothandaraman: Yes. We did in Q1 a little more than $5 million. We did in the high single digits. A little more than 5%. Having said that, C&I is a very lumpy business. And at least for us, until we have a nice pipeline established we do expect it to be lumpy. But the opportunity for us is that C&I installers, C&I developers do have a safe harbor window as well. And that safe harbor window will be closing in. They have to make their plans by early July. And for that, we have two things, we have actually three products for that. One is our already existing 208-volt 3-phase product, which is [ IQ80 ], which we have been supplying for some time. The other is our brand new IQ9 and [ 427 ] product, which is what we introduced very recently. The third one, which is coming, and we plan to start shipping in Q3. That product is the 548 watts, even high-powered version. That is suitable for safe harbor, which is because if they are going to be using these later in the years, the panel sizes are going to be even more. Today, for example, the panel sizes are between 595 watts and 650 watts, in the commercial business. It's going to go -- keep going up a little more. So that's why the 548 watch is also exciting. So we're very excited by the C&I business. In general, directionally, we expect it to continuously grow until we establish a pipeline. But in terms of quarterly, it is going to be a little lumpy at the beginning. Operator: The next question will come from Colin Rusch with Oppenheimer. Colin Rusch: Can you talk a little bit about the geographic distribution of where the channel inventories? Is it primarily in the U.S.? Are you seeing some channel inventories built up in the EU as well? Badrinarayanan Kothandaraman: It's mostly the U.S. Colin Rusch: Okay. And then can you talk about the customer maturity with the solid-state transformer, how soon can we start seeing some pilot in that product? And how many customers are you engaged with now in terms of potential testing here over the near term? Raghuveer Belur: Yes. We have talked to of the order of 20 customers or so prospective customers. And I think the most important thing is to get a dental demonstration system ready, which is what we are targeting for this year. Once that's done, the all natural following step, there are enough people out there who want to will be willing to test the system, but we need to get to the demonstration system, which is what we will be ready with this year. And that's what we are singularly focused on. And then followed up by 2027 will be about customer pilots and then 2028 will be about volume shipments. So that's the sequence of events that [ Q4 ]. Badrinarayanan Kothandaraman: We have -- we do have a detailed investor presentation, which is on the website as well as on the SST page. One of the things we'd like to highlight is we started working our team, Raghu and the CTO team, they basically recognize the opportunity that we have in the SST data center space about 9 months ago, and we started working on feasibility 9 months ago. And so since then, over time, we have gradually signed approximately 18 engineers in the company to be working on SST and they're all working full time. We also took the opportunity to think strategically and said, how do we create a lot more room for SST. So we restructured the company in Q1, basically to focus on SST. And you saw focus on assist without changing our operational expense structure. And so we got that done. And then we have worked on the basic power module. Again, you can find a lot of details in the Investor Relations deck as well. We have built the basic power module. We have it functional, and now the next step is to basically put together the full system, which is a lot more complex, and we expect to demonstrate that by the end of the year. Once we do that, the customer engagements are going to be there, and we target pilots -- customer pilots throughout 2027 and volume shipments in '28. Operator: The next question will come from Philip Shen with ROTH Capital Partners. Philip Shen: Badri, you said that the Q2 sell-through was 10% to 15% below expectations. You cited TPO challenges. We've been talking about tax equity pausing and there's just a fair amount of I guess, challenge out there. So I was wondering with the core revenue for Q2 being down to about $210 million, down from $250-ish million in Q1, what does Q3 and Q4 look like? This is a seasonally strong time, Q2 and 3, but this TPO challenge with this tax equity pause, may endure or linger for a bit. So I know you can't guide or you haven't guided for Q3, but I was wondering if you might be able to give us some qualitative color on -- or quantitative on Q3 and Q4? Badrinarayanan Kothandaraman: Yes. I mean at this point, I will tell you what I see, but that's basically like what I told you the last time. That's my opinion. As we said, we expected Q1 sell-through to be around in the $250 million range, and we were 10% to 15% below that number, basically. And so we overshipped approximately $25 million in Q1. That's why I said we ended the channel with a little more inventory than what we would have liked. We are correcting that immediately within 1 quarter itself by under shipping in Q2 by that number. We do expect the native sell-through in Q2 to be a little better than Q1, driven by the usual seasonality. What could surprise us in Q3 and Q4 is the few factors that I just highlighted a few minutes ago. What could surprise us is the [ Propel ] could surprise us. There, we are proceeding with some caution. We are piloting in four states now. We are at a run rate of 200 originations a week, which is a nontrivial number. under originations a week. And that percentage increase on the originations a week is fast. I mean, we are very happy with the percentage increase. We are also very happy with the number of installers. Our vision with [ Propel ] was to give prepaid lease to our long tail of installers. And I won't declare success right now because we are still in the pilot, but it is going in the right direction. [ Propel ] comes with an 84% storage attached. Of course, that's a high number because of California. But that's a very encouraging number for our batteries as well. So that's one vector. The other vector is basically what I talked about in Europe. We talked about the business starting to show some sign strength on batteries in Netherlands, in France and in general, even for solar. So we are already seeing that in April compared to Q1. So that's the second thing. The third one is the IQ battery can see -- of course, the volumes in Q1 were a little light due to the '25 abrupt cut off, but we are making a lot of progress on the IQ battery [ latency ]. We are qualifying and 64 utilities have accepted our major color. And with the [ Propel ] ramping, IQ battery can see will also be ramping with new installers who haven't used in [indiscernible]. So that's that. And then on the small commercial front, I talked about more opportunities in small commercial in terms of -- before the safe harbor window closes I believe the commercial developers are going to need a solution for '27 through '30 -- I mean, '28 through '30. So I expect both steady increase in the commercial business as well as some potential safe harbor in -- which will be shipped in Q3 order hopefully by the end of Q2. So as you can see, there are a lot of moving parts. We see the challenges in the last few weeks, like you correctly pointed out, tax equity challenges, installer bankruptcies, they are never good for the business, but we are not the ones to complain. We try to do whatever we can do. And I think all of these initiatives are something that we'll be working on. Philip Shen: Okay. Secondly, as it relates to a quick housekeeping question. In your 10-Q, you guys had commentary about how you entered into a $30 million secured revolving credit facility with a probably held company. I'm wondering if this might be sole source, the company that you guys do propel with? And then back on SST for a moment, Badri, I think you talked about pricing the value with your low cost structure. Just was wondering if you could share what margins you guys might be targeting for this SST product? Raghuveer Belur: It's very early to tell, Phil, about what our cost is what price and cost is going to be. We have a -- we have a rough estimate of it, but it's way too early to tell. Right now, we are focused on continuing the development so we can get to that customer demo by the end of this year. And we're also investigating because we are using a very similar module to what we already do for solar, we are looking at if there is any IRA advantages here for us as well. So too early to tell. Right now, the focus is on getting this 1.25-megawatt customer demo by the end of this year. But over time, as we get deeper and deeper into the design, we'll be happy to share with you the details. Badrinarayanan Kothandaraman: And on the $30 million line, we are not breaking out in the customer. Operator: The next question will come from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Maybe I should just to pick it up off where Phil left it off. Maybe just to pick up on the tax equity piece and the target. You talked about 200 originations a week. I mean what are you thinking quarter-over-quarter into 4Q, what that target installer partnership would look like? I mean, how many are you pursuing? How do you think about tax equity as a limitation on the [ Propel ] program to ramp? What are the other factors when you think about continuing to get this program up and going, if you can speak to it in those terms. In theory as part of your conscious ramping? Badrinarayanan Kothandaraman: Right, right. yes, [ Propel ] is offered through our partners. So we are working very closely with them. there. Having said that, my wish is to basically get up to a run rate of 500 originations a week by the end of Q4. And that's my wish. Today, we have 200 installers that are using [ Propel ] again, my desire on why we launched [ Propel ] basically, that number should be a healthy multiple of $200 million. That's why we launched. That's one of the reasons us and our partner, distribution partner, we launched this [ TPU ] led program [ Propel ] is because we wanted to bring that access to the long tail installers with an ease of doing business. The tax equity question is a better question for [ Propel ]. We are not going to make any comments on that right now there. Operator: The next question will come from Eric Stein with Craig Hallum. Eric Stine: So maybe just sticking with [ Propel ]. Can you just talk about -- I know you're piloting in four state. I mean what is the limiting factor to expanding that to other states? I mean, is this I mean I would assume when you're talking about piloting it you going hand-in-hand with your TPO partner to installers, educating those installers. I mean in my Am I thinking about that correctly? And what would that time frame be to expand to different states? Badrinarayanan Kothandaraman: Right. It is -- yes, once again, I'm answering on behalf of our TPO partner. So basically, what we want to look at is that entire chain that is -- you want to basically start from originations, you want to look at installations, you want to look at M2 -- M1, M2, M3 then you want to be able to appropriately monetize the tax credits. So that takes time. So therefore -- and the usual time could be from originations to monetization could be 4 to 5 months. And we are still -- that's why we are still in the pilot. All of that needs to execute flawlessly. Ease of doing business for the installers is very critical. We cannot keep changing parameters on the installers. We need to be able to needs to be able to monitor -- I mean, to monetize the tax credits property. Again, I am trivializing there their work. They have a lot of work to do. So -- and we need to prove that the entire chain works properly. And until then, we will not be doing a drop launch, like what I stated. Having said that, what are we piloting for? We are piloting to see if we can support a lot of installers. And the answer to that is yes. Since the last earnings call, at that time, they were 14, now they are $200. The last earnings call, the number of originations is an order of magnitude low. Now it is 200 a week, which is -- and climbing rapidly. So we are closely monitoring it. We are working with our partners. And the moment we are ready to launch. We'll be transparent about it. Eric Stine: Yes. Is it -- I know that you -- that [ Propel ] is one of the things that potentially mean improvement in the second half of the year. But I mean, fair to say that this is much more about 2027 and beyond than potentially positively impacting the second half. Badrinarayanan Kothandaraman: That's right. I think you're thinking about it right, positively impacting the second half and also in 2027. That's right. And don't forget the other things, which are what we do nuts and bolts is basically the Europe opportunity is a big one. We are doing well there, especially Netherlands has picked up steam. France has picked up steam. And there, we are actively doing things. Once again, we are holding two to four homeowner events a week. Each of these homeowner events are attended by almost 150 homeowners each one. And our target for on every event, I told my team every event should at least generate 0.5 megawatt hours. So basically, if you do four events that should generate 2-megawatt hours a week and that should only compound as we go. So we are going to replicate the same thing in France as well, where we have 400,000 installed base. And we are introducing our third-generation battery third-generation battery. The form fact of -- sorry, 5th generation battery. The form factor is very, very small. It's 50% energy density using 100-amp prismatic cells, a 40% lower cost -- our cost -- internal costs, and we expect to translate that into a lower price for our distribution partners. So that's another very exciting product. The other one, I didn't talk too much on the buyback. On the day, we are gearing up for a launch in the fourth quarter. Again, a very simple product, which is along with the meter color, and just the charger of it can provide V2H, which is both V2H, vehicle-to-home resiliency and vehicle-to-grid, V2G. So that's another product. And there, we have two partnerships with North American OEM car providers, which we will announce when we are ready. So that's that. And then, of course, IQ9, we are launching IQ9 residential markets. We have already launched for the commercial market. We are going to introduce higher power higher-powered version. So that business, especially with our domestic content compliance, U.S. manufacturing, all of that is a very big advantage there. That business takes a little time. It's a design in business, and so we expect to make steady progress there. The last one, which I talked about is the commercial battery. The commercial battery, it's a gigawatt hours of TAM, and we are talking about batteries for small and medium businesses, schools, hospitals, churches, small businesses, the gas stations, convenience stores all of those, they typically need battery size anywhere between a 50-kilowatt hour system and 250 to 300-kilowatt hour system. So now basically, we will be able to offer that along with IQ9 on the [ PB ] side, on the solar side, and now we will have 80-kilowatt hour battery, and you can string 25 units of those, you can go up to 2-megawatt hours. So we are extremely excited by that offering as well. So we're doing lots of things, and we expect sequential growth. Of course, it's a turbulent market, but we are controlling what we can. And of course, the IQ SST, which we talked about. Operator: The next question will come from Dylan Nassano with Wolf Research. Dylan Nassano: Badri, I would just love to get your take, I guess, on Europe, just in terms of how durable you think this bump is, I mean, that market went through a boom for kind of similar reasons back in 2022 and it was followed by a pretty severe kind of destocking cycle. So just wondering if you could kind of compare and contrast where we're at today? Badrinarayanan Kothandaraman: Yes. I mean it is anybody's guess. Yes. I shared with you the question and the concern. Last time it was an extended the Ukraine crisis basically led to an explosion of demand this one may be more modest. But nevertheless, we are seeing an increase. I'm not sure how long it will last. But there are some fundamentals there, which is basically batteries are good in general. And Europeans are -- I have to say that Europeans are a little more advanced. And the U.S. here, almost every region is accelerating to a battery-first market. And battery-first pulls everything else, solar, EV chargers, energy management, it puts everything. And what we are going to be doing there is, of course, we are going to get more competitive. We talked about sharper pricing. We already made necessary pricing corrections on microinverters in December. We are making pricing corrections on batteries in May, which is next month. And we already made battery pricing corrections in the U.S. in March. So we are laser-focused on expanding our battery business. I talked about that. In Europe, we are going to go from a third-generation battery to our fifth-generation battery in Q4. And so that will be a massive leap there in terms of cost, in terms of pricing, in terms of installation, in terms of space. So we just did -- one of the things we -- before we finalize our design, it's our practice to show it to installers and get a group of installers and get limited or get some feedback from them. So we did that in the first quarter. We did that in France, in Netherlands, in Germany, and we got a lot of feedback on the battery and mostly very positive. So for us, it is all about batteries there and batteries were pulled through solar and I think we are making the right necessary steps for us to grow through 2026. Operator: [Operator Instructions] The next question will come from Vikram Bagri with Citi. Unknown Analyst: It's Ted on for Vik. I wanted to ask about the guidance for 2Q. It looks like it still includes tariff impact. Are you able just to share how much of the inventory roughly is still impacted by those tariffs? And would there be any interplay between the possible refunds that you may receive on that? And then could you just also talk about the progress being made on ramping the non-China battery cell supply. What's the outlook for that mix? Badrinarayanan Kothandaraman: Yes. The -- in terms of tariffs, like what I said, we do expect -- Mandy said, we have applied sort of $15 million refund and we do expect that to basically the decision and the refund to come within 90 to 120 days. As far as we are concerned on our gross margin guidance for Q2 that basically includes -- there is a benefit for us of a couple of percent, 2% in gross margin due to the change in reciprocal tariff, note that still even now -- all of most of the countries are at 10% right now. So right now incorporated in our current guide is a benefit in gross margin of approximately 2%. And we said in our prepared remarks that this tariff -- the reduction in tariffs helps us to be a little more aggressive on our batteries, and we have taken advantage of that to increase our demand by adjusting the pricing to be a little bit sharper in both Europe as well as the U.S. Unknown Analyst: Got it. That's very helpful. And I have one follow-up. Just going back to the prepaid lease offering, do you have a view on where you think the prepaid lease products could be as a portion of the total TPO market this year? So not necessarily for [ Propel ], but just looking at the market as a whole. Badrinarayanan Kothandaraman: It's hard to say, and my comments should be taken with a grain of salt because we are still in a pilot. And right now, we are at a run rate of approximately like what I said at 200 originations a week, it corresponds to something like 90 to 100 megawatts a year. So that's the number at 200 originations run rate a week. So you can do your math on how does it compare to the [ TP ] market. Operator: [Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Badrinarayanan Kothandaraman for any closing remarks. Badrinarayanan Kothandaraman: Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: [Operator Instructions] I would now like to turn the conference over to Cathy Yao, Senior Vice President of Investor Relations for T-Mobile US. Please go ahead. Quan Yao: Good afternoon, and welcome to T-Mobile's First Quarter 2026 Earnings Call. Joining me on our call today are Srini Gopalan, our President and CEO; Peter Osvaldik, our CFO; as well as other members of the leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors set forth in our SEC filings. Our earnings release, Investor Factbook and other documents related to our results as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found on our Investor Relations website. With that, let me now turn it over to Srini. Srinivasan Gopalan: Thanks, Cathy, and good afternoon, everyone. We're here in Bellevue today ready to discuss another extraordinary quarter for T-Mobile. This quarter is a powerful demonstration that the strategy we outlined for you in February is working. Our strategy is driven by widening differentiation, providing customers with the best network, best value and best experience, all at the same place so that they don't need to make trade-offs anymore. We made strong progress on this strategy this quarter and nothing demonstrates this more succinctly than our NPS score. An industry-leading 45, over 20% higher than that of our next closest competitor. This widening differentiation gives us access to unprecedented growth opportunities, and our industry-leading growth this quarter is a testament to this. One of the largest of these growth opportunities is the 20 million-plus families and businesses who are network seekers not currently with T-Mobile. This is an opportunity with a lot of runway and one where we're making great progress. In fact, this quarter, amongst recent switchers who chose to come to T-Mobile from another carrier, the highest percentage ever said they chose us for one reason, network quality. Similarly, across multiple third-party surveys like HarrisX and from the analyst community, we've seen a strong improvement in the perception of our network. That's what's led us once again to grow our share of postpaid households in each of our cohorts in the top 100 cities. In smaller markets and rural areas where we have only 24% share of households, we continue to accelerate and capture more switching share with word of mouth driving strong momentum. In addition to our tremendous momentum in consumer across network seekers and other underpenetrated cohorts, our low share in T-Mobile for business also continues to give us substantial growth runway. This quarter, we continued to capture share with our network superiority-led value proposition in T-Mobile for Business. Our industry-leading nationwide 5G advanced network continues to allow us to drive TAM creation with advanced network solutions and leveraging that as a thoughtful cross-sell opportunity into traditional voice and broadband offerings. One example of our innovation in action is Major League Baseball's recent rollout of our automated ball-strike system, which uses the T-Mobile network to allow challenges to umpires' calls. Let's now turn to broadband. For yet another quarter, we were the fastest-growing ISP in America, adding over 0.5 million total broadband net additions with 5G broadband net adds accelerating year-over-year. 5G broadband continues to lead the industry in terms of customer experience, topping J.D. Power, Forbes, CNET, Consumer Reports and OpenSignal, just to name a few. Our 5G broadband speeds also continue to lead the peer group at over 50% faster than the next closest competitor. Fiber is tracking great, leveraging the T-Mobile brand to draw strong interest. And I'm excited about our announcement earlier today that we're entering into 2 additional JVs with leading infrastructure partners to acquire GoNetSpeed, Greenlight Networks and i3 Broadband as part of our returns-focused capital-efficient approach. Every piece of the business I've talked about so far helped drive our tremendous postpaid net account additions of 217,000 in Q1, which was up 6% year-over-year. But in addition to volume growth, as I said in February, we also have a double-digit advantage in back book pricing over our leading competitors. In Q1, that translated to a really strong postpaid ARPA growth of 3.9%, a powerful proof point that our unique and durable value prop is resonating as we deepen relationships with customers. T-Ads and financial services, smart and thoughtful adjacencies that piggyback off the success and scale of our brand and ecosystem are also delivering strong incremental growth. Now even as we capitalize on our differentiation to drive growth, we consciously double down on the sources of this differentiation across best network, best value and best customer experiences. Let's start with the network. We're continuing to push the envelope of what's possible. We're excited to be rolling out live translation on beta soon, our first network native AI application that we demoed for you at our February event. Live translation uses language learning models embedded into our core and translates your voice into 1 of 80 different languages anywhere in the world. All you need is just one connected T-Mobile phone. Importantly, this is just the initial step in us building AI capabilities directly into our network core. Longer term, we see a world where our network becomes the connective tissue for physical AI and accommodates inferencing at the edge. As a step towards this, we're delighted to share today that we're connecting our 5G advanced network to Figure AI's F03 humanoid robots, enabling seamless and reliable connectivity from the moment they power on. This partnership, amongst others, will allow us to explore how the T-Mobile 5G advanced network and its capabilities, including assets like the network edge can support the broader evolution of physical AI. This is an important stepping stone towards building an even more capable network of the future with 6G. On value leadership, which we guard zealously, we further strengthened our credentials with the rollout of our better value plan earlier this year, which offers access to our premium wireless experience to even more customers at a great value. Our other key differentiator is our customer experience. T Life is continuing to drive digital interactions with about 25 million monthly active users engaging with the app multiple times a month. T Life will also serve as the unified platform to support growth into considered adjacencies like financial services and advertising. In retail, we're well underway in our journey towards more experienced stores with several hundred already up and running. Our experience stores see higher premium mix, higher NPS scores than our traditional outlets. And over time, our mix shift will lead to fewer doors, but also more meaningful customer experiences. So even as our differentiation drives industry-leading growth, we continue to feed and stoke it so that the gap to competition only widens further. Pulling all this together, this is what drives the industry-leading financial growth we've delivered yet again across all key metrics in Q1. Our postpaid service revenue grew 15% year-over-year. Total service revenue 11%, a rate that's more than 4x that of our next closest competitor. Our core adjusted EBITDA also grew an industry-leading 12% year-over-year, all of this while continuing to deliver industry-leading free cash flow margins of 24%. Alongside this incredible financial growth, we returned $6 billion to shareholders in the form of dividends and share buybacks. I'll end with saying our results speak for themselves. The unique differentiation we have as the Un-carrier continues to lead to best-in-class results. Just look at our NPS score. The best part of all of this is this team's hunger and the incredible passion our people have to truly delight customers means we're only at the beginning. Okay. Peter, over to you, provide an exciting update on our guidance. Peter Osvaldik: All right. Thanks, Srini. As you can see, our growing differentiation not only drove a strong start to the year, but also gives us the confidence to increase our guidance across multiple fronts. Starting with accounts. We are raising our expectation for total postpaid net account additions to be between 950,000 and 1,050,000 on the strength of the underlying momentum in the business. Turning to service revenues. We continue to expect to deliver full year service revenue of approximately $77 billion, representing 8% growth with Q2 expectations of approximately $19 billion or up 9% year-over-year. As part of that service revenue growth, we continue to expect strong postpaid ARPA growth of between 2.5% and 3% for the full year. We are also raising our full year core adjusted EBITDA guide, which is now expected to be between $37.1 billion and $37.5 billion, an increase of $100 million at the lower end of the range. As part of that, we expect Q2 core adjusted EBITDA of approximately $9.4 billion, up 10% year-over-year. Our expectation for full year 2026 cash CapEx remains unchanged at approximately $10 billion as we continue to invest to further differentiate the network. And we now expect adjusted free cash flow to be between $18.1 billion and $18.7 billion for the full year, also an increase of $100 million at the lower end of the range. And finally, last week, we announced we are increasing our 2026 stockholder return authorization by up to $3.6 billion to a total authorization of up to $18.2 billion. And as always, we will continue to follow our disciplined capital allocation philosophy. To sum it all up, we continue to see strong momentum in the business and cannot be more excited for the future. So with that, I'll now turn the call back to Cathy to begin the Q&A. Quan Yao: Thanks, Peter. All right. Let's get to your questions. [Operator Instructions] We will start with a question on the phone. Operator, first question, please. Operator: The first question today comes from Craig Moffett with MoffettNathanson. Craig Moffett: Let me start with the reports that you're considering a merger with Deutsche Telekom. Can you talk about the logic behind that and as well as the logistics, would that require a vote of the majority of the minority among Board members as independents? And exactly how would that work? And would there be any premium for U.S. shareholders? Srinivasan Gopalan: Thanks, Craig. Let me pick that up. As a matter of policy, we don't comment on market rumors or speculation, nor is there anything specific to comment on anyway. However, the article has raised a lot of questions inbound on governance. We've looked into the governance. And what I've been told is hypothetically, if someone were to ever consider such a transaction reported in the article, that would specifically require a separate approval process by disinterested shareholders, what many of you refer to as majority of the minority. Thanks Craig. Operator: The next question comes from Sam McHugh with BNP. Samuel McHugh: On the fiber JV you announced today, I just wonder if you've seen much movement in kind of the bid-ask spread on fiber assets as we started to see maybe fiber ARPUs come under pressure. I don't know if some of the commentary around broadband growth and pricing impacts your appetite for more fiber JV going forward. Srinivasan Gopalan: Thanks, Sam. And as you well know and as I've read in all of your stamp surveys, the reason we're doing fiber is much more because we see an equity value creation opportunity rather than the myth of convergence. And that sort of drives the way we think about these assets. So when you think about things like bid-ask spread or multiples or compression and the rest, each of these assets is a unique case. The way we think about it is, do we believe that this asset has a strong likelihood of giving us our target IRRs and those are in the double-digit level. And we look at each of these very, very specifically because as all of you guys know, each of these assets operates in a specific geography, operates in a specific competitive environment, in a specific pricing environment. So it's really hard to give you an overall sense of our bid-ask spreads changing, our multiples compressing, what's happening with pricing, et cetera, et cetera. What we know so far is our fiber JV, the ones we've launched so far are well on track. They're delivering exactly what we expected. The lift from the T-Mobile brand and our distribution is completely in line with our expectations. And on the new JVs that we've done, we are very confident of our double-digit IRRs. That's kind of the criteria we'll use going forward as well. There is no magic number we're chasing on homes passed because I could kind of put fiber on the street and claim multiple homes passed. We're looking for places where we can create true equity value. And that will drive -- do we have appetite for cases which create true equity value and which tick the box for us in terms of actually being an opportunity that is monetarily sound? Yes. Are we going to chase a homes passed number? Absolutely not. Quan Yao: Thank you. Operator, next question please. Operator: The next question comes from Sean Diffley with Morgan Stanley. Quan Yao: Let's move on to the next one. Operator: The next question comes from John Hodulik with UBS. John Hodulik: Srini, could you comment on the competition you're seeing in the sort of postpaid market? I think both of your competitors have talked about sort of less handset subsidies going forward. And I think Verizon even pointed to what they saw was a sort of less competitive market as they look out. So just any thoughts on that side. And then on the broadband, the greater than 500,000 was a great number. And it sounds like you got some real strength in fixed wireless. How does the runway look there? Do you expect similar growth this year as we saw last year? And any issues sort of constraining the network in terms of your ability to grow that bid? Srinivasan Gopalan: Thanks for that question, John. So first on competition and the broader way we think about competing in this market. I think sometimes we tend to over-rotate on promotions and specific subsidies and how all of that's playing out. In the end, the direction of flow gets driven by differentiation. And this is where our unique position of kind of best network, best value, best experience and therefore, no trade-offs for the customer really drives traffic in our direction. And that's what drove not just the 6% growth in accounts year-on-year, but also the near 4% growth in ARPA. That's the fundamental way we think of competing. Now all of that happened in a quarter where I'd say January was particularly competitive and particularly heavy in one-dimensional competition based on subsidies. I think Feb and March and going into April, we've seen some cooling down of that environment. But through that quarter, we focused very much on what differentiates us, and that differentiator is a much broader set of things than purely subsidy. And the way we think of it, and you saw a lot of our advertising, it was about savings you make every day rather than savings you simply make at the point you get a phone. It was about our network. It was about that more rounded broad proposition. And then we decide how hard and heavy we go based on CLVs, right? That ultimately is the test of how much volume we want in any quarter in the context of our overall guidance. That should give you some sense of the competitive dynamic. But Mike, I don't know if you wanted to add anything specifically on the subsidy section. Michael Katz: Yes. No, I think you've got it exactly right, Srini. I mean the way that we think about this is customers -- we're providing customers the most important technology in their lives that they use every single day. And so how through both best network, best experience and best value, can we prove that to customers every single day, not once every 1,000 days when they're replacing their phone. And so that's where you've really seen us focus is having a great overall value message for our customers where they can save more with T-Mobile than anywhere else. In fact, $3,800 T-Mobile customers save relative to competitors over the last 5 years. And they can get a suite of benefits that they only get because they're T-Mobile customers. And these are benefits that really matter. They're not throwaway benefits, free Netflix subscription, et cetera. So I think the results that you saw in Q4 as well as in Q1 really demonstrate that, that's important to customers, and that's why they're choosing us at the rate that they are. Srinivasan Gopalan: Thanks, Mike. Your question on broadband, let me just touch on the big picture. And André, it would be great if you can talk about some of the stats we're seeing in terms of how many more users and usage. We're very confident on the runway on fixed wireless access. Just to give you a sense of this, right? We said we would get to 15 million customers by 2030 a couple of months ago. Now how did we get to that 15 million? We basically divide the country to almost 36 million hexbins, order of magnitude. And we look at a hexbin level. We forecast the level of wireless traffic. And what is left is really fallow capacity. And then we subject that fallow capacity to saying, yes, we've got that fallow capacity, but let's put a reasonable market share on how much we can get to in fixed wireless access. And then we commit to a number. And that calculation we did for 2030, remember, assumes we buy no further spectrum. It doesn't assume 6G. It doesn't assume any further spectral efficiency improvement. That's the basis on which we got to the 15 million. We're tracking strong to that, and this quarter was another demonstration of it. So we feel very good about it. But André? André Almeida: No. As Srini said, I think, one, we're very confident about the 2030 number. And I think one of the reasons that makes us very comfortable is what we're seeing today in reality. So not just the outstanding commercial performance we've had for many quarters in a row, but also the fact that all the leading indicators in terms of capacity and customer satisfaction continue to go up. We continue to increase our NPS. The average speeds our customers have on our product continue to go up quarter-over-quarter. The new routers we just launched, as we mentioned in February, have even higher speed than the existing routers. And all of this we've done while increasing 80% the number of customers we have on the network in 3 years. So as Srini said, we plan very carefully. We have a very detailed plan for the next 4 to 5 years in terms of the capacity of the business and beyond that time frame to make sure that this is completely sustainable long, long term and we're seeing it come through every day, every quarter for our customers. So very, very confident on the runway we have. Quan Yao: Thanks, John. Alright operator, lets go with the next one. Operator: The next question comes from Michael Rollins with Citi. Michael Rollins: Two topics, please. The first one is I was curious if you can unpack the contributors to the ARPU growth of about 4% year-over-year in terms of price actions, uptiering lines per account, the broadband update. Just some color on what you're seeing there. And then second, I was just curious if you can share what was happening with the postpaid account churn on a year-over-year basis. And given the comments of what you were just describing competitively in the answer to an earlier question, is that something that actually started to get better maybe through the quarter and into the second quarter? Srinivasan Gopalan: Great. Thanks, Mike. Let me pick up the postpaid account churn piece, and I'll hand off to Peter for the ARPA piece. So postpaid account churn is doing exactly what we expected. When you look at the underlying postpaid phone churn, that was pretty stable. It was up about 3 bps. Now there's 2 things that are worth explaining, given this is the first time we're reporting this metric. One, why is account churn higher than line churn? And two, why has account churn gone up more than line churn? The simple answer is basically math. Now there's kind of 2 groups of customers who churn more than the average. One is new customers and the second is broadband-only customers. Now the reality is the weighting of these customers in accounts is higher than the weighting in lines. Now that's obvious when you look at broadband alone customers, but also with newer customers, we just haven't had enough time to grow that relationship. So the lines per account with newer customers tends to be less. So the 2 groups that churn quicker than the average have a higher weighting in accounts than they do in lines. That's why account churn is higher than line churn. Why has it increased more than line churn? Again, it's pure math. It's simply that our fastest-growing business by long distance is broadband, which structurally, and we've talked about this before, has higher churn than wireless. So those -- it's really math that explains the postpaid account churn. Line churn looks great. We're really happy with where we are. Account churn is doing exactly what we thought it would do. Peter. Peter Osvaldik: Yes. Probably just to add to that, I think one of your questions, Mike, was, did it get better in March? Well, I think you've heard some of our competitors kind of cherry pick the -- well, March is better than December. Well, that's every single year. So yes, of course, we saw churn improvement in March -- in the last week -- yes and 2:34 a.m. on Tuesday, was even better. In terms of ARPA growth, it was all the factors, and that's the beauty of this model. Certainly, if you recall back last year, we did a round of rate plan optimizations that impacted particularly Q2 of last year. So you see a little bit of year-over-year impact on the comparatives in Q1 of this year from that. But it's also continually deepening the relationship, so an increase in lines per account, and that's across all product categories, the continued success that we're having with rate plan self-selection up the tiers continues to be at over 60% of new account lines are on our premium tier rate plans, value-add service attached. So it's really every element of the equation that we've been talking about before that's driving the ARPA increase. So again, Q2 will be a little bit different because Q1 didn't have the impact of the rate plan optimizations. But continually, for the full year, we're seeing strength of 2.5% to 3% growth. Remember, that includes the anticipated dilutive impacts of UScellular and the acquisitions of Metronet and Lumos. So the underlying organic growth of ARPA is even stronger than that 2.5% to 3%. Operator: Thanks, Mike. All right. We're going to try Sean Diffley again in the queue. Sean, are you on this time? Sean Diffley: Can you guys hear me? Unknown Executive: Yes. Sean Diffley: Sorry for the delay. So I was hoping you could further elaborate on the inference at the edge opportunity, which you referenced. I think you said you signed a figure AI deal. But maybe just flesh out why T-Mobile is better positioned than peers to capture this? Is it your network architecture, AI RAN, your spectrum position? And how should we think about the business model? Is this something where you'd have to buy GPUs? And how big could this revenue opportunity be? Srinivasan Gopalan: Yes. So let me deal with the second part of the question, and then I'll hand over to Dr. John Saw. We might be here for a while. So just on the -- here's the vision of this, right, from a -- do we need to buy GPUs, et cetera. So we're going to be -- we've already started introducing large amounts of AI into our network. And as we move closer towards AI RAN, in fact, even during things like Winter Storm Fern, you saw AI in our network being a big reason why things like antenna tilt being done automatically, things like optimizing our network, a self-healing network in many ways is not kind of science fiction. It's reality. It's the way our network runs every day. Now as we do more and more AI in our network and as we build for more and more AI in our network, we will be building compute into our network. And just as in FWA, we have the concept of fallow capacity. As we build more AI into our network, we will generate a bunch of fallow compute, especially at the edge. Now the fallow compute plus low latency creates an incredible opportunity. Because if you're thinking of scale automation, it's impossible to do that without low latency. Just think of robots running into each other or even we're still somebody trying to do remote heart surgery without low latency, right? Low latency has to be essential to any form of robotics or automation that you do. So the combination of low latency as well as fallow compute is what makes us excited about the opportunity. It's too early to size TAM. It depends on who you're listening to at any point in time, but all estimates of this market are very large. But John, do you want to talk about architecture and how we're different? John Saw: Sure, Sean. And by the way, we are highly optimistic with the prospects of physical AI just because I think when intelligence moves into the real world, right, you're going to start seeing a shift from generative AI to physical AI. And when objects move that has built an intelligence, we believe that we have a big role to play. So we are more than prepared to take this on, and we saw this coming a while back. So the big advantage we have is our 5G Advanced network that we have built. And we are the only ones that have rolled out 5G advanced nationwide. And with that, we have a bunch of innovations that we have developed with 5G advanced to increase spectral efficiencies and capacity like especially for the uplink, which is really needed for physical AI, like things like uplink transmit switching, higher transmit power and uplink MIMO, right? This is why the latest iPhones and the latest Samsung phones actually perform best on our network. Now we didn't build a 5G advanced network just for faster phones. We actually built it for physical AI and with an eye to the future, right? And now that we have a 5G advanced network we can take on the extra capabilities that is needed to support edge inferencing for physical AI better than anybody else. And we believe that we have a multiyear advantage over the competition for this. Quan Yao: Thanks Sean. Operator, let's go to the next question in the queue, and then we'll probably flip over to Social. Operator: The next question comes from Kannan Venkateshwar with Barclays. Kannan Venkateshwar: So maybe in the broadband business, when we think about the model you guys seem to be adopting, I mean it's obviously a capital-efficient model of joint ventures combined with fixed wireless. But the trade-off, I guess, is there's also some embedded inefficiencies of managing all these JVs. And it's not clear what the economics are if it's symmetrical, but it would be great to get some sense of that as well. But the bigger question is, is there a path here where maybe you look at more scaled deals instead of trying to scale this in bits and pieces across multiple JVs? Srinivasan Gopalan: Yes. Let me pick that up and André, you can add on to it. So I think it's important to understand scale in the context of fiber. Scale in the context of fiber comes from 2 things: a national brand and local scale because scale in fiber is about local zoning, local permitting, local expertise in terms of digging trenches. The fact that you have it in one geography means nothing for the next geography you go into because quite often, zoning and permitting are completely different things. The important thing for us is local scale. We are not chasing a random number of x million spread all over. We're very focused on where we are creating that local scale so that we're meaningful in that community so that we can drive the right economics. To your point on scale deals, I think there's kind of 2 or 3 different cuts to it, right? Are we interested in a scale deal purely for homes passed on fiber? No. Are we interested in mixed ILEC and different deals? No, we want to be first to fiber. And there would be exceptions where we'd look at it where some part of the footprint potentially has some non-first to fiber. But on the whole, we want to focus on first to fiber and driving the economics out of that. And that's really the coherent strategy that we're executing. FWA, of course, is a national product. André, do you want to add anything to that in terms of. André Almeida: Yes. I think just to underpin a couple of things you said, Srini. One, as we said before, we look at all of these partnerships, all of these JVs from a creation of shareholder value perspective. And that also includes making sure we have partners that are experts in deploying fiber, experts in managing this deployment business, but also have strong, as Srini said, local footprint and the ability to build in an efficient manner in each of these geographies. So we're not looking at master plan on having fiber everywhere. We're looking at geographically with each of the partners, where does it make sense to build, where we can create value out of these builds. And the second thing, as Srini said, which is very important for us, is also partners that bring the right technology. So when we looked at each of these assets, it's very important for us that these are pure-play fiber assets. We've done it with the first 2 deals with Lumos and Metronet, and we've done it now with these 2 JVs that we set up. On your other question on just addressing it on inefficiencies, the way we've built this is to make sure that we can take the advantages of scale where that scale is meaningful. And that scale is meaningful in distribution. That scale is meaningful on brand. That's why T-Mobile has taken over all of the retail consumer operations for these assets. That scale is also important in terms of, for example, the way we look at internal processes and IT. And the way we've integrated the JVs is we have a common IT platform that runs across all of the JVs that allows us from the perspective of our customers, our frontline and our processes that these JVs all look like one single operation from our perspective and from our customers' perspective. So we take scale where scale matters, where it's more important to have local knowledge and local scale, we will take that. Thank you. Srinivasan Gopalan: Kannan, it just struck me that your reference to large deals potentially was you asking the question I get asked quite often, which is the cable story. And I think I've said this at least a couple of times before, we're not going to go do scale for scale's sake. Specifically, cable is not something we're interested in. We see our strength as attacking incumbents rather than becoming an incumbent. We see a huge opportunity to attack incumbents across fiber and FWA. That will be our key play. Quan Yao: Thank you, Kannan. We're going to go over to X from [ Walt Piecyk ]. T-Mobile is packaging Starlink as a backup for businesses using 5G Internet, branding it Super Broadband. Good sign for T-Mobile SpaceX relationship. MVNO next. Srinivasan Gopalan: Thanks, Walt. Let me deal with some of that and then hand off to André on some of the pieces on super Broadband. So first, I think it's -- I know everyone around this call gets it, but this is something that gets confused quite often, which is SpaceX, Starlink, are we talking broadband? Are we talking Direct to Cell? We see them as 2 completely different businesses. We see the broadband business as actually a substitution to broadband, especially in the rural areas. We see Direct to Cell very much as a complementary product. And I think if you listen carefully to some of the things SpaceX talked about at MWC as well, they were very clear in positioning it as a complementary product. Let me deal with the MVNO question, and then I can pass on to André on Super Broadband. So first on Direct to Cell as a whole. Look, our partnership with SpaceX is very strong. We've worked closely with them to really invent an entire category, and that's been putting an end to dead zones. We're pleased with that. Most of the usage we're seeing is in national parks. And if anything, courtesy of the great network that Dr. Saw has built, we're seeing a lot less usage than we were originally thinking. But it's a great complementary product. And as you look at the future, we're seeing multiple other space providers show up. And the way this will evolve, we think is as a complementary product, it will become more and more of a standard feature of a whole set of offerings. So in some sense, less differentiated. And we're good with that at the Un-carrier because this is our history. We have go out there, innovate, create a breakthrough, solve a customer problem and then the others follow. And while they're following, we're on to our next big thing. So that's how we see DTC as a whole. On MVNOs, we've got a very clear philosophy or approach to MVNOs. MVNOs make sense for us when it's a TAM expansion. TAM expansion happens because it's a new customer base that we couldn't target earlier. It's a new channel. I mean an example of this is what we did with cable focused on SMB. It's not obvious to me how an MVNO with SpaceX or any other LEO operator fulfills those conditions. André, Super Broadband? André Almeida: Thanks, Srini. On Super Broadband, as Srini said, one, just grounding element. I know as Srini said that most people on the -- all of the people on the call understand this, but just as a grounding element, this is a broadband product. So it's not a Direct to Cell product, and it's B2B only. So we see -- and I'll explain a little bit why we see that this is an opportunity in B2B, but we don't see any translation of this into the consumer space. First, two things. One, this product is only possible because it's anchored on our 5G FWA product and the best network in America. And that's the core, core anchor of the product. Second thing is what we're bringing to the market today, and we announced this morning is anchored on an innovation by T-Mobile, which is our ability to -- within one single device and within one single network policy to be able to aggregate and coordinate between 5G FWA for businesses and the second connection, which in this case, is satellite. And that allows customers to solve 3 problems that businesses feel today. Number one is reliability and redundancy which this product has incorporated by default. Second thing is coverage. Obviously, the reason why we're using satellite and Starlink is that allows us to provide this service nationwide in every single ZIP code in America, which is a challenge we see some of our customers facing. And third is that it's very simple from a customer perspective because this means that to cover all your locations with primary and redundancy, you only need one contract, one provider and one management platform. And so we're very excited about this. If you remember when we talked in February, I said that business Internet was one of the areas where we were looking into, where we thought and believe there was opportunity and that we were going to announce something in a couple of months, and we did so today. Thank you. Quan Yao: Thanks, André. Operator, let's go back to the queue. Operator: The next question from the phone comes from Michael Ng with Goldman Sachs. Michael Ng: Just two, if I could. First, just on cost synergies, how are you progressing against the $3 billion target exiting 2027? And how much have you kind of realized to date in 2026? And where have the key sources of those cost savings come from? And then just as a housekeeping item, on the 2 JVs, anything you could share as it relates to how much you're contributing to the JVs or how much they should contribute to EBITDA on a run rate basis once it closes? Srinivasan Gopalan: Peter, do you want to... Peter Osvaldik: Yes, happy to take it. Let me start with the JVs, much like we did with the last ones. From an investment perspective, we laid out in the press release that it's about $2.7 billion of investment across the 2 JVs when they close. And at the time that they close, we'll certainly give you a more wholesome update as appropriate then around what does it mean from a subscriber perspective, increase in our target fiber households passed figures and all of those things. But it's a little early because they haven't closed. So please hold on that. In terms of the cost synergies, I'm glad you asked just 2 months after we laid it out for you on how is the progress going? And what are you doing out there? And frankly, it's going really well. And remember, what we laid out at Capital Markets Day is the source of synergies are across a number of fronts, inclusive of customer care, retail, but you also have back-office efficiencies from AI and transformation. And we're seeing great progress on that regard. I would say the $2.7 billion that we laid out for you exiting 2027 certainly is on track. I would say most of that will come towards the last part of 2026 and then fully into 2027 and beyond. And by the way, there's a lot more runway and opportunity than $2.7 billion. It's just that's what we see our way to phasing through to '27, leaving more runway into 2028. Probably not a lot of metrics I'll give you in the intervening 2 months that have created a lot of updates, but we are seeing great progress on many of them. And one, for example, is just the use of the chatbot, an AI-powered chatbot that is actually capturing a lot of customer questions and addressing them in a great Un-carrier fashion that you'd expect and actually containing about 60% of those already. So just another proof point on the way as we're going. Quan Yao: Alright operator, next question please. Operator: The next question comes from Peter Supino with Wolfe Research. Peter Supino: A question on the cost of getting new customers. Just running some simple math in your income statement, the cost of equipment sales versus equipment revenue produced a greater loss than a year ago by a few hundred million dollars. And if I look at sort of a rolling 4-quarter average of that number for the last couple of years, it's gradually climbing. And I'm wondering what the underlying trend in the business is that's driving up that loss. And if it's positive ARPA or ARPU growth, I wonder if we should expect that trend to continue. Peter Osvaldik: Yes. There's a number of things there. If you just focus on that one line item, and then I'll step back and kind of give you a view of the business. And that is a few things. One, you just have a larger base. So you'll notice that our upgrade rate was similar. And of course, our acquisitions were even higher as we see more share of switching and flow to T-Mobile. And so in a world where you do have device-centric promotionality that is driving switching as well as upgrades on a smart value-accretive CLV basis. One, you have a larger base, kind of doing the same upgrades, you're capturing more acquisitions. So naturally, you're just going to have a higher dollar amount there that's associated with that. To your point, though, there is an element of we are able -- because remember, we very smartly tend to design our most premium device promotions to be associated with our most premium device plans. And customers see that as a great trade-off, inclusive of all the other value that is incorporated in those premium rate plans. And so you do see ARPA increases as a result of that. In fact, we mentioned that we continue to see over 60% of lines on new accounts taking our premium plans. So you really have to step back and say, okay, not just that one line item, which I think this same dynamic will continue to play out on that one line item. But what is it doing to the totality of the business? And how is that doing? And I know, Peter, you've looked at this more deeply. And I don't think Q1 could have been a better demonstration of the things we've been talking about for a long time now, which is if you invest in what is your product, I've heard others in the industry say, you don't need to invest in your network, it's not important. And I just -- I mean kudos to them if that's what they believe. It's our product. It's what we sell to customers. And the differentiation that we're starting to see with consumer sentiment now following what the actual network progress is, the value that we embed in our plans as well as the experiences mean that it's not just devices that make customers come here. You see us be very thoughtful around the promotions around devices that we do, inclusive of linking them to our top-tier rate plans in most instances. But you see the flow of customers coming to us because it's not the devices, it's these 3 other elements. And not only did you see that in top line KPIs in terms of service revenue of 11%, 4x the next nearest competitor, core EBITDA of 12%, the all-important free cash flow generation, but if you double-click down like you do so often into the next level of KPIs, you see a tremendously stark difference developing in Q1. And it's one of those that is a result of all this investment and differentiation that we've done. I mean if you take a look at what we delivered, 217,000 postpaid account net additions up year-over-year and ARPA growth of 3.9%. That's what delivers the top line service revenue that's so differentiated. If you look at Verizon, for example, they lost 127,000 postpaid net accounts and their ARPU was almost down 2% year-over-year. And so if you -- I know they didn't do this for you, but if you somehow back out what you believe the frontier service revenue contribution was from M&A, their business -- the core business ex Frontier actually declined in service revenue. Mean that's fascinatingly stark to show you, by the way, why accounts and ARPA is such an important metric to focus on in terms of value creation. Similarly, when you look at AT&T, they just delivered the highest, yet again, the highest year-over-year postpaid phone churn increase in the industry, proving that all the convergence talk is just that. It's talk. But also more importantly, they had declines in postpaid phone ARPU sequentially and year-over-year. And if you look at what they just did with contract assets in Q1, where that was a $300 million increase in terms of pulling costs off the P&L and putting them on the balance sheet. If you adjust for that, EBITDA was down year-over-year there. So it just shows you, if you step one level down, you see the formula here that's way more than a device promotionality formula. It is that best network, best value, best experience means customers are choosing to change their whole relationship coming to T-Mobile, deepening that relationship vis-a-vis ARPA and our ability then because of the efficient way that we run to translate that not only into core EBITDA leadership growth, but also that all-important free cash flow growth. I think Q1 started showing you a lot more of what we've promised with this differentiation would come, and that is it's starkly different in terms of financial performance as well. So sorry, let me go off for a little while because it was just not equipment revenue and COGS, you really have to step back and see the broad picture of value creation here. So I appreciate you letting me go on, Peter. Quan Yao: Operator, let's move on to our next question please. Operator: The next question comes from Sebastiano Petti with JPMorgan. Sebastiano Petti: Peter and Srini, I guess, for either of you. Good to see the increase in the capital allocation for the year of $3.6 billion, $18.2 billion. You had the accelerated share repurchase in the first quarter that you announced. I guess, help us think shares have come in here a little bit. How are you thinking about perhaps the appetite for additional share repurchases or an accelerated buyback program here? And then related to the postpaid phone account -- postpaid account metric, great to see the upgrade. Maybe help us think about where you are in the process of integration on the UScellular base and whether that perhaps led to maybe some of that churn increase that you talked about earlier on, the math, Srini, whether or not -- like where are you in that migration or integration of that base? And when should we anticipate churn perhaps converges with the legacy T-Mobile base? Srinivasan Gopalan: Peter, maybe you pick up the first bit and John do an another update on your... Peter Osvaldik: Absolutely. So on shareholder returns, you just saw us execute in Q1 an acceleration and delivered $4.9 billion in share buybacks for a significant cumulative amount of share buyback and dividends that have been returned to date under the program. And you saw us more excitingly, just recently announced that the Board authorized us to increase up to the $3.6 billion. And the way we're going to approach it is the way we've always approached this, which is I'm not going to talk about the daily trading dynamics and what we're thinking about and all of that for obvious reasons. But really importantly, it's -- we're focused on where do we see this company and its discount relative to intrinsic value. And of course, we'll follow our capital allocation philosophy, investing in the core business, investing in value-accretive M&A and then its shareholder returns consisting of this very balanced dividend and share buyback approach. But that's how we're going to approach it. And so I'm not going to be able to say more in terms of what we're thinking about and how and when and trading dynamics there. But I think you saw us execute in Q1 and very smartly and thoughtfully based on where we believe the intrinsic value of the company is and the discount relative to that is going to guide us in a lot of these instances. John Saw: Yes. Then I'll pick up on Sebastiano. I'll pick up on the UScellular integration piece. As you guys know, we closed the UScellular transaction on August 1st of last year. And we stopped promoting UScellular to new customers right before the holidays last year. So we unified everything behind the T-Mobile brand, even in UScellular branded stores, we're acquiring all new accounts under the T-Mobile brand. And to the premise of your question, we're now just now beginning into the final kind of big throes of the customer migration. We've done a lot of the network-oriented migration, that's behind us. And now we're handling the customer migration. It's a relatively small base, 4 million customers or so. And we've got recent experience with this, given that we integrated the Sprint base back in 2020 to 2023. So a lot of learnings that we're applying to this overall customer migration effort in terms of communications and how we're mapping customers over, making sure they're getting all the benefits and understanding the full T-Mobile value proposition. All of that's going extremely well. I could not be more satisfied with how it's going in the UScellular marketplace. So we're going to be working through that over the spring, the summer and the fall. I think we'll substantially have it wrapped up by this year in terms of the overall integration effort. And then, of course, what that's leaving with is an incredibly bolstered network advantage in smaller markets and rural areas where we're continuing to do quite well. You heard Srini talk about where our share position is now in smaller markets and rural areas of 24%. But the other big thing that we're doing in smaller markets and rural areas is continuing to drive that win share in postpaid switching. We're leading now 12 quarters in a row. So when you think about the majority of 2023, 2024, 2025 and so far in '26, continuing to lead that position, enormous runway ahead of us and really fortified by the overall UScellular assets that we've incorporated into the T-Mobile network. Srinivasan Gopalan: Yes. Just one thing, Sebastiano, just to clarify, the math I was laying out about account churn. UScellular is not a contributor to that. So that behaved exactly like we expected it. This was more kind of weighted average math camp. Quan Yao: Let's move on to our next question. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Brandon Nispel: I think the last couple of quarters, and it was sort of asked, but the last couple of quarters, you guys gave an organic ARPA growth. And I was hoping you guys could give that organic ARPA growth this quarter. And then just looking at the guide for service revenue in 2Q, it seems like the trend on ARPA growth needs to come down something with a 1 -- and I was wondering if I got that right. And then it seems like, again, going -- looking at your guidance to hit $77 billion, we need to reaccelerate that. I want to just confirm that all of that was correct and get your thoughts there. Peter Osvaldik: Yes. I can go on -- you're absolutely right on the ARPA piece. But remember, it's a remnant of the fact that we had rate plan optimizations that benefited Q2 of last year, but not Q1 of last year. So you had that being an impact over the year-over-year. So yes, when you think about Q2, I think you're absolutely right in terms of the numbers, probably near 2% on a year-over-year ARPA basis there simply because of the dynamics of you have the rate plan optimizations and you have, remember, the dilutive effect that was long anticipated around both UScellular as well as Metronet and Lumos, which were taken on and impact Q2 of this year, but not, of course, Q2 of last year. And then we will see an acceleration for the second half of the year back. So this is all just math dynamics here. In terms of ARPA and giving you organic versus inorganic, we moved away from that primarily because I just don't have a great answer for you. It would all be subject to art. So for example, as we brought on a UScellular customer and they expanded their relationship with us post-merger, what do I do there? Is that organic or inorganic? Or when we had fiber-only customers come on board and then expand their relationship and take on phone and other products, how do I allocate that away? And so we're not in the business of creating art here. We want to be very transparent with you. And I think at this point, because of how we've accelerated some of the UScellular elements of it and these nuances, we're really not giving organic or inorganic ARPA for that reason. Quan Yao: Thanks, Brandon. Operator, let's do one last question please. Operator: The last question today comes from Timothy Horan with Oppenheimer. Timothy Horan: With basically the highest quality service out there on almost every metric, you're at a 20% price discount, give or take, versus your peers. I mean, can you get that pricing to parity over time? I mean with the quality service, you might not even impact subscriber growth at all, but how are you thinking about pricing longer term? Srinivasan Gopalan: Yes. I'll take that up. The way we think about pricing power and pricing as a whole is ARPA growth, right? We don't tend to fixate on one number. We love the fact that our back book is actually at a lower price than our front book. Simply put that our existing customers pay less than new. That's rare in an annuity business, and it creates incredible dynamics, right? Because that means as you bring on customers, you're growing ARPU as well as volume. You're growing value as well as volume. And when you have this position of having best network, best experience and best value, that creates a position of no trade-offs. So we are going to protect our position on best value. We're not going to look at it kind of with one variable, which is what is our ARPU versus other people's ARPU or what is our ARPA versus others. We will, from time to time, do thoughtful moves on our pricing. They are typically more-for-more moves where what we end up doing is give our customers more because a lot of the plans, for example, would be outdated. So what we will end up doing is bringing them up to date with newer, better plans, and that may or may not come with a price change. But we don't see a world where we look at a 20% discount and go, let's go whack that pricing up and create a change because we think getting -- titrating the volume and value, making sure that we stay with this position of best network, best value, best experience is what creates long-term shareholder value, long-term customer loyalty. It's what creates the number I love the most, our NPS, 20% ahead of everyone else. Quan Yao: All right. Thanks, Tim, and thanks, everybody, for joining us today. We're looking forward to connecting with you again soon. In the meantime, if you have other questions, please contact the Investor Relations or media departments. Thank you.
Operator: Hello, everyone. Thank you for joining us, and welcome to CareDx, Inc Q1 2026 financial results earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your keypad to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Caroline Corner, Investor Relations. Caroline, please go ahead. Caroline Corner: Thank you, operator. Good afternoon. Thank you for joining us today. Earlier today, CareDx, Inc released financial results for the first quarter 2026 ending 03/31/2026. The results are currently available on the company's website at caredx.com. Joining me on today's call are John Hanna, President and Chief Executive Officer; Keith S. Kennedy, Chief Operating Officer and Chief Financial Officer; and Doctor Jeffrey Titterberg, Chief Medical Officer. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Information concerning the risks, uncertainties, and other factors that could cause results to differ from these forward-looking statements is included in our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, 04/28/2026. We disclaim any intention or obligation, except as required by law, to update or revise any information, financial projections, or other forward-looking statements, whether because of new information, future events, or otherwise. This call will also include a discussion of certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures may be found in today's earnings release, which is posted on our website. With that, I will now turn the call over to John. John Hanna: Thank you, Caroline. Good afternoon, and thank you all for joining today's call. Since I joined CareDx, Inc in 2024, I have been singularly focused on transforming this company into a precision diagnostics market leader. Today, I am going to highlight two portfolio actions we have taken to accelerate our growth strategy, including the divestiture of our Lab Products business we announced on April 15 and the acquisition of Navaris announced today. In my prepared remarks, I am going to briefly review our strategy in solid organ transplant that is propelling the growth in our core business. I will then cover the two portfolio actions in more detail. After that, Keith will walk through the financials and our updated outlook for 2026. At CareDx, Inc, our growth strategy is focused on extending our leadership in precision medicine testing and patient and digital solutions by addressing markets where our core competencies give us the right to win. We are addressing clinical markets where we hold a clear number one position. These markets are characterized by patients with a high cost and burden of disease that warrants repeat molecular testing to inform clinical management. These patients are managed by a concentrated group of subspecialty providers, and we service them through our solution selling approach that integrates digital solutions and pharmacy to support clinical workflows and patient engagement and adherence to our testing services. Our organic growth strategy is anchored on three connected drivers. First is our pipeline programs. Innovation is central to how we maintain leadership and extend our model into new markets and grow our TAM. Q1 marked continued progress across our pipeline, with advancement in both new clinical programs and platform capabilities that extend our core monitoring model over time. In 2026, we are advancing three key pipeline initiatives. First, during the quarter, we advanced our lead cell therapy program, Alaheme, with clinical data from the ACROBAT study. The ACROBAT data have now been presented at both Tandem and EBMT; we anticipate publication submission in the second quarter. In solid organ transplant, we are progressing our program to expand AlloSure into liver transplantation. Liver transplantation is unique in its biology and clinical management, and in our MAPLE trial, we are gathering follow-up data for patients enrolled in the study to validate our solution for this important indication. Strategically, AlloSure liver would extend our core monitoring model into a new organ system, enabling total addressable market expansion while remaining tightly aligned with the same workflow-driven, repeat testing, solutions-based approach that underpins our core business. Additionally, late last year, we announced the launch of HistoMap kidney, which extends molecular insights to the moment of biopsy and complements our existing blood-based kidney monitoring. For example, when a kidney transplant patient undergoes a biopsy, clinicians typically rely only on histology, looking at tissue under a microscope, to assess what may be happening in the graft. HistoMap kidney adds a molecular layer, providing additional biological context that can be evaluated alongside traditional pathology. During the quarter, we continued to make progress toward the planned HistoMap kidney launch, including submission of our second clinical validation manuscript and advancing our CLIA readiness. Together, Alaheme, AlloSure liver, and HistoMap demonstrate how we are innovating on our core platform to extend our leadership into new clinical markets. Second, our go-to-market strategy is focused on building belief in molecular testing as the standard of care in solid organ transplant and simplifying the workflow for health systems to drive operational efficiencies in their practice and adherence to testing protocols, while improving the quality and consistency of how customers experience working with CareDx, Inc. We are executing this through two primary go-to-market initiatives. First is emphasizing the clinical differentiation of our solutions, where we lead with indication-specific strategies tailored to how transplant clinicians make decisions. With HeartCare, our focus is on informing prognosis and treatment decisions, leveraging our SHORE data. In kidney, we are expanding the context of use for AlloSure beyond surveillance with a focus on for-cause testing indications, which currently account for 50% of our kidney testing volume. In lung, we continue to build adoption by promoting early findings from our ALAMO registry. This approach allows us to drive relevance within each indication rather than relying on a single commercial message across markets. The second initiative is driving workflow improvements and ease of use, which is increasingly critical to scale. We are embedding our solutions more deeply into clinical workflows through a combination of center-based software, Epic Aura integrations, and Epic Enterprise LIMS infrastructure. Together, these capabilities are designed to support more consistent ordering, reporting, and cash collection by reducing friction within transplant center workflows. As we look ahead, we are targeting approximately 50% of testing volume through Epic-integrated sites by year end, reflecting our belief that workflow integration is central to sustained adoption. We made continued progress on this strategy during the quarter, with nine centers live and 16 additional integrations underway. While still early, these integrations are showing signs that they reduce friction for care teams and enable increased adherence to center-specific testing protocols. These initiatives are supported by continued investment in sales, medical education, and patient engagement through our CareDx Cares team with a clear emphasis on improving the customer experience. We are deploying resources to accelerate growth, and today, we have over 120 field support team members that assist transplant centers with their workflow and assist patients with blood collection. Overall, our go-to-market approach reflects a clear strategic intent to establish molecular testing as the standard of care by combining clinical differentiation, workflow simplicity, and scalable execution. Our evidence generation strategy is intentionally designed to support how we scale the business and extend our leadership position. The objective is to advance the clinical utility of our on-market products, inform how clinicians use molecular testing over time, and support expansion into new indications in a disciplined way. In solid organ transplant, studies such as ALAMO and HARBOR focus on demonstrating longitudinal utility and monitoring relevance. MERIT is a meaningful step beyond that. MERIT is an interventional study which evaluates how molecular insights can actively inform therapeutic decision-making. Strategically, this is important because it makes molecular testing integral to clinical action, reinforcing its role within routine care pathways. In cell therapy and hem-oncology, we are advancing our Transplant+ strategy starting with ACROBAT, which serves as the foundation for the clinical validation of Alaheme and our entrance into AML and MDS markets. We are also extending that same molecular monitoring model into DLBCL and multiple myeloma in our ACROSS study evaluating CAR T persistence. This work focuses on understanding expansion and persistence kinetics in real-world CAR T care. Strategically, this study helps define where molecular monitoring can add value in a rapidly evolving market, which may become an important part of our future pipeline. We announced in March the launch of Vantics, our AI-enabled clinical insights platform, which adds an intelligence layer to clinical decision-making. In practical terms, consider a kidney transplant patient who is undergoing routine molecular testing as a part of follow-up care. Over time those results, such as serial AlloSure measurements, are generated alongside clinical data already captured in the care workflow. With Vantics, centers can securely aggregate and analyze center-specific molecular and clinical data across cohorts, enabling more consistent interpretation of trends over time. The supporting algorithms are informed by CareDx, Inc's large clinical study databases, including SHORE and KOAR, helping translate real-world longitudinal data into scalable program-level insights. Together, these efforts reflect a consistent strategy to extend molecular monitoring in adjacent clinical settings in a disciplined way, prioritizing evidence, clinical relevance, and timing. Last week, CareDx, Inc's precision medicine testing services were featured in more than 50 abstracts, including 16 oral presentations, at the International Society for Heart and Lung Transplantation's Annual Meeting, drawing on data generated from across approximately 95 transplant centers. This breadth reflects one of the largest coordinated bodies of real-world longitudinal molecular monitoring data presented at a national transplant meeting. The data spanned both heart and lung transplantation and included findings from large prospective registries such as SHORE and ALAMO, as well as early interventional work supporting MERIT. Across these studies, and key features of the highlighted abstracts on this slide, the consistent theme was the clinical relevance of longitudinal molecular signals over time, supporting risk stratification, earlier signal detection, and more informed post-transplant management. The scientific momentum we highlighted at ISHLT reinforces our broader strategy and the growth drivers we have discussed, demonstrating how molecular monitoring is becoming increasingly embedded in clinical practice. Next, I would like to briefly turn to the divestiture of our Lab Products business, an important step in our recent portfolio actions. This transaction simplifies the company to what we do best: precision medicine testing services and digital and patient solutions. The Lab Products business includes manufacturing, regulatory, and commercial operations that are distinct from our U.S.-based testing services platform. By separating these activities, we are streamlining our operating model and allowing each business to move forward with greater focus and alignment. Strategically, this reinforces our testing services and patient and digital solutions core business, which are driving growth. In the first quarter, they delivered 48% and 33% revenue growth, respectively. Financially, the transaction provides upfront cash consideration of $170 million at closing, improving our financial flexibility and supporting our capital allocation strategy. At the same time, the transaction positions the Lab Products business for continued success under Eurobio Scientific, a longstanding partner and global IVD manufacturer with scale and distribution capabilities. Keith will walk through the pro forma financial impacts of the transaction in more detail in his remarks. Now on to the big news. We announced today an agreement to acquire Navaris. This is a thoughtful and deliberate step in our growth strategy. Along with our Alaheme and CAR T organic pipeline in oncology, we are taking a very selective and differentiated approach to solid tumor MRD with a category-defining and indication-leading platform with Navaris. Importantly, this is not a move to broadly pursue MRD as a category. Rather, it is a targeted addition in a specific viral-mediated cancer space where longitudinal molecular monitoring is already reimbursed, embedded in specialty workflows, and aligned with how we operate our core business today. Navaris' platform is built around a tumor-naive blood test used across the care continuum from diagnosis through MRD surveillance. First, I would like to share a little bit about the business at a high level. To date, the company has performed more than 130,000 commercial tests, has approximately 2,000 active ordering physicians, and is operated by a strong U.S.-based team of approximately 100 employees. The testing is currently covered for approximately 100 million lives, including Medicare, and has Advanced Diagnostic Laboratory Test, or ADLT, designation with a $1,800 reimbursement per test. For 2025, the estimated unaudited revenue is $34 million, and we expect it will grow by 30% to 40% or greater over the next three years. The Navaris testing platform uses a proprietary and differentiated tumor tissue-modified viral DNA, or TTMV, approach to detecting tumor-derived viral DNA in a blood sample. The liquid biopsy platform is tumor-naive by design, meaning it does not require access to tumor tissue. As a result, testing can be performed through a simple blood draw, while also differentiating malignant signal from transient or benign HPV infection without reliance on having a tissue sample. The platform is built on an ultra-sensitive digital PCR technology combined with proprietary analytical methods, supporting both strong clinical performance and scalable operations. Multiple indications for Navaris testing are supported by a large and growing body of evidence that now totals 56 peer-reviewed publications. In a large multicenter real-world observational study of 543 cancer patients reflecting use in routine clinical practice, the Navaris test demonstrated strong performance with a negative predictive value of 98% and a positive predictive value of 95% during post-treatment MRD surveillance. As shown in the Kaplan-Meier curve on the right, patients with persistent negative TTMV DNA results during surveillance experienced improved recurrence-free and overall survival compared with those with one or more positive tests, and the median lead time to identify recurrence was four months ahead of standard-of-care methods. Based on these findings, the study authors recommended post-treatment monitoring and guideline-specified routine surveillance intervals. Viral-driven cancers represent a growing specialty oncology market, with HPV playing a central role across multiple solid tumors. According to U.S. population-level data from the CDC, HPV is associated with the majority of cases of several of these tumor types, reaching approximately 80% of head and neck cancers and close to 90% of anal cancers, Navaris' two lead indications. Importantly, the incidence of HPV-associated cancers continues to increase, demonstrated here by the growth in head and neck cancer on the right. The Navaris platform is validated across multiple viral-mediated cancer indications. In aid to diagnosis, Navaris is validated in head and neck, and planned validation in anal cancers. In MRD surveillance, Navaris is clinically validated and Medicare covered in head and neck and anal cancers and has planned validation in gynecologic cancers. And now, I would like to ask our Chief Medical Officer, Doctor Jeffrey Titterberg, to walk us through the patient journey for head and neck cancer diagnosis and molecular MRD monitoring. Doctor Jeffrey Titterberg: Thank you, John. I am excited to join the call and share what we see to be a significant opportunity for a differentiated solution to address an unmet medical need in viral-mediated cancers. Today I am going to focus my comments on head and neck cancer for the Navaris adoption of the greatest and illustrate how Navaris fits into the workflow and management of these patients. Patients with head and neck cancer typically start their journey after being referred to an ENT surgeon, with symptoms that may include chronic sore throat, pain or difficulty swallowing, or a neck mass. The ENT surgeon will first examine the patient, perform laryngoscopy and imaging, and then obtain tissue via biopsy or fine needle aspiration. Importantly, these methods can be inconclusive, and an HPV diagnosis can be missed if tissue samples are inadequate or nondiagnostic. Peer-reviewed evidence has shown that Navaris is highly accurate, aiding in the diagnosis of HPV-positive head and neck cancer. When utilized in conjunction with traditional approaches, more patients are correctly classified as HPV positive, which is important because making an accurate diagnosis of HPV positivity is critical to downstream therapeutic decision-making. HPV-positive patients almost always undergo surgical resection, followed by chemotherapy, radiation, or both, under the care of a multidisciplinary team. Navaris testing may be utilized to inform treatment response through its unique quantitative tumor tissue-modified viral DNA score, which correlates with tumor burden. The TTMV DNA score has the potential to inform both the duration and intensity of therapy, for which studies are ongoing. Following definitive treatment, Navaris molecular testing is positioned as a monitoring tool in this context; serial blood-based monitoring is used to complement routine follow-up, enabling a repeat assessment of the molecular signal over time as part of standard surveillance workflows. The MRD surveillance protocol for Navaris testing aligns with guideline-recommended physician follow-up time points, including quarterly for years one and two, and semiannually for years three, four, and five, for a total of 14 tests per patient over the first five years post treatment, followed by annual testing thereafter. Currently, Navaris is the only Medicare-covered assay for HPV-positive head and neck and anal cancer MRD. Care is delivered by specialists at accredited centers consistent with NCCN- and CAP-aligned practices, where patients are followed closely for multiple years due to risk of recurrence. John Hanna: Thank you, Jeff. With that context on the technology, patient journey, and the reimbursement framework already in place, I want to step back and talk about the size and quality of the opportunity in front of us. HPV-driven solid tumors are a large and growing portion of the overall specialty oncology testing market. Today, we estimate the U.S. total addressable market to be approximately $4.5 billion, split across two distinct clinical applications. The first is molecular residual disease surveillance, which represents roughly $1.5 billion of TAM. This is where Navaris is focused today with clinical validation and Medicare coverage and in the early stages of clinical adoption. The second is aid to diagnosis, representing an additional $3 billion opportunity that has yet to be tapped. In totality, at CareDx, Inc, we are building a differentiated multi-indication precision medicine portfolio to drive growth. In solid organ transplant, we have established leadership across heart, kidney, and lung, with liver progressing from development into validation. In specialty oncology, we are applying our core competencies in high-value indications. That includes viral-mediated cancers and hematologic malignancies like AML and MDS. Importantly, this diversified portfolio approach allows us to continue on our strong growth trajectory by extending our precision medicine testing services and patient and digital solutions into new indications. When taken together, we estimate the total addressable market for solid organ transplant and specialty oncology now exceeds $12 billion. The result is a diversified growth profile across specialty markets. Navaris extends our platform into a large specialty oncology market where our model already applies and where we can lead. It allows us to stay disciplined about where we compete, focusing on indications where molecular monitoring is differentiated and scalable. As we evaluated this opportunity, we were particularly focused on the long-term impact on our growth and returns to shareholders, and we have strong conviction that this investment can deliver both within the framework of our existing operating model. This brings us to the core takeaway: CareDx, Inc is the right company to scale Navaris. We have the proven platform, the operational discipline, and the specialty focus that can turn this expanded portfolio opportunity into durable growth and profitability. I will now turn the call over to Keith to review our Q1 financials and 2026 guidance. Caroline Corner: Keith? Keith S. Kennedy: Thank you, John. I plan to cover our first quarter 2026 financial results and our updated 2026 guidance. You may access our earnings presentation at caredx.com by clicking through to our Investor page. Turning to the financial highlights section of our earnings presentation, for the first quarter 2026, and our year-over-year results: Total revenue increased 39% to $118 million. Testing volume increased 17% to 54,900 tests. Testing services revenue increased 48% to $91 million, or $16.60 per test. Patient and digital solutions revenue increased 33% to $16 million. Lab products revenue declined 4% to $10 million. Our non-GAAP gross margins increased to 73%. Non-GAAP operating expenses of $69 million, or 59% of revenue, included approximately $2 million incremental bonus accrual for performance above plan. Our GAAP net income was $3 million, GAAP net income per basic and diluted share was $0.05, and adjusted EBITDA of $19 million increased 300%+. Cash collections increased 52% to $121 million. Cash flow from operations was $4 million this quarter and $72 million over the last four quarters. We ended the quarter with $198 million in cash and cash equivalents and no debt. In the first quarter, we collected $14 million in excess of December 31 receivables. This out-of-period revenue contributed $260 per reported test. Excluding this revenue, our revenue per test was $14.[inaudible]. Turning to guidance. We are raising 2026 revenue guidance to $447 million to $465 million, representing a 20% increase year over year at the $456 million midpoint of the range, and adjusted EBITDA of $43 million to $57 million, a 58% increase year over year at the $50 million midpoint of the range. Our full-year guidance covers the business in our hands today, including our products business. After I cover our annual guidance, I will provide details for our products business embedded in our annual guidance, which we hope will provide our preliminary insights into the financial carve-out. We applied the following assumptions in modeling our full-year guidance, consistent with non-GAAP measures. We believe testing volume will range between 224,000 and 229,000 tests for the year, representing a 13% increase year over year at the 226,500 midpoint of the range. Based on our experience and seasonality in our business, we expect to see a step up in volume of approximately 1,700 tests from Q1 to Q2, flat from Q2 to Q3, and another step up in volume of 1,800 tests from Q3 to Q4. Our guidance assumes revenue for each line of business calculated on a year-over-year basis at the midpoint of the following ranges: Testing services revenue of $337 million to $351 million, a 25% increase at the $344 million midpoint. Patient and digital revenue of $63 million to $66 million, a 13% increase at the $65 million midpoint. Product revenue of $45 million to $50 million, flat at the $48 million midpoint. For testing services, we included a slide on revenue per test in our earnings presentation. We expect our revenue per test to increase 10% year over year to the midpoint of our guide—7% due to an increase in our average accrual rate and 3% due to the combination of cash collections in excess of receivables offset by our estimate of the LCD price impact. In modeling to the midpoint of our guide, we assume average accrual rate per test to increase from $14.[inaudible] per test in Q1 to $14.60 by year end, out-of-period revenue of $7.5 million in Q2, $5 million in Q3, and none in Q4, and the LCD to negatively impact revenue, not volume, by $7.5 million in 2026. Per quarter, we modeled gross margins in the range of 68% to 71% and operating expenses of $68 million to $70 million, including higher bonus accrual of approximately $2 million per quarter, and we anticipate depreciation recorded in operating expenses to be approximately $9 million for the full year. As mentioned in our April press release, the Board of Directors authorized a common stock repurchase program of up to $100 million of shares over a period of up to 24 months. Turning to our Lab Products divestiture, as John mentioned, we signed a definitive agreement to divest this business, which we expect to close by the end of the third quarter and net approximately $160 million in cash, equal to the $170 million sales price net of $10 million in estimated transaction expenses. As I said earlier, our full-year guidance covers the business in our hands today, including our products business. In 2026, our Products business generated approximately $10 million in revenue and less than $1 million in adjusted EBITDA. To provide context on the carve-out of our Products business, the following slide in our earnings presentation illustrates the following. On the left, we prepared a chart showing our revenue mix by service line for 2025 and the full-year guidance at the midpoint of the range. Our 2026 guidance includes $48 million in lab products revenue, or flat year over year, and $[inaudible] in core business revenue, including testing, patient, and digital services, or 23% growth year over year. The table to the right of this slide provides assumptions built into our 2026 guide for our products business, which is our best estimate at this time, but we expect to vary depending on when the transaction closes, transition services we provide to the buyer, etc. In a perfect world, both parties would like to achieve a clean close at quarter end, or June 30, but we are allowing for slippage into Q3. Our 2026 guidance assumes lab products generates $45 million to $50 million in annual revenue, $26 million to $30 million in gross profit, $21 million to $24 million in operating expenses, approximately $5 million in depreciation, and contributes $3 million to $9 million in EBITDA. We are reviewing our post-close expense structure and will have more to say on the carve-out after we close. For modeling purposes, we provided the quarterly ranges underlying our 2026 guide, which we will update post close. For example, we modeled $5 million to $6 million in quarterly operating expenses for the lab products business. Hopefully, this is helpful detail. I will now turn the call back over to John. John Hanna: Thank you, Keith. In summary, I want to thank all the team here at CareDx, Inc and Navaris and look forward to the path forward. We think these actions, taken together, are advancing our growth strategy as a company, optimizing our portfolio, and extending our leadership in precision medicine diagnostics. Thank you, and I will now turn the call back over to the operator. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 on your keypad to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tycho Peterson with Jefferies. Tycho, your line is open. Please go ahead. Tycho W. Peterson: Hey, team. This is Lauren on for Tycho. Quick ones for me. First, on the $4.5 billion TAM for MRD, how much of this market right now is immediately accessible to you guys through your existing infrastructure, and what new clinical channels must be established for the 30% to 40% projected annual growth? And then second, on the digital solutions business, as you guys are growing this out in the solution selling strategy, what is the attach rate for digital solutions among your high-volume transplant center customers? Thanks. John Hanna: Yeah. Thanks so much for the question, Lauren. As we outlined in the prepared remarks, $1.5 billion of the TAM is currently in the MRD space and covered in head and neck and anal cancers. From a channel access perspective, the Navaris team has done a great job building a channel into the specialty providers that diagnose and monitor those patients, including ENTs—predominantly in head and neck—and then medical oncologists that they work with. We do not anticipate having to build a net-new channel; Navaris has already built that channel. With CareDx, Inc capabilities in driving repeat testing and building workflow optimization, including Epic integration, we think we can accelerate that revenue and volume growth rate. Your second question on the attachment rate of digital solutions: we said previously that 70% of transplant centers across the U.S. use at least one of the CareDx, Inc patient or digital solutions, and that continues to be true today. As we have shared previously, the more solutions a transplant center has, the more embedded we become into their workflow and, therefore, the more testing we see and revenue generated from those centers. Tycho W. Peterson: Perfect. Thanks so much. John Hanna: Thank you. Operator: Our next question comes from the line of Brandon Couillard from Wells Fargo. Brandon, your line is open. Please go ahead. Brandon Couillard: Hey. Good afternoon. Thanks for the time. John, on Navaris, just curious how long these assets have been on your radar screen. It looks like they also operate two labs, one in Massachusetts, one in North Carolina. Would it be your expectation to keep both? And R&D spend must be pretty lean here. Would this be a type of situation where maybe you could spend an extra $10 million or $20 million and get a lot of juice out of that, be it commercially or with the R&D pipeline? Or would you expect to keep operating this business near breakeven to slightly profitable? John Hanna: On the labs, they operate and have CLIA licenses in both their labs. It is not really that material at this point, and they are in the middle of automating some of their workflows, so we will be spending a lot of time really helping them on their cost per test, continuing to drive that as well as the revenue cycle management over time. We will evaluate the lab strategy. And I think, Brandon, on the R&D spend, the company operates incredibly efficiently. There are a high number of active clinical trials in addition to the 56 publications that have already been published on the products. Right now, there is a focus on the aid-to-diagnosis indication both in head and neck and anal cancer to unlock that larger portion of the TAM, and then development work really around the 14 time points of testing over the first five years post definitive treatment for those patients. That is what we are going to be focused on. That is really the core competency that makes this deal work and why Navaris selected, quite frankly, CareDx, Inc as their partner going forward. Brandon Couillard: Super. And then, John, it would be great to get your macro view on the transplant procedure environment right now. Volume growth is still pretty sluggish here. Curious how much longer you can keep growing your own testing volumes at double digits if this type of environment persists, and to what degree at all does your guidance assume that procedure volumes pick up as we move through the year? John Hanna: Yeah, it is hard to predict, as you know, Brandon. It seems like in the transplant market, the procedure volumes accelerate and then fall back and accelerate and fall back. We saw some acceleration at the end of the first quarter, particularly in kidney. We are monitoring that closely. As you are aware, we are coming toward the end of the first reporting period in the IOTA program, and we keep hearing chatter in the market about a focus on increasing transplant volumes as a result of that program, but we are not seeing it nationwide in terms of total volume growth—that is in select centers. So we are very focused on supporting those centers that are in the IOTA program around hitting their goals as they move into this first reporting cycle. Keith S. Kennedy: As we test patients, our population of unique patients we are testing is growing year over year. Once you get a transplant, you are followed for years in getting testing. So even if the underlying transplant volume is flat, growth rate is going to be significantly higher in surveillance testing. Operator: Thank you. Our next question comes from Mark Massaro at BTIG. Mark, your line is open. Please go ahead. Mark Anthony Massaro: Hey, guys. Congrats on the acquisition of Navaris. I wanted to ask a couple on that deal. So the first one is where is the GYN cancer indication in terms of development, and how quickly do you think that could launch? The second one is, I understand there are 100 employees at the company. How many are in commercial, and did I hear you right that you do not expect to expand their commercial? And then the third one is on the reimbursement. I think the reimbursement rate is $1,800 per test under an ADLT. When do you think that might reset, if ever, and is that locked through the end of this year? How are you thinking about that going forward? John Hanna: Hey, Mark. Thanks for the questions. The GYN indication is still in development. There is greater heterogeneity of HPV-driven proteins in GYN than in the other indications, so that is a development program within the company that will continue, and we do not have a specific timeline around it today. From a commercial channel perspective, what I was saying in response to Lauren’s question is that the channel exists today. We certainly anticipate supporting and expanding that channel. Driving growth requires more reach and frequency with providers and building belief, and so we will do that, but that is part of our model here, and we think it is very doable to maintain the financial profile that we anticipate with the asset. The $1,800 ADLT—as you know, with ADLT status, you report data every year—and that reimbursement rate has been consistent for the company, so we are not expecting any change in that rate. Mark Anthony Massaro: Yep. Understood. And then I figured I would ask an unrelated question to the Navaris acquisition. What is your latest thinking around the timing of the LCD for transplant from the MolDX group? Is that perhaps mid-26? Or I know we are approaching mid-26. So how are you thinking about that? John Hanna: Yeah. It still continues to be mid-26, given that the draft issuance date was July 15, and CMS generally holds themselves to publishing a final or retiring the draft within one year of the draft issuance. So we still anticipate we could see the LCD here sometime at the end of the second quarter or early third quarter. Mark Anthony Massaro: Sounds good. I will keep the questions there. Thanks, guys. John Hanna: Cool. Thanks, Mark. Operator: Our next question comes from the line of Andrew Brackmann from William Blair. Andrew, your line is open. Please go ahead. Andrew Brackmann: Hey, guys. Good afternoon. Thanks for taking the question. I also wanted to ask on Navaris. It certainly checks a lot of the boxes that you outlined with respect to specialty markets that you are concentrating on, both organically and with potential M&A. Can you maybe just unpack the operational learnings from the transplant business that you can apply here? You talked about driving the repeat ordering and the Epic integration. What specifically are the operational learnings that you have found over the last few years here that you can apply to this business? Thanks. John Hanna: Yes. Thanks for the question, Andrew, and I will ask Jeff to jump in here as well. It is not just operational. It is also around provider education and awareness of the data and the use of the products. Do you want to share a little bit? Doctor Jeffrey Titterberg: Yeah. I mean, as people get more familiar and more comfortable with using these noninvasive tests rather than their typical invasive tests or even radiographic tests, they see the utility of this. A lot of times, patients go to physicians and it is hard to diagnose these recurrences by physical exam, and the radiology can be equivocal, particularly right after treatment, when you have things like PET-CT scans lighting up because there is so much metabolic activity from a recent surgery. So there are lots of really good uses for this test. I think people, as they start to use it, will start to see more and more utility. Keith S. Kennedy: Operationally, they are not at scale, so their ability to buy things at scale the way we are able to do that, to deploy automation, have engineers, and things like that—we do believe there is potentially up to a third reduction in the cost per test you can achieve by automation and just price negotiations. We have line of sight that we looked at during the diligence. And then on Epic, obviously, this is too small of a company on their own to invest in something like that, but adding them to our Epic instance and turbocharger is something that we can do quite easily without incremental cost. We are excited about that opportunity, supported by the commercial initiatives and go-to-market strategy. John Hanna: Yeah. And I talked a little bit about our customer service team and the CareDx Cares team and really supporting workflow within a specialty practice or subspecialty practice. Oftentimes, these practices are rate limited by the amount of labor that they have—the amount of support staff—and it becomes overwhelming. Ordering a diagnostic test is not top of mind because they have a slew of patients waiting in the waiting room to get in and see the clinician. Ensuring that there is a very streamlined workflow, that we are supporting them, and that we are engaging patients after the order has been set and pulling through access to the blood is really critical. These are things that we have built expertise on at CareDx, Inc, and we think we can port over to the Navaris business. Andrew Brackmann: Perfect. Appreciate all that color. And then if I could just follow up, obviously I am sure you did a lot of diligence around the competitive environment for this asset. Can you maybe talk about how you are viewing the specific indications that they are in right now, any potential emergence that you have on your radar, and bigger picture, how do you maintain the niche that they have established? Thanks. John Hanna: Yeah. Thanks, Andrew. Certainly, we did diligence on the competitive environment, and we operate in competitive markets today. But Navaris has a differentiated technology, and that technology makes it a preferential tool in the monitoring and diagnosis of these patients with HPV-driven cancers. That made us very comfortable with the transaction, and we think we can sustain that competitive advantage and market-leading position that the company has today. Andrew Brackmann: Great. Thanks, guys. Operator: Our next question comes from the line of Mason Carrico from Stephens Incorporated. Mason, your line is open. Please go ahead. Mason Carrico: Hey, guys. Thanks for taking the questions here. Could you provide a bit more detail on the financials of Navaris—what was the 2025 growth rate off of 2024, maybe how it ramped throughout the year? And then on that 30% to 40% growth rate going forward, how much of that is volume driven versus ASP? Keith S. Kennedy: I am going back to 2024. I have the 2025 in front of me. Of course you guys have 2024. Sorry about that, Mason. Go ahead to John, and I will come back to you on that one. John Hanna: Yeah. I think, Mason, obviously there is a mix of ASP and volume growth, but volume has been the key driver here for the company given that it is relatively early in the adoption cycle in the market. I would say that we feel very comfortable with the 30% to 40% growth rate going forward, and that is why we provided commentary that we anticipate that to persist over the next three years. Keith S. Kennedy: Mason, the growth from 2024 to 2025 was 75% top-line growth. Mason Carrico: Got it. Okay. Yeah. Thanks, Keith. And, John, could you just update us on maybe where you think market penetration stands today for cell-free DNA testing in transplant—maybe your estimate across organ types—and how much growth runway remains ahead of you here? John Hanna: I think that the growth runway remains significant. There are still, as with many of these markets, factions that do not use molecular tests at all. As an organization, dating back to mid-2024, we started to focus on reinstituting surveillance testing in kidney. Over the past several quarters, we have also been focused on for-cause indications in kidney because there are many, and as I shared in my prepared remarks, we are now seeing roughly 50% of that volume be for-cause today. We still think there is substantial runway in kidney. We continue to see growth in HeartCare and, in particular, AlloMap as a product growing sequentially quarter over quarter even after being on the market for over 20 years now, which is incredibly impressive and indicative of the strength of the evidence, data, and utility of the product. In lung, we feel like we are still early days in adoption, and we are eager to see data from ALAMO published such that we can continue to drive adoption even in its limited levels that we see in lung transplant centers today and have that grow into sustained utilization. We have got a lot of work still to do in this space, and we think there is a lot of runway still to go in solid organ transplant. Mason Carrico: Got it. Thanks, guys. John Hanna: Thanks, Mason. Operator: Your next question comes from the line of John Wilkin with Craig Hallum. John, your line is open. Please go ahead. John Wilkin: Hi, guys. Thanks for taking the questions. Just one bigger picture one on Navaris. As you think about any potential needs of a broader portfolio as you go into that channel—do you believe that you need to have that, and if so, how do you get there? John Hanna: Thanks, John. That is a great question. I think today we feel really confident in the portfolio that the company has, and it is the market leader in both head and neck and anal cancers. Certainly, you could foresee having a service that augments it for non-viral-driven cancers, but that is not our focus today. As we go through the close process, integrate the business, and continue to execute on the large opportunity ahead of the company, we will come back and update you if we have different thinking around broadening the portfolio. John Wilkin: Great. And then am I correct in assuming that there is no contribution from Navaris currently included in revenue guidance for the year? John Hanna: Correct. John Wilkin: Okay. Great. Thank you, guys. John Hanna: Thank you. Operator: Our next question comes from the line of Tom DeBorsi with Nephron Research. Tom, your line is open. Please go ahead. Tom DeBorsi: Thanks for taking the questions. I wanted to focus on transplant—specifically the ASP improvements that you are clearly seeing. Keith, you mentioned ASPs moving towards $14.60 by the end of this year. I wanted to understand how much of that is driven by better claims submissions or less rejections versus the push towards getting 50% of volume through Epic Aura. Keith S. Kennedy: Yeah. We do not have any Epic Aura uplift built into our guide, and our cash collections per test are exceeding our revenue per test. As we laid out in July, we started transitioning to shrinking the look-back period in our revenue recognition policies. As we were improving automation and workflows and revenue cycle management—obviously that is driving significant cash, which quarterly is exceeding our expectations. We are really excited about that, but you are going to see that flow into revenue per test as the year goes on. You will see out-of-period revenue, or revenue that comes in reflective of exceeding our AR at the beginning of that quarter, and you will see that start to flow into revenue recognition and AR so that levels out. That is why I am giving you out-of-period revenue forward-looking view so that you know how I am transitioning that. Obviously, that is up higher than it was last quarter because our out-of-period revenue was so high this quarter, and it continues in April. Tom DeBorsi: Understood. And then just as a follow-up question, on hematological malignancies or blood cancer MRD—with Alaheme and potentially AlloSure—I think the existing plan had been to leverage existing transplant center relationships given stem cell transplants and others. Is that still the current plan, or does the addition of Navaris change that sales rep strategy? Thanks. John Hanna: Yeah. Thanks for the question, Tom. The acquisition of Navaris does not change that strategy. We have a very focused strategy around Alaheme, given that it is not yet Medicare covered. 2026 is going to be very focused on clinical education around the product and early adoption and building toward Medicare coverage for the product, and then we will think longer term around what the channel looks like. Operator: Thank you. Caroline Corner: Thank you. Our next question comes from the line of Yi Chen from H. C. Wainwright. Operator: Yi, your line is open. Please go ahead. A reminder to unmute on your device locally. Caroline Corner: He took a break. Operator: We have reached the end of our Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the A10 Networks First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to your host, Tom Baumann. Sir, you may begin. Tom Baumann: Thank you, and thank you all for joining us today. This call is being recorded and webcast live and may be accessed for at least 90 days via the A10 Networks website at a10networks.com. Hosting the call today are Dhrupad Trivedi, A10's President and CEO; and CFO, Michelle Caron. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its first quarter 2026 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release, presentation and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results, demand, industry and customer trends, macroeconomic factors, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning and our dividend program. These statements are based on current expectations and beliefs as of today, April 28, 2026. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially, and you should not rely on them as predictions of future events. A10 does not intend to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise, unless required by law. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-K and quarterly report on Form 10-Q. Please note that with the exception of revenue, financial measures discussed today are on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website at a10networks.com. Now I'd like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks. Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today. A10 continued to deliver on our strategic plan centered around the current AI-driven demand cycle, while simultaneously focusing on disciplined execution. Our customers are seeking solutions to address 2 major challenges: accelerating traffic volume and complexity and emerging security threats in the rapidly evolving AI landscape. A10 is well positioned to address both these challenges. We delivered 13.4% revenue growth in the first quarter. This was our third quarter in the last 4 with double-digit growth. On a trailing 12-month basis, we have grown revenue by 12.1% and delivered TTM adjusted EBITDA margins of 29.7%, in line with the rule of 40 we outlined several years ago. During the same period, we have grown service provider revenue by 11% and enterprise revenue by 13%, demonstrating the importance of the strategic shift we have made. A key contributor to our growth is the relevance of our core platform to the demands of AI infrastructure build-out, which create new challenges with greater traffic within the networks. As a result, traffic management is returning to the forefront of build-out plans, and this trend is aligned with A10's history and core expertise. Second, AI is evolving rapidly, creating new threats and expanding the footprint of security concerns. For most of the last decade, A10 has prioritized security advancement in each of our solutions. During this period, we have built a security portfolio that is now directly in the path of AI-driven threat expansion. This quarter, we were selected as a technology partner for a new application at 1 of the most significant AI infrastructure build-outs in our industry. As a result, the customer behind this build-out represents a 5% of total revenue this quarter. The expansion of the customers' commitment to their enterprise applications reflects our focus on and relevance of next-generation networking. Deployment of this scale are time-sensitive and technically demanding, and it required prioritized allocation of product inventory and engineering resources. This was a deliberate choice to support a strategic customer and partner through a time-sensitive deployment window. We believe capturing this opportunity at the right cadence creates long-term value for the business. I also want to highlight that dynamic, I believe, is increasingly important to our story. AI is transforming the distinction between how large enterprises and service providers build their networks. The workloads are the same, the performance demands are the same and security requirements are the same. What this means practically is that a Fortune 500 customer standing up an internal AI cluster is now evaluating the same architectural choices as a cloud provider. A service provider hosting AI workloads for their enterprise tenants is being held to the same standard as its customers' own data centers. We have built our platform for exactly this world, 1 architecture, 1 operating model, 1 security framework across both segments. That is a meaningful competitive advantage as this convergence accelerates driven by AI. Our disciplined operating model balances targeted investment with margin expansion converting growth into profitability and cash while dynamically reinvesting in strategic priorities. We continue to meet our objectives for EBITDA margin, reflecting our ability to reallocate resources based on best business opportunities. This results in consistent revenue and EPS performance. With that, I'd like to turn the call over to Michelle Caron, our Chief Financial Officer, to review the numbers in more detail. Michelle? Michelle Caron: Thank you, Dhrupad. As a reminder, with the exception of revenue, all of the metrics discussed on this call are a non-GAAP basis, unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website. So let me turn to the results. As stupid noted, Q1 results were aligned with our business model goals and delivered revenue growth of 13.4% to $75 million. Turning to mix. Product revenue was $44 million or 59% of total revenue, growing 22.3% year-over-year with service revenue comprising the remainder. Security led revenue was a strong driver of our product revenue growth and continues to meet or exceed our long-term goal of security-led revenue as a percentage of total revenue. Security remains the dominant revenue driver across our next-gen networking, legacy networking and network security solution areas. Turning to our major verticals. Enterprise customers represented 56% of Q1 revenues, with Americas continuing to outpace overall enterprise revenue growth. While first quarter benefited from timing of large orders, this segment continues to grow above company average in terms of results as well as outlook. Enterprise momentum reflects the combination of our focus on this segment as well as continued strong demand for our next-gen networking solutions as customers prioritize modernizing their infrastructure. Our customers across both segments are aligning on the same underlying requirements for performance, security and scale. From a financial lens, this convergence is showing up in larger opportunities with our enterprise customers. Service provider revenue was 44% of total revenue in the first quarter. Both verticals align with our strategy and reflect the alignment of our offerings with AI infrastructure build-outs. A10 has evolved its solutions to be well positioned to capture this next-gen networking demand while also addressing legacy refresh opportunities as this market transition progresses and customers resume investment while continuing to align the evolving priorities around performance, scale and security. From a geographical perspective, our Americas region represented 67% of global revenue, driven by continued investment in AI infrastructure build-outs. In EMEA, we saw headwinds related to regional conflicts. In APJ, spending remains conservative as customers navigate an uncertain capital environment. We're not losing market share or experiencing competitive displacement, rather customers are extending asset lives and deferring discretionary spend. Q1 operating results reflected our continued investment in our strategic initiatives as well as our financial discipline amidst temporary input cost pressures. Non-GAAP gross margin was 80.6%, in line with our stated goals. Operating expenses were $41.5 million as we prioritized investments in AI facing innovation, next-gen networking and security. Operating margin was 25.2%, resulting in net income of $17.7 million or $0.25 per basic and $0.24 per diluted share. Q1 diluted weighted share count was 72.9 million shares. Operating cash flow and therefore, free cash flow in the quarter was temporarily impacted by the timing of receivables as well as inventory investments. Neither item reflects a change in underlying business fundamentals, and we expect both to normalize over the course of the year. Full year free cash flow expectations remain unchanged, expanding on a year-over-year basis. Adjusted EBITDA was $22.5 million, 30% of revenue, consistent with our business model goals as we balance investment and growth initiatives with our commitments to sustained and expanding profitability. Turning to the balance sheet. Cash and marketable securities were $369.7 million (sic) [ $ 369.8 million ] as of March 31, and deferred revenue was $147.2 million. During the quarter, we paid $4.3 million in cash dividends and repurchased $2.5 million worth of shares, returning a total of $6.8 million to our shareholders. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on June 1, 2026, to shareholders of record on May 15, 2026. The company has $53.4 million remaining on its $75 million share repurchase authorization. As is true for everyone in the industry, we are seeing delivery and cost challenges related to pricing of certain components. We entered this environment with strong supplier relationships, and we will keep evaluating the evolving market and adapt as needed. I'll now turn the call back over to Dhrupad for an update on our 2026 outlook and closing comments. Dhrupad Trivedi: Thank you, Michelle. A10 continues to strengthen its position as a partner of choice to address the evolving traffic and security needs of next-generation networks. The strong financial results, including double-digit growth and solid EBITDA margins validate the strategic investments we have made. As a result, A10 is well positioned in front of multiple durable secular catalyst. We continue to invest to enhance our position across our portfolio while preserving profitability and shareholder returns. We are reiterating our 2026 outlook with 2026 revenue growth within our guided range of 10% to 12% and adjusted EBITDA margins between 28% to 30% and EPS growth of 12% to 14%. In addition, we remain confident and committed to our long-term operating model. Operator, you can now open the call up for questions. Operator: [Operator Instructions] Our first question comes from Gray Powell with BTIG. Gray Powell: Okay. Great. And congratulations on the very strong set of results. It was really good to see the product revenue growth accelerate to 22% this quarter. So I guess my first question would just be, where do you think we're at in the investment cycle around AI. And if you start to see a further acceleration in traffic growth, would you think about prioritizing faster revenue growth over the historical 28% to 30% EBITDA margin framework that you've always talked about? Dhrupad Trivedi: Yes. First of all, thank you, good question. So in terms of, I think, the investment cycle, as I think we have said in the past that we see this as there is a large build-out phase and where we are actually focused with customers is in that phase, but also with customers who will, over time, deploy their own solutions, whether it's around sovereign AI and things like that. So the second part of that cycle, I think, is very early stage, and we expect to see that benefit next few years. The first part of the cycle, I think, is pretty active build out. I don't know how much higher it will go or lower it will go, but it is pretty solid and stable in terms of the significant committed to the build-out and even though the build-out itself takes several quarters, right? So I think we are in the midst of that build-out phase, and we are at a very early stage of where enterprise and other entities will use AI for their own business more directly, whether it's on-prem or cloud or combined. And I think your second question is this correct and appropriate. So we certainly continuously look at that trade-off. And I would say the focus for us is if there are opportunities to grow faster, typically, that also helps in growing EPS faster, right? So I think -- we look at it from a point of view of revenue and EPS being the ultimate top and bottom line. And the EBITDA margin is a reflection of our ability to drive kind of OpEx productivity as well as maintain sufficient margin that the fall-through is good. But absolutely, I think as we navigate the market and if we see opportunities for significantly faster growth while still delivering EPS expansion, we continue to look at those. Gray Powell: That's perfect. And then just my follow-up question, if that's okay. So you called out the large customer win. I'm assuming that hit in the enterprise segment because the revenue growth there really spiked. Is there any additional detail you can give? Like was that 1 of the larger frontier models? And if not, just how should we think about sort of the split between growth in enterprise and service provider going forward? Dhrupad Trivedi: Yes. Yes. No, look, a perfect question. And I think I touched on it very briefly, but that's a great question. So I think, first of all, what we are seeing is that many of our large customers that were traditionally SP or enterprise, right? There is a complication where a lot of our SP customers when they are doing AI are sort of also doing a lot of enterprise applications. And so that's really where that becomes hard to segregate completely. And then enterprise customers are planning to build our own on-prem inference models and build out. So in that case, they look like a service provider, right? So that's the demarcation. And I think this is the case of an existing large customer expanding their deployment. And it's really around an enterprise application, so it's not the DDoS type product. And it's an enterprise application that enables their delivery of AI. Operator: The next question comes from Hamed Khorsand with BWS Financial. Hamed Khorsand: Just for clarification purposes, is it -- was this -- on the accounts receivable build, was it all related to this 1 large project? And did you receive payment for it? Dhrupad Trivedi: Good question. Michelle, you can answer that. Michelle Caron: So this is a calendar event and not a credit event right? So our business fundamentals remain strong. There was no meaningful uptick in our aged receivables or there were no deterioration in our payment behavior. There were no concessions on standard payment terms with any customers. So we see the business fundamentals as favorable. Dhrupad Trivedi: And I think, Hamed, you are correct, we expect it to be in Q2 in addition to the original Q2 -- we expect to action normalize over the course of the next couple of quarters and expect the full year to be on track. Hamed Khorsand: And then just given the growth that you saw in Q1, why the hesitation to keep guidance unchanged if you're growing in excess of 10% to 12%... Dhrupad Trivedi: Yes, I think it's more that we are still in Q1, and I think we want to see the progression through the year. And if we see that momentum continuing in Q2 and beyond, Obviously, we will revisit that. So it's not -- it's just that we are navigating, obviously, things that from a time perspective, right, including supply lead times and cost challenges for some components -- and obviously, our EMEA business has a little impact from some conflicts there, et cetera. So we feel really good about 10% to 12%. And if we see that progress in terms of pipeline growth and execution into Q2. Obviously, we will revisit that on it. So a fair question. Operator: The next question comes from Michael Romanelli with Mizuho. Michael Romanelli: So yes, I mean, in the press release, you guys noted that you're seeing expanded commitments from some of your top customers. Just wanted to dive a bit deeper into that comment. So outside of this large project, like how is business activity across the installed base to kind of get a feel for I guess, the magnitude or size of this and just how business was excluding that large project? And then I have a follow-up. Dhrupad Trivedi: Yes. So I think that the intent of that Michael was really to highlight that many of our existing customers who are service providers or large enterprise are all beginning to allocate more spending and priority to AI, whether it's building it or using it. And so in general, what we are seeing is even if they were buying certain other product categories from us, this is an area of expansion for us, and that's the basis for the government of expanded commitment, right? So it could be a service provider in Europe who is also now doing enterprise or it could be somebody like that as well as an enterprise customer who is now deploying or expanding their AI infrastructure and build out. So it could be any of those kinds of things. Michael Romanelli: Okay. Got it. That's helpful. And then just as my follow-up, you touched on this in the prepared remarks, but can you maybe just characterize demand and business activity across your primary geos. It sounds like some parts of the business are still challenged. Anything worth highlighting or calling out this quarter? Dhrupad Trivedi: Yes. No problem. So I think the -- maybe I'll go in reverse order, right? So we talk about Japan, and that market is if you look at all the macro factors and spending pattern, there is caution with a lot of reasons, right, that they keep siding. And what we see is typically what would have been a spending profile of the large customers there is getting pushed out more to the right -- because it's both ends of it, it's not just being worried about. -- cost or international issues or something. It's also concern around deploying more when there is not that much GDP growth and expecting to recover it, right? So from an ROI as well. So I think we see that as a region where we are very focused on maintaining those customers staying close to them, helping them solve problems now and expect that to come back, but we don't see it imminent, right? It could be later, and we don't know exactly. EMEA, I think, as you can imagine, there's section of EMEA, which is quite challenged with active activity with international news, obviously. And so I think that is part that is not kind of growing well, but we continue to see progress and improvement in our business in core Europe part of that segment, right? So -- but obviously, the Middle East part is a little bit harder right now. And then when it comes to Americas, I think there's obviously categories, right? So we see customers who are leaning more into AI are more optimistic and spending more and are more outward looking towards wanting to be participating in that. On our traditional sort of telco customers, what we are seeing is stability, I would say. So I think it's not where -- it's declining anymore for sure. And it's not growing, but it's very stable right now, right? And it could improve in the future as those customers as well figure out their AI spending and deployment pattern. So -- but we certainly see the spending on AI as being the biggest in Americas or U.S. And I think -- and then EMEA and then Japan, we continue to make progress, including on AI solutions in Japan, but the spending is correlated, obviously, to economy and outlook and we are mostly focused on ensuring customer satisfaction. Operator: Next question comes from Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the quarter. In the past, you said that the product revenue is indicative of the services growth, right. But -- and we've seen the product growing quite nicely over the past couple of quarters, but the services has been lagging. What's the lag do we see there? When do you expect the services to pick up? Dhrupad Trivedi: Yes. No, good question, Anja. So I think if you think about it, typically the way the product is sold is when you have product growth in 4 quarters time that contract or support comes up for renewal. And so typically, you would see that in the fifth quarter right after that. Meaning, for 4 quarters, they already are covered. And then at the end of fourth quarter, they have to renew, which goes into the support pool again. And so product growing faster will show up in service improving in 4 quarters later, roughly, right? So that's 1 dimension of it. The second, I think, is I think our renewal rate is fine, very stable. I think, and we continue to manage services with customers. there is sometimes timing fluctuation a little bit because of large contracts and renewal time and early or late collections and so forth. So -- but you are correct. It should be a lead indicator for service revenue growing faster in roughly 4 quarters. Anja Soderstrom: Okay. And then in the past, you also said talked about you're taking shares from competitors. Have you seen any changes to the competitive dynamics recently? Dhrupad Trivedi: Good question. So no, we really have not seen any significant changes since the last quarter or 2. And I think I feel confident in what our trajectory is and what we are doing because if you look at even our peers and even the recent kind of reports or outlook, 10% to 12% is still a little bit north of most of them. So we feel if we continue that and can continue to improve on that as well. we are in a good competitive position. And no -- I would say no real change in the dynamics in terms of the specific landscape here. Operator: Next question comes from [indiscernible] with Craig-Hallum. Unknown Analyst: I'm on for Chris Schwab here, just a quick question on the 10% to 12% reiterated. Is that going to be kind of a step function every quarter? Or is it a stronger second half? And then with that, is that tied to just the continued growth and market share gains? Or is that concentrated on a few customers? Dhrupad Trivedi: No, I think that's a good question. So I think it's a broad market share, obviously. And the reason, I think, Ben, we reiterated this year is because we had our Investor Day subsequent to the earnings call in Q1. So this is not indicative of a new trend where we will be doing that every quarter. This was just reiterating and recapturing in 1 place because we had announced that again at the Analyst Day, right? So -- so that's the objective. And so it's not indicative of us saying we will be guiding every quarter. Unknown Analyst: All right. And then just thinking about I believe you guys said it was 12% was a long-term target. Is there -- with legacy decreasing in the stronger CAGRs, mid-teens even was previously stated at Investor Day, is there any of -- with those mid-teens CAGR and legacy down it -- is there a path to exceed that 12%? Is there anything that you guys think that needs to happen to get there? Dhrupad Trivedi: Yes, sure. No, I think -- so I think the factor is right. I think there's to and we touched upon 1 of the earlier questions. So certainly, if we see stability in demand and supply as we go through the year, we will continue to evaluate. I think certainly, AI spending could be 1 of those factors that helps us improve that in terms of our participation in that spending profile. So that's probably evolving, right? Obviously, -- and the second factor was we had talked about the notion of the mix shift. So as we grow next-generation network and security solutions faster than legacy, we are also automatically exposed to higher growth rate markets. right? So I think through that evolution, I think we had said obviously, right, more than 12% next year and beyond. So I think the mix shift is helpful in being exposed to higher growth market. Second is to the degree that we can get more embedded into AI build-out, whether infrastructure or applications is the second factor, right? And third is, long term, we don't know, but when SP spending resumes more -- to more normal rates, that obviously helps us, right? So we don't need all but we need 1 or 2 of them, right, to be more confident of raising it immediately. Operator: Next question comes from Simon Leopold with Raymond James. W. Chiu: This is Victor in for Simon Leopold. Can you provide some color around the supply chain and kind of memory shortages. You mentioned you observed some impacts around that this quarter. Have you adjusted pricing around this? And if so, how is that impacting kind of the demand dynamics that you're observing? Dhrupad Trivedi: Yes. It's a good question, right? So I think, obviously, as well known, right, the memory is the biggest. There's other component shortages. But and certainly sort of the DDR categories, the most specifically the biggest one. And we have seen the same price increases. And I think it's more than just price increase. It's also lead time and allocation right from the suppliers. So we absolutely see that phenomenon as well, and we are continuously ensuring that on 1 hand, obviously, driving demand, but on the other hand, also trying to do as much as we can to line up enough supply. In the next few quarters, like where it's not expected to get better in like, let's say, 4 quarters, maybe at least, maybe more. So absolutely, we see the same phenomenon. All of us use almost the same 3 or 4 major memory suppliers, right? And we are navigating it the same in terms of securing supply managing costs but also managing our ability to fulfill kind of customer needs. And we'll continue to do that, and I think it's obviously something we have to navigate and there's no -- as of now, when we say 10% to 12%, that is not an area we are worried about, we can achieve that. and we'll continue to work towards improving that and making it not for us. But it is certainly a cost issue. I think as we said in the past, we try to split that with customers as much as we can. And it doesn't always work, and sometimes it does, and we'll continue to navigate that. W. Chiu: Okay. Great. And I think you also mentioned the benefit of timing. You have some large orders. Was that related to that large enterprise order specifically? Or was there maybe some kind of pull-ins that maybe you observed from customers kind of pulling in orders ahead of these shortages? Dhrupad Trivedi: No, no, I don't think it's bad. I think it's not yes, good question. So it's not a question of people kind of overbooking it to book capacity, right? I don't think that's the issue. I think in our case, it's more -- our customers are looking at building out things fast, and we are trying to keep up with them to make sure we get them everything they need. So it's more of that phenomenon versus -- I don't think at least we don't have a concern around double bookings and things like that at all. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Dhrupad Trivedi for closing remarks. Dhrupad Trivedi: Thank you, and thank you to all of our employees, customers and shareholders for joining us today and for your continued support. I am increasingly confident in our strategic orientation with security and AI infrastructure spending patterns. Thank you for your time and attention. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Second Quarter 2026 FICO 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 today, Dave Singleton. Please go ahead, sir. Dave Singleton: Good afternoon, and thank you for attending FICO's second quarter earnings call. I'm Dave Singleton, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing; our CFO, Steve Weber. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison with the prior quarter to facilitate understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the company's website at fico.com or on the SEC's website at sec.gov. And a replay of this webcast will be available through April 28, 2026. We have refreshed our quarterly investor presentation with additional content, which is available on the Investor Relations section of our website. We will refer to this presentation during today's earnings announcement. I will now turn the call over to our CEO, Will Lansing. William Lansing: Thanks, Dave, and thank you, everyone, for joining us for our second quarter earnings call. We had a very strong quarter and a great start to the first half of our fiscal year. Based on our results and outlook, we are increasing our fiscal 2026 guidance. We reported Q2 revenues of $692 million, up 39% over last year, as shown on Page 5 of our investor presentation. For the quarter, we reported $264 million in GAAP net income in the quarter, up 63% and GAAP earnings of $11.14 per share, up 69% from the prior year. We reported $297 million in non-GAAP net income, up 54% and non-GAAP earnings of $12.50 per share, up 60% from the prior year. We delivered free cash flow of $214 million in our second quarter. Over the last 4 quarters, we delivered $867 million in free cash flow, an increase of 28% over the prior fourth quarter period. In Q2, we continued returning capital to shareholders through share repurchases, buying back $605 million or 484,000 shares at an average price of $1,251 per share. At the segment level, shown on Page 6, our second quarter score segment revenues were $475 million, up 60% versus the prior year. While B2B scores were the key driver of growth, we also experienced the sixth straight quarter of growth in B2C scores. In our Software segment, we delivered $217 million in Q2 revenues, up 7% over last year. Results included 54% platform revenue growth and a 12% decline in non-platform revenue. Steve will provide additional revenue details later in this call. Last week, we issued a statement on our website in response to the FHFA and FHA update on credit score modernization. We applaud the FHFA and FHA initiative to get FICO Score 10T into the market in the coming months. FICO Score 10T is the most predictive credit score for all borrowers, including first-time home borrowers. FICO Score 10T incorporates rental and utility payment history, enabling more consumers to qualify for mortgages. To support the goal of increased homeownership and bring the benefits of increased competition to the marketplace, we updated our FICO Score 10T performance model pricing in the FICO mortgage direct licensing program from $4.95 per score plus $33 funding fee to $0.99 per score plus $65 funding fee. We anticipate the release of FICO Score 10T data and the time line provided by the FHFA and GSEs. In the last quarter, we added 11 more lenders to our FICO Score 10T early adopter program. As a reminder, through this program, FICO Score 10T is made available for free with the purchase of classic FICO. The 55 lenders in the program account for more than $495 billion in annual serviceable originations when evaluated using 2025 HMDA data and more than $1.6 trillion in eligible servicing. We're moving closer to the go-live dates of our next-generation Cash Flow UltraFICO Score with our strategic partner, Plaid and the FICO mortgage direct licensing our reseller partners. We continue to actively work alongside participants to support testing on both initiatives. As AI adoption accelerates, we recognize the need of stakeholders to weigh the associated opportunities and risks. At FICO, we view AI as a tremendous opportunity that we've committed significant resources to for several years. In the Scores business, AI is limited by strict regulatory requirements on credit underwriting outcome explainability and model governance. In addition, our scoring models are supported by proprietary data access, mainly with the credit bureaus and deep ecosystem integration. Across both businesses, FICO has been issued 137 AI-based patents, which include patents and blockchain technology that are helpful for traceable and explainable decision-making, the type of market-leading innovation that will be in high demand as businesses seek ways to safely deploy AI analytics in highly regulated industries. In our software business, as shown on Page 13, FICO Platform is architected from the ground up to be agentic-by-design. That foundation delivers decision grade analytics, deep domain expertise, and an enterprise platform that clients depend on for precision, consistency, explainability and trust. These principles are nonnegotiable for our primary target market, the highly regulated financial services industry. FICO Platform is the world's leading AI decisioning platform for financial services recognized as such as a leader by Gartner, Forrester and IDC. Its agentic architecture power is a real-time, always-on customer profile engine that delivers hyperpersonalized consumer experiences where every interaction can inform and improve the next. There are over 150 clients globally using the FICO Platform across multiple connected use cases to power their customer experience, business critical operations, risk management and fraud monitoring and prevention. FICO Platform brings together multiple functions within an enterprise in a common operating environment and enables them to operationalize AI at scale to drive real business outcomes. Financially, a substantial majority of our nearly $315 million platform segment annual recurring revenue is driven from FICO Platform. Financially, a substantial majority of our Platform segment annual recurring revenue, approaching $350 million and growing rapidly is driven by the FICO Platform, reflecting years of proven commercialization. FICO transformed 70 years of proven deep domain knowledge into validated expandable AI that powers the most consequential business decisions with that expertise embedded directly into the agents, models and guardrails that operate on the platform. Fico Platform accelerates client innovation by providing clients with the ability to build, test, optimize and monitor decisioning across the enterprise. With FICO AI-guided operations, clients create a self-reinforcing cycle of value generation, reinvesting outcomes back into the platform by enabling additional use cases, driving further value for their businesses. FICO Platform's marketplace and FICO Assistant unlock broader capabilities that compound with scale. Every new model, agent and integration from the ecosystem strengthens the customer profile engine and accelerate consumption of proprietary capabilities across the platform. At FICO, AI is already driving meaningful results today while creating significant opportunities that we are well positioned to capture. I'll now pass it back to Steve to provide further financial details. Steven Weber: Thanks, and good afternoon, everyone. As Will mentioned, our Scores segment revenues for the quarter were $475 million, up 60% from the prior year. As shown on Page 16 of our presentation, B2B revenues were up 72%, primarily attributable to higher mortgage origination scores unit price and an increase in volume of mortgage origination. Our B2C revenues were up 5% versus the prior year, driven mainly by our indirect channel partners. Second quarter mortgage originations revenues were up 127% versus the prior year. Mortgage originations revenues accounted for 72% of B2B revenue and 63% of total Scores revenue. Auto originations revenues were up 13%, while credit card, personal loan and other originations revenues were up 6% versus the prior year. For your reference, Page 17 of our presentation provides 5-quarter trending of our scores metrics. As in the past, our updated guidance assumes conservative score volumes. And to reiterate, we do not anticipate share loss competition in any vertical. Turning to our software segment. Our software ACV bookings for the quarter were $28 million, as shown on Page 18 of our presentation. On a trailing 12-month basis, ACV bookings reached $126 million this quarter, an increase of 36% from the same period last year. With our strong pipeline, we expect bookings in the second half of the year to exceed the first half of the year. Our total software ARR, as shown on Page 19, was $789 million, a 10% increase over the prior year. Platform ARR was $349 million, representing 44% of our total Q2 '26 ARR. Platform ARR grew 49% versus the prior year, while nonplatform declined 8% to $440 million this quarter. Platform ARR growth was driven by both new customer wins as well as expanded use cases and volumes from existing customers. Platform ARR growth includes the onetime Q1 liquid credit solution migration and Q2 CCS migrations from non-platform to the platform. Excluding those migrations, our platform ARR growth was in the mid-30% range. The non-platform year-over-year ARR decline was driven by migrations, end-of-life products and some usage declines. In our CCS business, which contains both platform and non-platform, ARR growth was relatively flat. Our dollar-based net retention rate in the quarter was 109%. Platform NRR was 136%, while our non-platform NRR was 90%. Platform NRR was driven by a combination of new use cases and increased usage of existing use cases. Second quarter software segment revenues detailed on Page 20 were $217 million, up 7% from the prior year. Within this segment, our SaaS revenues grew by 19%, driven by FICO Platform. Our on-premises revenue declined 4%. Year-over-year, our platform revenues grew 54%, driven mainly by the success of our land and expand strategy. Non-platform revenues declined 12%, driven mainly by migrations. As a reminder, our FY '26 revenue guidance reflects an expectation of lower point-in-time revenue throughout FY '26 due to fewer non-platform license renewal opportunities compared to the prior year. From a regional point of view, 90% of total company revenues this quarter were derived from our Americas region, which is a combination of both our North America and Latin American region. Our EMEA region generated 7% of revenues and the Asia Pacific region delivered 3%. Operating expenses for the quarter, as shown on Page 21, were $289 million this quarter versus $278 million in the prior quarter, an increase of 4% quarter-over-quarter, driven by personnel expenses. We expect operating expense dollars to trend modestly upward from the Q2 run rate into the back half of the fiscal year, driven mainly by personnel expenses and marketing for both FICO World and our Scores business. Our non-GAAP operating margin, as shown on Page 22, was 65% for the quarter compared with 58% in the same quarter last year. We delivered year-over-year non-GAAP operating margin expansion of 712 basis points. The effective tax rate for the quarter was 25.7%, and we expect a full year operating tax rate of 25% to 26% and an effective tax rate of around 24%. At the end of the quarter, we had $272 million in cash and marketable investments. Our total debt at quarter end was $3.64 billion with a weighted average interest rate of 5.5%. This includes the March issuance of $1 billion in senior notes due 2034, which used some proceeds to fund the redemption of $400 million in senior notes that were due in May. As of March 31, 2026, 93% of our debt was held in senior notes. We had $265 million balance on our revolving line of credit, which is repayable at any time. We anticipate interest rate expense dollars to trend modestly upward from the Q2 run rate into the back half of the fiscal year. As Will highlighted, we continue to return capital to our shareholders through buybacks, as shown on Page 23. In Q2, we repurchased 484,000 shares for a total cost of $605 million, representing the single largest quarterly repurchase in dollars in FICO history. We continue to view share repurchases as an attractive use of cash. With our recent $1.5 billion Board authorization, strong free cash flow and unutilized revolver, since April 1, we have bought an additional $170 million or 164,000 shares at an average price of $1,040 per share. And with that, I'll turn it back to Will for closing comments. William Lansing: Thanks, Steve. As we approach the start of FICO World 2026, which is going to happen on May 19 through the 22nd in Orlando, we look forward to showcasing our continued innovations. The event brings together customers and partners from around the world to explore how real-time scalable decision-making is transforming consumer engagement. We remain focused on enabling deeper customer relationships through always-on personalization that drives strong business outcomes. The conference also provides a forum to connect with industry experts, share best practices and advance initiatives that drive financial inclusion. We had a great first half of our fiscal year, and I'm pleased to report that today, we are raising our full year guidance as we enter the third quarter. As shown on Page 24 of our presentation, revenue guidance is now $2.45 billion, an increase of 23% versus prior year. GAAP net income guidance is now $825 million with GAAP earnings per share of $35.60, an increase of 27% and 34%, respectively. Non-GAAP net income guidance is now $946 million with non-GAAP earnings per share of $40.45, an increase of 29% and 35%, respectively. With that, I'm going to turn it back to Dave, and we'll open up for Q&A. Dave Singleton: Thanks, Will. This concludes our prepared remarks. We're now ready to take questions. Operator, please open the lines. Operator: [Operator Instructions] Our first question is going to come from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious to start, Will, if you could talk about the philosophy behind adjusting your pricing model going to the $0.99 upfront. I appreciate some commentary. William Lansing: Yes, absolutely. So that's a step in the direction we've been talking about now for several years. I mean we have historically charged upfront for score. That's the historical way we have always charged for our IP. But what that does is it doesn't spread the cost across the rest of the value chain. And so a lot of the beneficiaries of the IP are not really paying for it. And so we have that cost concentrated upfront. The whole idea behind moving to the performance model was to give us more flexibility so that we could distribute the value -- the monetization of that IP over more players across the chain. And so that's really what we've done. In this most recent move to $0.99 plus a $65 funding fee, the idea was to encourage adoption of FICO 10T because we think that the most powerful thing that we can do is really get FICO 10T established. And obviously, it's already established in the non-performing market, but we'd really like to encourage wide use of 10T. And so this kind of pricing is designed to encourage that. Jason Haas: Great. That certainly makes sense. And then now that VantageScore is available to be used on the conforming mortgage market, do you expect -- what percentage of lenders do you think would shift fully away from FICO to just using VantageScore? Or do you see most lenders, if they are going to use VantageScore, do you see them also pulling FICO during the mortgage process and then submitting the score ultimately that's most favorable to them to the GSEs. William Lansing: I suppose we'll see how it turns out. But if you think about the decision process for those who purchase scores, if they're after the most predictive score, 10T is the answer to that. If they're after price, then I think we have parity, 10T at $0.99 is at parity with Vantage at $0.99. And so on both predictability and price, we think we're highly competitive and frankly, don't see good reasons to switch. Now depending on how the FHFA decides to handle the gaming problem, there may be opportunities for Vantage based on the gaming. And so we'll just have to see how that unfolds. Although our analysis suggests that in a gaming scenario, if there's true consumer shopping for the best rate and the system is going to be gamed in that way, that originators and lenders would wind up pulling both scores. Operator: Our next question will come from the line of Manav Patni with Barclays. Manav Patnaik: Will, for the 10T adoption, obviously, that $0.99 is only available through the direct loan model that you have, DLP model. Can you give us an update on when that's going live, what the feedback right now is with lenders and kind of adoption that you expect there? William Lansing: Yes, absolutely. So there's a few pieces to getting the direct license program live, and they're mostly in place. We're working on the last kind of final details now. So we have 3 of the top 5 major resellers signed up. We are in deep discussion with the other 2 and fully anticipate that all 5 of the big resellers will be able to provide the direct license program. We also see a great deal of interest from the lender community for this performance-based pricing model. So there's a pent-up demand, and we anticipate quite a lot of usage of this model once we get direct up and running. We do still need FHFA final sign-off on having the resellers calculate the score. But we don't anticipate any issues there because the math is identical and the score we've tested and the score calculated by the resellers is the same score as that calculated by the bureau. It's on the same data. It's the same methodology. So although I can't give you a date, I can tell you that we're closing in on it. Manav Patnaik: Okay. And then just in terms of the historical 10T data coming out sometime in the summer, maybe just some help on how that process works? Like will there be another pilot like they're doing now with VantageScore once 10T is out and we're only looking for something realistically in 2027 for both to be ready to go fully live, I guess? William Lansing: Well, the FICO 10T data, as you know, is with the FHFA and the GSEs, and it's up to them to decide when to release it. There's certainly a lot of market sentiment for being able to evaluate 10T and Vantage at the same time. And certainly, by the time the GSEs accept -- truly accept Vantage, I think the market would like 10T to be available as well. So there's some market pressure to get this done, but I don't have the time line. Operator: Our next question will come from the line of Simon Clinch with Rothschild & Co Redburn. Simon Alistair Clinch: Well, I was wondering if you could just cycle back to the question. I think it was Jason asked about the pricing of 10T. And your comments that it's at parity VantageScore. I was wondering if you could talk about the philosophy or like how you think lenders will treat the success fee in that kind of situation and how we should think about that dynamic in that sort of comparison? William Lansing: Well, I think the beauty of the way we've structured this is that mortgage originators and lenders have a choice. They can continue to buy the score the way they always have on a per square basis or if they prefer, they can move to the $0.99 plus funding fee. And the idea there is that it encourages very widespread use of the score in the prospecting phase, in the customer acquisition phase and figuring out who's qualified for a mortgage. And frankly, with the goal of trying to encourage more housing and more mortgages, making the upfront score cost very low is likely to support that. And so it really is up to the lenders, which model they prefer, and we leave it to them. We are -- I've said before, we're largely indifferent as between the 2 models because it's about revenue neutral for us either way. But I think that each model meets the needs of different customers for the score in different ways. Simon Alistair Clinch: Understood. And just as a follow-up to the reseller readiness right now. I mean, I understand we're getting close to go live to come into place. A bit -- I would love to get a bit more color on is just, I guess, sort of what has -- relative to initial sort of expectations, it feels like it's taking longer than expected. And I was wondering if you could talk about sort of what has been behind some of the prolonged process here. William Lansing: I think that some of the expectations were a little on the optimistic side. We certainly didn't think it was going to happen in a couple of months. We thought that it would take a while to put this together. It's a pretty complicated program, not a complicated program, but it's -- there's enough moving parts that require validation and testing that we knew it was going to take some time. This much time, I would say, we actually believe that it would be up and running by now. I would say that we're close and as I said earlier, it's really up to the FHFA to sign off on the calculation of scores by the resellers and then we're pretty much there. Operator: Our next question comes from the line of Surinder Thind with Jefferies. Surinder Thind: Well, just following up on the timing of 10T. Just to understand, is there a sequence of dependencies before the FHFA kind of makes it available in the sense of like releasing the historical data. Obviously, you got to have the systems and everything ready. But are there other things that we should be aware of? Or is it just kind of once the systems are ready, they can release it, whether or not the historical data is available? William Lansing: No. I would say that there are not a bunch of additional things that no one knows about. I think we have to get the 10T data out so that people can test it and then the GSEs have to accept 10T, and that's it. That's all that's required. Surinder Thind: Got it. And then in terms of just switching away. Can you maybe talk a little bit about the outlook for expenses here. I noticed you talked a little bit about incremental scores, marketing expense what should we expect there? And then other than kind of the step-up that's related to the annual FICO World Conference. Steven Weber: Yes. I mean it's not all that material. I mean there'll be some expense. I mean it's not I think you can kind of back into it when you look at our guidance numbers, but it's not all immaterial. But we've got some -- there's some additional personnel expense. We got expenses around FICO World. There's some other types of marketing we're doing. When you see more growth on the software side, that comes at a -- that's not 100% margin either, right? There's cost of goods sold. So you're going to see some expenses there. But none of it's all immaterial. Operator: Our next question comes from the line of Faiza Awa with Deutsche Bank. Faiza Alwy: So first, I wanted to ask about the very strong growth that you saw in mortgage revenue this quarter, up 127%. I think we know about your pricing but it implies pretty strong volume growth. So I'm just curious if you can talk a little bit more about some of the factors there. Steven Weber: Yes. I mean we had decent volume growth. I think it was a pretty good quarter. There was a period of time that where interest rates dropped a little bit. We saw a little bit of an uptick here and I think it's consistent with what you hear from the bureaus as well. So it was a decent volume quarter, probably better than we expected when we gave our guidance. But again, we guide very conservatively because it's really difficult to know what those numbers might be. Faiza Alwy: Okay. Understood. And then just on the software side of the business, again, pretty strong bookings, really strong ARR growth on the platform side. So again, give us some context in terms of what you're seeing there? Are you seeing higher [indiscernible] and I have noticed that you alluded to growth or maybe focusing outside of financial services. And I'm curious if you're sort of thinking your approach there at all? William Lansing: I would not say that moving to other verticals is driving the growth. It's really primarily in financial services. And it's across a wide range of use cases. And we continue to have success. And the model that we've been experiencing just continues to be strong, which is a financial institution will adopt the platform and make it the kind of the heart and soul of the way they interact with their consumer customers and then discover just how powerful it is and then get more utility out of it, the more use cases they put on it. And so it's the land and expand strategy, which we have for that business is working really nicely. And the customers have tremendous satisfaction, and that's driving the growth. Operator: Our next question will come from the line of Jeff Meuler with Baird. Jeffrey Meuler: From an earlier question, it sounds like the answer may be TBD depending upon what FHFA decides to do. And I don't know, do we have to wait for the selling guidelines. But the question is, what's your understanding? Because I think the language is the enterprises cannot accept scores from multiple models. But have they said anything about if an underwriter can pull scores from multiple models earlier in the process? Or is that waiting for the selling guidelines to know the answer? William Lansing: I think that's waiting on the selling guidelines. I mean I can't speak for the GSEs on that. Jeffrey Meuler: Okay. And then do you have any sense of what went into the approval process of the 21 initially approved lenders for Vantage 4.0. Were they asked to apply by FHFA? Is there any sort of like commitment, how intensive of a process it is? Just trying to figure out if that's a meaningful signal or not. William Lansing: We don't really have a lot of detail around that program. Obviously, we weren't invited to be part of it. And so we just don't have the details. It remains to be seen what happens there. Our understanding is a fairly manual process. Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I know you just announced the FICO 10T pricing, but I just wanted to understand what's your pricing strategy over the midterm? Is there still a gap between price and value and as you think about it, how do you think about closing that gap? Would you also consider alternative pricing algorithms, including a percentage of the loan amount for the success fees. So any color there? William Lansing: As you know, we've talked about a lot of different approaches to pricing for our IP. And those are under constant evaluation and study. And the balancing act is, we don't want to shock the market. We don't want to make precipitous changes. In fact, we don't love change. We -- the market works really well the way it is today, and so we don't like change. That said, there is a case to be made for low pricing upfront. There's a case to be made for shifting around the monetization of the IP across more than just the first purchaser. And so we're always evaluating those kinds of things. Our philosophy has not changed. What you see is the first couple of steps in the direction of what we've been talking about for several years now. Ashish Sabadra: That's very helpful color. And then maybe just on the VantageScore LNPA grids, FHFA mentioned that they are taking into account proper credit risk accounting in order to make sure -- and that's why those matrices are different compared to FICO. I was wondering as based on your experience, what are the key credit risk that they would consider when they are designing these matrices? And why should FICO or FICO 10T get a preference? William Lansing: Well, so again, I can't really speak for the way the GSEs are thinking about it. But what we believe is that in these LLPA grids, if you're going to account for risk, there's going to be price differential. There's going to be gaming that goes on. What kind of risks might be accounted for? I don't know how they account for them exactly, but certainly, you could have very different credit default risk for Vantage versus FICO. You could have very different prepayment risk for Vantage versus FICO. As you know, Vantage only goes -- the Vantage data only goes back to 2013. It's never been tested through a full cycle. And so there's a lack of understanding, not for want of trying, but there's just -- the data is not there to understand how Vantage will operate through a full cycle. And so I'm not really sure -- what does that mean? It means that downstream, investors are going to demand some kind of a premium for the lack of understanding around the prepayment risk and default risk. How that gets translated into the LLPA grid, the G fees, hard to say. And then because the pricing will be different for FICO and Vantage, and we guess that sometimes Vantage will have better pricing for consumer and sometimes FICO will have better pricing for consumer. It's going to create some real headaches for the GSEs. So we'll see. We'll just have to see how they solve that problem. Operator: Next question will come from the line of George Tong with Goldman Sachs. Keen Fai Tong: With the direct licensing program, it sounds like you're awaiting FHFA approval. Are there other implementation hurdles they have to overcome among the top 3 resellers that have signed up so far? And can you talk about why the remaining 2 out of the top 5 are taking a bit longer to sign up? William Lansing: I would say that there are not other factors, nothing meaningful. So we're really just waiting on approval from the PSCs and from the FHFA. And then in terms of the 2 that haven't signed, I can't get into the details, but we're very close. Keen Fai Tong: Okay. Got it. And then with respect to your outlook, can you elaborate on what assumptions are baked into your full year guide with respect to VantageScore adoption, the timing of the direct licensing model going live and performance fee adoption? William Lansing: Yes. We anticipate no loss of volume to Vantage in this fiscal year. That's in our -- that's assumed in our guide. We are -- as I said earlier, we're in roughly the same place financially, whether they go with the per score model or the performance model. So it's revenue neutral. There's a little bit of a timing difference because with the performance model, the funding fee would trail the initial fees. So I mean there's some minor differences, but I would say on balance, it's pretty close to a wash between the two. So it doesn't really matter when the adoption occurs. I suppose you could argue that if the adoption of the direct license program is delayed, that's beneficial to FICO in the very short term from a timing standpoint, but we don't think about it that way. Steven Weber: Yes. And we do have some lag built into the guidance based on the assumption that performance model will go live, and we'll have some revenue that's pushed from late this fiscal year and early next fiscal year because again, that the [indiscernible] timing cost described... Operator: Next question is going to come from the line of Alexander Hess with JPMorgan. Alexander EM Hess: Could you start with the 127% year-on-year growth in mortgage? I understand that your rack rate is widely known. Layer on top of that volume assumption is still a bit below. So maybe were there any prior year pricing adjustments have feathered into the present fiscal year. Just anything that might have given that an extra booster is this sort of the rate you guys think you can continue at these volume levels? Steven Weber: Yes. I mean not really. I mean there might be some difference in the unit cost. I mean there's some without getting to a lot of detail that some people are on a little bit lighter rate last year, and we're up to the full wrap rate this quarter. But it's primarily just the new rate and then the additional volumes we saw. Alexander EM Hess: Got it. And then maybe shifting to usage of the FICO score overall. I know there were some remarks about stepping up expenses for the Scores business, introducing the new version of UltraFICO. If you could just talk about your investments in innovation in the Scores business and how that sort of benefits the franchise you guys have there? That would be super helpful. William Lansing: In the scheme of things, the investments and incremental expense is not large, okay? I mean, just to be really clear. That said, we are constantly investing in innovation, developing new scores. UltraFICO is -- although we've talked about it for several years, it is very much on our minds, and we have a plan, which we're going to talk about at FICO World next month. But I can't go into the details now, but UltraFICO is likely to be a pretty significant factor in the Scores business in the future. Operator: Next question is going to come from the line of Kyle Peterson with Needham. Kyle Peterson: I wanted to just start off on software. The platform growth remains really impressive. Bookings are really good. I know the non-platform was kind of ran off maybe a little faster than we expected in the second quarter in a row. But I guess should we expect this trend to continue where the platform growth is accelerating, the non-platform is running off? Or do you think it will kind of return to flattish non-platform and historical platform growth? Just I guess, the moving pieces there would be helpful. William Lansing: It's a good question, Kyle. And we've talked about this in the past. There's -- we have the platform growth, which comes from selling the platform often to customers -- generally to customers we already have, but not necessarily for the same things that they've been doing with us on the legacy side. And so there's new growth in platform, which look like new deals with customers that we know and occasionally with customers that we've never met before. And then there's migration from our legacy applications to platform. And I would tell you there that we are not forcing that migration. We're not even really encouraging that migration because we have our hands full with the growth in the new platform. And so we really leave it to the customer. It's the customer's choice. If the customer comes to us and wants to renew for 3 more years, a legacy application that is working extremely well for them, we are all for it. And it's a highly profitable business for us, and it's good. If they're ready to make the move, we're happy to help them make the move. And so we work on that, too. I think there is a balance there. I think there at some level, there's a bit of migration that happens from the legacy business to the platform business. And so that would explain higher growth on the one side means a little bit lower growth -- a loss of business on the legacy side. But I wouldn't say it's a huge factor. I just think that the two are kind of in balance at this level now. We're not pushing it with our thumb on the scale one way or the other. That may change in the future. But for now, we're very happy with the growth on the platform side. Kyle Peterson: Got it. That's helpful. And then as a follow-up, I wanted to switch over to auto origination Scores revenue. I guess, it did decelerate a little bit this quarter. Obviously, I think the comps are getting tougher, but I want to see at least directionally, if you guys could give a little bit more color on what drove the year-on-year detail between tougher comps, pricing changes in calendar year '26 or any changes in origination volumes or trends that you guys are seeing? Steven Weber: It's really the tough comps. The volumes are not growing as rapidly as they were. The pricing is relatively consistent. The '26 price increase is consistent with '25. I think what you see is that the comps are difficult, and there's probably a little bit of mix shift there in terms of the pricing tiers that some of the lower unit cost pricing tiers have gained the volume from those that are higher unit costs. So there's some of that happening in the auto industry in general. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Craig Huber: We've talked about this in the past, but can you just update us on your understanding, what's the data show you in terms of what the market share out there is for VantageScore in credit cards, autos, personal loans, and also nonconforming mortgage loans. What's their market share right now and we'll go from there. William Lansing: I guess it all depends on how you measure it because if you ask them, they would tell you they have significant market share and all those things. Near as we can tell, nobody is paying for VantageScores and the bureau send along the VantageScore for free when someone buys a FICO score. So when you see the big VantageScore volumes that Vantage talks about, you should know that they're largely unpaid for. So are they -- is anyone using them? I don't know. Is anyone paying for them? Our sense is not much and so it's pretty hard to triangulate on what their market share is. I mean I think it's trivial is what I would say. Steven Weber: And I think you see that in our numbers, right? I mean if there were -- we were losing market share, you'd see it in our numbers, and you don't see any that. We have to report our results or audited. They don't have that same obligation, so there's a lot of scrutiny on what we produce, and we back it up with actual numbers that are verified. Craig Huber: So just to be clear, if you had a ballpark, you think it might be 5%, 10% market share? Maybe it sounds like not even that... William Lansing: Ballpark, I would call it 2%. Craig Huber: Okay. So then on the nonconforming part of mortgages, you're saying probably the same thing, right, roughly that... William Lansing: No. On the nonconforming part of mortgages, they don't particularly any care at all. Just to be really clear, in the nonconforming market, the lenders use FICO Classic and they use FICO 10T, and they don't use Vantage. Craig Huber: So what's -- all the worry out there about AI, put that aside for a second, all the worry out there that VantageScore is going to take significant share just because of the changes from the government standpoint. The rest of the market here is -- you guys have been -- VantageScores have been going up against FICO for 20 years, right, since 2006. You're telling me it's roughly 2% market share, give or take. William Lansing: We don't know. No one know. Craig Huber: What's going to change, though, but what's going to change here on the conforming mortgage side of things here that they're going to get significant market share. I mean that's the theory out there for a lot of people. What's the case there that you can possibly see? William Lansing: Look, I am not going to make the case for how Vantage takes market share because I think we're competitive on price. We are far more competitive on predictiveness. We have a better score than Vantage. There's not a good reason for them to take any share at all. Craig Huber: Okay. Let me just -- my final question and is why did you lower the upfront fee down to $0.99 from $5 then? William Lansing: Two reasons. One is to be competitive with Vantage and to have a low entry point and encourage widespread use of the score and second, to encourage adoption of FICO 10T. A pretty classic approach to launching a new product is to price it so that people use it. Craig Huber: But again, you're not worried at all that Vantage is going to take any meaningful share from you on the conforming mortgage side, right? That's what you're saying? William Lansing: That is correct. Operator: Our next question comes from the line of Ryan Griffin with BMO Capital Markets. Ryan Griffin: I'm just wondering if you have any feedback to share from the securitization market in terms of reference in light of... William Lansing: Everyone has done their own market checks, and we have to. And I would say that the securitization market is not ready to accept Vantage. It's -- there's some hurdles to be overcome. And so we'll see how that all unfolds. I don't have a lot of insight there. I mean the market is still all FICO. I think something like 20 mortgages have been securitized with VantageScore paper and -- which is obviously less than 1%, less than 0.1% of the most recent securitization. So it's not real yet. We'll have to see how the market reacts. Ryan Griffin: And I know we're getting some data released over the summer from the GSEs. I was wondering what you're expecting that relate the tail and how you think it might validate the predictiveness in FICO? William Lansing: Well, I think that I can't give you a date for when the FHFA will release the FICO 10T data to the marketplace. But we're certainly not standing in the way. We provide the data and we're ready to go. In terms of validating the predictiveness, we have white papers posted on our website that actually analyze FICO 10T versus Vantage and provide insights on credit default risk and prepayment risk and the differences. We qualify 5% more borrowers. I mean there's a lot to see there. That's already been done. But then if you don't believe FICO because it's self-serving, I'd encourage you to look to third-party analysis as they come out because I'm sure they will. And you're going to see a lot of analytic work around this topic in the coming weeks and months. Operator: Our next question comes from the line of Owen Lau with Clear Street. Owen Lau: So the AI disruption narrative hasn't gone away. Could you please talk about why it's very hard for whatever Vantage or a third-party AI platform to come in and create a more predictive credit score, which will be adopted by lenders and consumers if they can offer a lower price? William Lansing: Okay. So there are two different things there. One is AI versus the current credit scoring system. And the second is within that, more predictive. So first, I would say, with respect to AI displacing the FICO score, we have a really well-defined body of law and the fair lending laws, which are designed to protect consumers to ensure that there's not discrimination, ensure that consumers are treated fairly. And that requires compliance with all kinds of things that our scores take into account. I mean just one small example would be red lining, which is not allowed in the United States. Is it a predictive factor? Yes, it's a predictive factor, but it's not allowed. And so you can't use red lining as a factor in a credit score. Well, AI doesn't -- AI would find 100 other ways to get to the same result. And so the regulators are not going to be comfortable with AI making underwriting decisions when they're not explainable when it's a black box, when they can't demonstrate that discrimination is not occurring. So that's kind of the core problem with using AI and underwriting. I mean AI is great in a lot of things. But using it in underwriting, the biggest play is that it's going to get around the rules and regulations of the fair lending laws. Now you're probably aware that FICO scores carry with them 32 reason codes. So when a consumer turn down for credit, they get a letter and/or the line is not increased on a request or whatever, they get a letter, and the letter says, here's why. And that reaches into the FICO score and the reason codes and those reason codes are shared with the consumer. And so there's a level of comfort with the regulators and with the consumer that they understand what's going on. I would also point out that the experiment with AI and some of the black box underwriting that was undertaken several years ago by Upstart ended with the CFPB shutting it down. So I think there's some real challenges, not that it will be this way forever. And we are prepared for the day when AI is appropriate in underwriting. We have patents in the area of explainability and ethical AI. And so I think we're in an advantaged position, but I would not hold my breath. I think that's going to take a long time. And then on predictiveness of the score, I would tell you that our latest and greatest score is more predictive than Vantage. And frankly, more predictive than any other score out there. The only asterisk I would put on that is there are lenders who build proprietary scores on top of FICO, and they leverage their first-party data. And so they have incremental data and they get incremental signal out of that. And so there are some proprietary scores that are really excellent that are most typically developed on top of FICO. Owen Lau: Got it. And then maybe quickly on LLPA, have you heard of any of these 21 lenders received the updated LLPA grid from FHFA for the pilot? And do you have any expectation that when the new grid will be made public? William Lansing: No idea. I have heard nothing, I encourage you guys to keep asking the questions, what's going on there? I think it's a manual process. Operator: Our next question comes from the line of Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just on the guidance, I understand you're still being -- it seems like being conservative on your assumptions regarding volume. Just wondering if there had been any sort of change to your volume assumptions after the last quarter at all? Steven Weber: Not really. I mean, again, we tend to be pretty conservative because, obviously, there's a lot happening in the world. And if we get that number wrong, it's difficult to make that up someplace else, but not really. I mean I think we had a better second quarter volume-wise than we had anticipated when we gave guidance. But we don't necessarily think that's going to continue. So we tend to take the same conservative approach for the rest of the year. Scott Wurtzel: Got it. And then just on the buyback, I mean, the number, $600 million in the quarter was great to see along with the incremental buyback this quarter. Just wondering, I mean, how aggressive do you think or would you guys be with the stock at these current levels and given the capacity that you have? William Lansing: What I can say is what we've said in the past, we're always interested in share repurchase, and we're in the market kind of all the time. And we tend not to be market timers, although we have leaned in much more heavily on an opportunistic basis. I would certainly consider our stock at these levels to be an opportunistic time. Operator: Our next question comes from the line of Kevin McVeigh with UBS. Kevin McVeigh: I wonder if you had any thoughts on, given the current shifts in the regulatory environment, do you feel like that's pretty much contained at this point? Or is there anything else you're kind of focused on as we think about whether it's FHFA or other parts that you kind of continue to manage through from a regulatory perspective? William Lansing: The mortgage market is a $13 trillion market, and everyone takes it pretty seriously, and no one wants to do things that are reckless there. And so everything that happens in that market, you see coming a mile away. And I think that's kind of where we are. I think we know everything there is to know about the way this is unfolding for now. And so no, I don't really see being blindsided by regulatory or other kinds of things in the market. I think we understand how the market is evolving. We understand what the choices are for evaluating credit in the modern market. Will things change if the GSEs get out? I mean anybody's guess when and if that happens, and will things change? We actually don't think they'll change that much. And we think that in a world where the GSEs are private or if they were to lose the guarantee, the emphasis on credit default risk would go up, the interest in credit default risk goes up, and that's advantaged FICO because we have the best score for evaluating that. But again, these are more theoretical and down the road kinds of things. I don't think there's any surprises ahead. Operator: Our next question comes from the line of Curtis Nagle with Bank of America. Curtis Nagle: Most of my questions have been taken, but just maybe, Will, I guess, any stats or detail you could provide in terms of the uptake of 10T within the nonconforming market at this point for mortgages? William Lansing: Yes. I don't have an updated number for you, but it's -- we have underwritten trillion. Steven Weber: Yes. Most of them are running in parallel with Classics because they want to be able to use the latest score and so they run in parallel with each other. Curtis Nagle: Got it. I just -- any running... William Lansing: I think the number is $1.2 trillion. The latest number. Operator: And our last question is going to come from the line of Sean Kennedy with Mizuho. Sean Kennedy: So with VantageScore, I was wondering if you could discuss a bit more about potential adverse selection, how lenders could pull both scores in the beginning of a process that could pick one or the other for the remaining initial results and the implications there for the mortgage market. William Lansing: Yes, it's a good question. I think -- and of course, we don't know how this is going to unfold. I mean it is strong. It's really in the interest of the GSEs and the FHFA to prevent gaming to not have a gaming situation. That said, in a 2-score system, it's almost inevitable. It's kind of structural that one score or the other is going to be more beneficial to the consumer at all times. And so in a world where the systems are in place to use both scores and barring other unforeseen things, there will be some people who pull both scores. And so it may unfold that way. I think to the extent that, that happens, that's not -- I mean, it is technically share loss for FICO, but it's not volume loss. What you're really doing is expanding the market by the second pull. And so it's conceivable that Vantage could get some share that way if they don't solve the gaming problem. But I don't -- again, I don't see volume loss for FICO. Sean Kennedy: Great. And then I was also wondering just with the auto and card key loan growth, if you saw any volume weakness later in the quarter [Technical Difficulty] on the macro. And if you were seeing any consumer weakness there? Steven Weber: Yes. Auto tends to be pretty stable unless there's like a really disruption in the economy. A lot of the volume on the card side is really the banks that are marketing. And if they want to market more, they'll find consumers that will take it off. So -- and that can vary quarter-to-quarter. But so far, we haven't really seen any significant weakness on the volumes. They've actually been pretty good. There's been a little bit of a falloff in the subprime, but it's been picked up throughout the rest of the prime, super prime. So we haven't really seen any... Operator: This does conclude today's question-and-answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Greetings, and welcome to the Varonis Systems, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tim Perz. Please go ahead. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2026 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our second quarter and full year ending December 31, 2026. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our first quarter 2026 earnings press release and our investor presentation, which can be found at varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our first quarter 2026 results. Our Q1 results reflect our strong performance as we execute on the growing need to secure data and safely enable the usage of AI. In Q1, SaaS ARR, excluding conversions, increased 29% year-over-year to $522.6 million and total SaaS ARR, including conversions was $683.2 million. Guy will review our results and our guidance in more detail shortly. We continue to see strong demand from both accelerating new logos and existing customers because companies understand that they must secure their data and their AI stack. Varonis helps them to do that with minimal effort because of the automation built into our platform. In Q1, we saw continued adoption of MDDR and AI-related products as well as traction in securing cloud environments. Early feedback on our newer products driven by acquisitions over the last year, including database activity monitoring, Interceptor and Atlas reinforces our belief that these offerings are a strong fit to our platform and can help drive ARR growth over time. Now I would like to take a step back from our near-term results and discuss why we believe we are best positioned to help companies safely adopt AI and prevent data breaches. Varonis founded on the belief that managing and protecting data would be impossible without automation. That belief is even more important today as customers work to adopt AI securely. The security model of the last 30 years was not built with AI in mind. Many organizations want to capitalize on the productivity gains from AI, but only connected a small portion of their data to AI because of security concerns. Companies want to connect more of their data to take advantage of the productivity gains, but need the right guardrails in place to confidently move faster. When we look at what's standing in the way of broader AI adoption, we see three barriers: securing the data itself, securing the AI systems and agents that touch that data and fighting AI-powered adversaries. The first barrier is securing the data and making sure only the right data is accessed by the right agents and systems. AI pushes existing access controls to their limits because many systems and agents inherit user access that is far too broad. One classic example of this is an employee asking an AI chatbot, a basic question and getting confidential information that they should not have access to such as salary data, financial record or intellectual property in a response. This is content a human mistakenly had access to, but was less likely to find without AI. Previously, a human employee had to log in, navigate, download and take action. There was friction because it took time and effort that reduces risk. In the agentic world, an agent can access a huge amount of your data estate in seconds. Agents can move fast, behave unpredictably and maximize privileges by design. And if an agent doesn't have permissions, it will try to get them. Connecting agents and models to data is what's blocking organizations from safely adopting AI faster. They need remediation at scale and to understand abnormal behavior, visibility alone is not enough. The second barrier is securing the AI systems themselves. In Q1, Varonis found a vulnerability called Reprompt, which allowed attackers to bypass safety controls in Microsoft Copilot [ personal. ] The vulnerability, if exploited, would give the attacker access to everything the Copilot [ personal ] session itself could access, including prompts, conversation history and all of the data [ consumer assist ] could access. The third barrier is fighting the AI-powered adversary. We have already seen examples of this, including last year when attackers used cloud code to breach a major organization with minimal human involvement or earlier this year, when a lone unskilled attackers use AI to scale an attack across 600-plus firewalls in 55 countries, an attack that would have previously required a team of experts to execute. AI-powered phishing doesn't just target humans. It targets agents too. Agents can read e-mail, Slack and key messages. One human clicking maliciously is one compromised identity. An army of agents can multiply the attack surface. The three barriers together, overexposed data, unsecured AI systems, AI-powered adversaries create a dangerous environment and companies must build foundational controls that operate at the speed and scale of AI starting from the inside out. Varonis does just that by securing the data itself using the automated find, fix and alert approach. The first piece is find. Know what you have across the entire data store, structured, unstructured, semi-structured and application data, classified for sensitivity, context and staleness, so you know what should and should not be connected to AI. The second is fix, rightsized permissions, label data and masking. Manual process can't work anymore. The remediation must be automated and AI-driven. And finally, alert, monitoring who and what is accessing your data and detect abnormal behavior quickly to stop breach before it happens. This is the basis for AI detection and response. AI security and data security are intertwined with one another. You need an inventory of every model, agent and pipeline running in your environment and you need access posture to know what data they can touch, what permissions they have and where they are vulnerable. You need runtime guardrails to block malicious inputs before they reach the model, preventing sensitive data from leaking in outputs and restricting tool use. Finally, you must fight AI-powered adversary, the volume and speed these attacks demand automation. These layers only work if they are connected. AI inventory and runtime protection is significantly more meaningful when you know what sensitive data they access and what data they are trained on. Guardrails that leverage the same accurate classification and labeling applied to enterprise data store reduce friction and increase control. We knew it would be impossible for humans to control data risk without tremendous automation. Only AI can defend AI risk. When you trust your brakes, you feel safe driving faster. When you have the right guardrails, data and AI become a force multiplier, not a breach waiting to happen. With that, I would like to briefly discuss a couple of key customer wins from Q1. This quarter, a global technology company with over 50,000 employees became a Varonis customer. They needed to quickly and safely roll out AI tools and also wanted to better protect customers and company proprietary intellectual property data to meet compliance requirements and perform forensics analysis in an event of the breach. During the risk assessment, our MDDR team detected multiple active threats. We also identified risks in Salesforce and Microsoft 365 and provided an operational plan to fix these risks with intelligent automation. Our ability to provide these outcomes and safely enable the usage of AI were the key reasons why we were selected over several DSPM point solutions. They ultimately purchased Varonis for AWS, Salesforce, Google Cloud Platform and Google Drive as well as Varonis SaaS for hybrid with MDDR and Varonis for Copilot. We also continue to see existing customers expand into new use cases as they consolidate point tools and utilize the breadth of our platform. In Q1, ServiceNow, a global leader of workflow automation, expanded its Varonis investments to cover internal AI systems and e-mail security, including protection against advanced phishing and social engineering attacks used by AI-powered adversaries. In summary, AI is forcing companies to prioritize data and AI security, and Varonis is uniquely positioned to help with our unified platform that allows customers to put the right guardrails in place in order to accelerate their AI deployment plans. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. Our first quarter performance represents a strong start to 2026, and we are excited by the momentum we are seeing in the business. Demand was healthy across both new logos and existing customers, and we are excited to raise our full year guidance after our strong start to the year. As a reminder, we are focusing on SaaS ARR growth, excluding conversions, which reflects our ability to add new SaaS customers and also expand with existing ones as this is the primary growth driver of our business in the years ahead. In the first quarter, SaaS ARR, excluding conversions, increased 29% year-over-year to $522.6 million, and total SaaS ARR was $683.2 million. In Q1, we had $11.3 million of conversion ARR, and we finished the quarter with approximately $83.7 million of non-SaaS ARR remaining. This quarter, we generated $49 million of free cash flow, down from $65.3 million in the same period last year, which reflects the previously communicated headwind from the end-of-life announcement of our on-prem platform and also includes approximately $12.6 million of acquisition-related costs related to the accounting treatment of our acquisitions. Adjusting for the acquisition-related costs, free cash flow would have been approximately $61.6 million in Q1. We remain on track to achieve our full year free cash flow guidance. Now I'd like to recap our Q1 results in more detail. In the first quarter, total revenues were $173.1 million, up 27% year-over-year. SaaS revenues were $161.1 million. Term license subscription revenues were $6.9 million, and maintenance and services revenues were $5.2 million. Our SaaS renewal rate was over 90%. Moving down to the income statement.I'd be discussing non-GAAP results going forward. Gross profit for the first quarter was $134.9 million, representing a gross margin of 77.9% compared to 80.2% in the first quarter of 2025. Our gross margin continues to be healthy and in line with our long-term target set at our Investor Day. Operating expenses in the first quarter totaled $136.3 million. As a result, first quarter operating loss was $1.4 million or an operating margin of negative 0.8%. This compares to an operating loss of $6.5 million or an operating margin of negative 4.7% in the same period last year. First quarter ARR contribution margin was 14.1%, down from 16.7% last year. This is in line with our expectations and as a reminder, is impacted in 2026 due to the end of life for our self-hosted platform. During the quarter, we had financial income of approximately $5.7 million, driven primarily by interest income on our cash, deposits and investments in marketable securities. Net income for the first quarter of 2026 was $7.5 million or net income of $0.06 per diluted share compared to net income of $0.7 million or $0.00 per diluted share for the first quarter of 2025. This is based on 132.8 million and 136.7 million diluted shares outstanding for Q1 2026 and Q1 2025, respectively. As of March 31, 2026, we had $900 million in cash, cash equivalents, short-term deposits and marketable securities. For the three months ended March 31, 2026, we generated $55 million of cash from operations compared to $68 million generated in the same period last year, and CapEx was $5 million compared to $2.3 million in the same period last year. During the first quarter, we repurchased 5,355,445 shares at an average purchase price of $24.67 for a net total of $132.1 million. As a reminder, we will provide quarterly SaaS ARR, excluding conversion guidance for this year only. We are doing this because of the difficulty in modeling the year-over-year growth rates due to the impact of conversions in 2025 and 2026. We are also providing a bridge to quarterly total SaaS ARR in our investor deck, which again assumes zero conversions from a guidance perspective for the upcoming quarter. For the full year 2026, we will provide annual guidance for both SaaS ARR, excluding conversions and total SaaS ARR. For more information, please see our earnings deck in our Investor Relations website, which includes a more detailed breakdown of our financial guidance. For the second quarter of 2026, we expect SaaS ARR growth of 24% to 25%, excluding conversions, total revenues of $175 million to $178 million, representing growth of 15% to 17% non-GAAP operating loss of negative $1 million to breakeven and non-GAAP net income per diluted share in the range of $0.00 to $0.01. This assumes 131.1 million diluted shares outstanding. For the full year 2026, we now expect total SaaS ARR of $814 million to $845 million, representing growth of 27% to 32%. This represents SaaS ARR growth of 20% to 21%, excluding conversions. Free cash flow of $100 million to $105 million, total revenues of $731 million to $737 million, representing growth of 17% to 18%; non-GAAP operating income of $7 million to $9 million, non-GAAP net income per diluted share in the range of $0.11 to $0.12. This assumes 132.1 million diluted shares outstanding. In summary, we are excited by the strong start to the year and continue to see healthy momentum from both accelerating new customer wins and expansion within our installed base. Our Q1 results, coupled with the underlying drivers of our business, give us the confidence to raise our full year guidance for total SaaS ARR growth to 27% to 32%. In addition, we increased our guidance for SaaS ARR growth, excluding conversions, to 20% to 21%, and we believe we can sustain this level of growth as a fully SaaS company. With that, we will be happy to take questions. Operator? Operator: [Operator Instructions] Our first question comes from Saket Kalia with Barclays. Saket Kalia: Nice start to the year. Maybe a question for both of you. I think one of the thoughts this year has been that Varonis sales teams could spend more time now on new business rather than on both new business and conversions as they did last year. Guy, maybe for you, can you expand on how that's looking the first quarter into that new model? And Yaki, for you, where are you having that success in driving new business? Guy Melamed: Saket, you're right. We talked a lot about the fact that the conversions from on-prem subscription to SaaS, we're cannibalizing the time of the reps. And that in 2026, the way we've structured the commission plan and the way we've focused our reps is to go back and focus on upselling SaaS customers with additional products and going into new TAMs and selling new products and selling our SaaS offering to new customers. And we saw an acceleration in the new customer contribution, which we're extremely happy with, and it very much fits with what we were trying to achieve and the strength of the platform. So our sales force is able to go and with the simplicity of the SaaS offering, sell to customers that we wouldn't be able to sell before, and that's worked really well in Q1, and we expect that to continue in the year ahead. Yakov Faitelson: In terms of what's in the market, the reality that for organizations to realize the value from AI for models and agents, they need to connect their organization and information into it. The AI is as good as the data. And this is the biggest problem that we see for organizations. We call it the 3% paradox. It's very hard for them to securely connect the data. So the MDDR becoming this AI detection and response, automated remediation of excessive permissions is the holy grail. If not, just these agents will create and read a massive amount of information that they should never touch. And you also see just a lot of attacks that are AI based, and this is hitting on all cylinders with the value proposition of the platform. You need just foundational security that is automated, but it needs to be security. It can be just partial discovery at scale and AI just hits every data type, structured, unstructured application in the cloud and on-prem, this works very well for us, and we see that it's driving the business. Operator: Our next question comes from Rob Owens with Piper Sandler. Robbie Owens: I want to build on Saket's question a little bit and just drill down into the selling efforts. And I know in the prepared remarks, you talked about accelerating new logos and expansion. Anything you can do to quantify that for us or give us a sense of how and where that's trending? Yakov Faitelson: Just in terms of the conversion, we see that just organizations need to convert all the data stores and definitely AI creates more urgency around it because what happened essentially, and it's happened very fast that just the tech stack, if you will, that organizations have is changing completely. Before we had a user that is accessing data through a user interface to a file system or just through a user interface to an application, and it changes completely. Starting to have an agent that is accessing in robotic speed and many times by using tools, from any kind and our customers and prospects understand that they need to understand what they have and to protect this data immediately because before, in the model, you had a lot of friction. User needs to be malicious or to do just a gross mistake in order to get to information they shouldn't get. The agents will get to it immediately. So what happened fairly fast is that the most important security controls are moving to two places to the agents and to the data, and this works very well for Varonis. Guy Melamed: And Rob, just to quantify in terms of the new customer contribution, we saw, as we mentioned in the prepared remarks, an acceleration in the actual total number of new customers. It was pretty significant from our end. And what we also think and believe is when we look at the contribution from some of the new products, even though Atlas only closed in February, we saw some nice contribution there, nothing too material, but definitely something that gives us the confidence that we can continue to sell that at an accelerated pace throughout the year, and that's not baked in the guidance. So when we look at the Q1 behavior, it was definitely kind of driven by the new customer side with a lot of opportunity throughout the year from an upsell opportunity with some of the products that we have that isn't baked in the numbers that we put out there. Operator: Moving next to Meta Marshall with Morgan Stanley. Abhishek Murli: This is Abhishek Murli on for Meta Marshall. Congrats on the quarter. I was wondering if we could get an update on the Microsoft Copilot partnership and whether there are any channels that are driving new customers there. Yakov Faitelson: So Microsoft Copilot is one of them, but what we see is that organization needs just control plan for every AI from just -- a lot of just models and Copilot and just -- there is just so much technology and so much innovation that is just happening in a neck break speed, and we are protecting everything. With the acquisition of Atlas, we have the ultimate control plan for agents, models and pipeline. We protect every data type. And what happened is that I think that what is important to understand is that the overall velocity. You have these agents that accessing data, you need to be ahead of them in your remediation. You need to understand any abnormal behavior. If a weather forecasting agent is accessing HR records in 2 a.m. in the morning, you better know about it, and you will be amazed how often things like that are happening. So Copilot is one of them, but we definitely see that in order for these AI agents and models to be useful, they need to be connected to data. And the only way that you can do it is in a secure way. And it just slowly but surely, we are becoming the foundation for organizations to adopt AI in a secure way. Operator: Next, we have Joshua Tilton with Wolfe Research. Joshua Tilton: Congrats on a pretty solid quarter. I have one. It's more of a clarification. I think maybe you addressed it in the beginning. I'm not sure if I heard you correctly, but I was kind of under the impression that the free cash flow guidance for the year is the way it was because there was an assumption around churn because you guys are basically guiding to no conversion or some assumption that some of these remaining on-premise customers would convert. And then you have a quarter where you did convert some customers, but the free cash flow guidance for the year kind of stayed the same. So I'm just wondering why the free cash flow guide isn't moving up as you actually execute on converting customers that I'm assuming were assumed to churn originally in the guidance. Guy Melamed: Let me clarify that. When we gave guidance on the full year numbers, we assumed the bear case scenario and a bull case scenario on the conversions, which was $50 million to $75 million. We are on track to achieve those numbers, and that's part of our free cash flow guide. It's not that the free cash flow guide assumed zero conversions. It assumed that midpoint range, that base case scenario of that $50 million to $75 million. And we're actually -- when we look at the Q1 conversion numbers, they were actually on track, and we felt very good with the numbers that we were able to convert in Q1. So the actual reduction that we announced last quarter on the free cash flow side was on the delta, the expectation of churn with the announcement of the end of life. And that was the headwind that we were talking about, but it was still baking in that $50 million to $75 million, and we feel very good with that guidance for the year on the free cash flow side and still assuming to be within that base case scenario of conversions for the year. Operator: We'll take our next question from Roger Boyd with UBS. Roger Boyd: Congrats on the quarter. For Yaki or for Guy, you mentioned enterprises prioritizing AI security. I think this has been kind of the bull case around Varonis for a while now. I'd love to get your sense of like did something change this quarter? And how did that actually manifest as you look at kind of the -- on a monthly basis throughout the quarter? Would you characterize demand from enterprises as ramping throughout the quarter and guide, just any sense of what you're seeing through April and how that kind of factors into the guide for -- I think it was kind of flat net new SaaS ARR ex-conversions. Yakov Faitelson: I think that what you mainly see just from a broader marketing, obviously, everybody just investing a lot in AI tooling and understanding how they can just derive real value from it. And there are obviously some use cases that are unbelievably strong, but the realization that we see is that they get -- they understand that they need to connect data securely and to make sure that these agents can work like employees, they need to make sure that they can connect it to all the universe of knowledge that the organization has. This is something that is just very hard to do because what happened that before, if you have excessive access control or data was exposed, the user need to be malicious in order to get to it. The agents are getting it immediately by design and making many times all efforts to remove very important security controls. So more than anything else, what you see is that just slowly but surely just an understanding that you need to secure the AI systems and the data that powers it. And this is something that works very well for us. We see more strategic conversation. We definitely see that organizations understand that they need to look at everything. Even when you look at databases, historically, databases was DBAs accessing databases and you have what we call connection pool. But now with agents, they can access it like a collaboration. So just a lot of the way that these agents and models consume information, it's something that put the security and AI security is a top priority. Guy Melamed: And I'd like to address the second part of your question. When we look at the Q2 guide, it really is kind of just following the same responsible guidance philosophy. And we're really excited with the start for the year and the performance that we had in Q1, and we feel very good about Q2 and the pipeline that we have for the rest of the year. So it really is just keeping the same philosophy guidance. Operator: Moving on to Matt Hedberg with RBC Capital Markets. Matthew Hedberg: Congrats on the results. Obviously, a lot of moving parts here. I guess there's a lot of uncertainty in the market, whether it's the Iran war, maybe demand trends in the Middle East or even some of the headcount reductions that we've seen out there from customers in different verticals. I'm just kind of curious if that's starting to creep in any customer conversation? And Guy -- is SaaS NRR trending up? It sounds like renewals are strong, but I'm kind of curious on the SaaS NRR side. Yakov Faitelson: In terms of just the conversation with organizations, it was primarily about just data and AI security. If you look at our pricing scheme and model, so much of it is just based on the volume of data and data store. And for us, it's just the identities that are accessing data. So just reduction in headcount is not something that we are feeling and affecting our pricing in any way. But our teams are just tremendous, and I want to thank them that during this conflict, we're able to maintain the right productivity levels, and we were just in front of customers, helping them secure the data. Guy Melamed: And from an NRR perspective, obviously, we provide the NRR on an annual basis. But in talking about the trends, we feel very good about our ability to go back to customers, SaaS customers and sell them additional licenses. And we talked a lot about the being able to finish the transition quickly and have our sales force focus on selling additional products. And it's definitely something that we saw in Q1, and we believe that we can actually continue and do even better throughout the year with the platform offering that we have. So when we look at the trends and when we look at the conversations and when we look at the pipeline and look at and track the meetings, it's definitely trending in a positive way, and we feel very good with our platform ability to go back and have the sales force focus on what they know how to do best, which is sell to new customers and upsell to our existing SaaS customers. Operator: We'll go next to Brian Essex with JPMorgan. Brian Essex: Great to see a Q1 beat and raise in such an uncertain macro. I guess I wanted to poke on the non-SaaS ARR remaining, and it was great to see that you had $11.3 million of conversion business in the quarter, and you guided to 0. I wanted to understand what the composition of that outperformance was. And then of the remaining $83.7 million of non-SaaS ARR, can you help us understand what the composition of that cohort is? Have the weaker or single-threaded customers churned off? Have we seen like a front-loaded churn rate and maybe it's higher quality? Or maybe just to give us a sense of your level of confidence in that portion of business that may convert over? Guy Melamed: Brian, there's a lot to unpack. I'll try and tackle them one by one. I'll start with the conversion guidance. We said at the beginning of the year that we're giving a base case scenario, a bull and a bear case range, basically, that $50 million to $75 million. We stand with that number and feel good about our ability to get to the conversions. We saw very healthy conversions in Q1. And the reason we didn't guide for any numbers on a quarterly basis, it's not that we don't expect conversions to happen. We just didn't guide for them. And there are two reasons for that. Reason number one is we want to focus investors on what matters the most, which is SaaS ARR, excluding conversion, which is a KPI that puts the emphasis on how this business would grow post transition. And we don't want to put too many numbers out there that would confuse everyone. We know that there's a lot of moving parts during this transition. And keep in mind at the end of this year, SaaS ARR would be ARR. We will -- with the announcement of end of life, we're condensing everything, and this will be very, very simple. And there's only three quarters to kind of go through with the moving parts. So that was reason number one of not putting a number on the guidance from a conversion perspective. And the second reason is that there are a lot of customers that kind of fluctuate on their conversion period. And some of the customers in Q1 where the renewal was up for renewal on the on-prem subscription side, will convert later on in the year. So we're definitely seeing those numbers kind of move, and we didn't want to put a number out there that would confuse investors and analysts. And that's why we're just giving that full year range of $50 million to $75 million, and we feel very good with that number. In terms of the single-threaded breakdown, we saw that continue in the same trends that we have seen in the past. And if you remember, the focus of those on-prem subscription customers that will not convert was mostly on the federal and state and government customers. That was the cohort that we felt would be impacted the most by not moving to SaaS, and we still think that is the case. But when we look at the numbers of that single threaded that converted, they continue to convert at the same rate that we have seen in the past. So we felt very good about that as well. I hope I answered all of your components of the question. But really, just the highlight of my answer is that we felt good with the conversions in Q1, and we feel good with what's yet to be converted for the rest of the year. Operator: And Richard Poland with Wells Fargo has our next question. Richard Poland: On the cash flow, I just wanted to clarify one point. I think you called out $12 million to $13 million of acquisition-related costs that seem to affect the cash flow side of things, but obviously not the non-GAAP operating income. I just wanted to see if there's anything for the remainder of the year with respect to some of those acquisition-related costs. And is it a scenario where we should try to back that out for a cleaner, I guess, year-over-year compare? Guy Melamed: So the biggest impact, obviously, was in the Q1 numbers, and that's why we broke it out. Obviously, we're still -- we remain on track to achieving the full year free cash flow guidance, and we want to emphasize that and highlight that. But for visibility perspective, we wanted to highlight that $12.5 million headwind coming from the accounting treatment of the acquisitions, and that's mostly the AllTrue that took place in February. We wanted to put that out there so investors can understand the apple-to-apple comparison, and that's why we highlighted that. Operator: We'll go next to Mike Cikos with Needham & Company. Michael Cikos: Congrats on the quarter here. I just wanted to come back to the commentary, whether it's the press release or the prepared remarks here, but it seems like the company is being more assertive as far as what the sustainable growth is for this company ex conversion, citing that 20% to 21% growth. If I'm just looking at the trend rate here, last quarter was 32%, [indiscernible] 29%. We're guiding to 24% to 25% this coming quarter. Can you just give us a better indication of what gives you the confidence to be putting that bogey out there today, just to help draw the lines for some of the longer-term investors who are looking at this asset post conversion? Guy Melamed: So first of all, you're right. When you look at kind of the full year guidance, we went from 18% to 20% to kind of having the low end starting with a two handle, and we feel very good about that. And we feel -- we believe we can continue that growth rate. We talked for a long, long time about our ability to continue to grow 20-plus percent with the platform that we have and with our ability to sell to new customers and go to the base and sell to -- upsell to existing SaaS customers. And I think that when you look at the trends that we've had in Q1, they give us the confidence. When you look at the environment out there, being able to accelerate with new customers is definitely something that we feel very good about and gives us the confidence. And when we see how our existing SaaS customers are receptive to additional licenses and the platform offering that we have, we definitely believe that there's a lot for us from a customer value perspective, customer lifetime value perspective to go back. And we've seen how many of the customers consume more and more. And that's part of the reason that we feel very good about that and noted it in our Q1. Operator: Moving next to Joseph Gallo with Jefferies. Joseph Gallo: Can you just talk a little bit more about Atlas initial traction, feedback and who you're competing with? Is it against pure plays? Or are people trying to do this themselves use a platform? And then if at all, did the AllTrue.ai acquisition contribute to ARR this quarter? Yakov Faitelson: We see just a lot of momentum around Atlas in terms of just the overall interest. In terms of the AI life cycle, we strongly believe that it's the most comprehensive product out there, but it also has a massive force multiplier with the Varonis platform. So the key is how you connect everything to data. Atlas is your best way to manage agent models and pipelines and then connect it to Varonis is what will give you the ability to use AI in a secure way. So there is just a lot of noise in the market. But at this point, no one has -- just on the actual pipelines, tools and models, no one has something that is so comprehensive. And the sales motion is together with everything that we have. Guy Melamed: I want to clarify that when we acquired AllTrue, there was no ARR that was added as part of the acquisition. So really, if you remember that the transaction closed in February, and it's not that we expected that it would have a significant impact, and it didn't have a significant impact in Q1, but there were definitely early signs that were encouraging in terms of conversations and in terms of some of the evals that were put in and even some several POs that we were able to get. But again, nothing significant that impacted the quarter from an ARR perspective. However, and as Yaki mentioned, the conversations and the pipeline that we're seeing is definitely giving us the encouragement and the expectation that we would see AllTrue contribute more throughout the remainder of the year. And as I mentioned before, that is not part of our guidance. We didn't bake in any optimistic assumptions with AllTrue selling throughout the year, but it's the upside ability and the conversations that give us the confidence to actually see that happen in Q2, Q3 and Q4. Yakov Faitelson: The initial conversations and more so the results from the POCs are very encouraging. Operator: Our next question comes from Shaul Eyal with TD Cowen. Shaul Eyal: Congrats on the solid performance and guidance. Yaki, supply chain attacks remain a major threat, especially when sensitive data moves beyond your original provider. As you look at your platform today, do you believe your supply chain security capabilities are sufficient? Or is this an area where you plan to invest and expand? And maybe a second one, who are you displacing given some of those big logos that you just announced one of them earlier on the call? Yakov Faitelson: Yes. Thanks. So in terms of supply chain attacks, this is how bad actors are getting in and with AI, it's much, much easier for them to get in and Interceptor is doing an unbelievable job. But -- and we believe that what we have in terms of the phishing sandbox and all the assets that we have with the browser extension and the mobile devices, we are just in the best position in the market. But as attacks becoming more sophisticated, we keep investing in it. And we -- and I think that this is in terms of just overall phishing, spear phishing and phishing attacks of this nature. This is how adversaries will get in, and we are extremely well positioned, and it's also worked unbelievably well with our MDDR and in terms of just replacements, it can be just database activity monitoring, other point solutions that related to DSPM. But what we started to see this quarter is that AI security and overall AI budgets starting to move slowly towards our platform. Operator: Our next question comes from Rudy Kessinger with D.A. Davidson. Rudy Kessinger: I'm curious, I want to dive in on the makeup of the SaaS net new ARR ex conversions, up 31% year-over-year. Was that primarily driven by higher new logo contribution or similar expansion rates on a larger renewal pool? And then also, how did the composition of that net new ARR look relative to recent quarters in terms of the workloads that you're protecting, specifically maybe in Microsoft for the Azure ecosystem versus everything else? Guy Melamed: So I'll start, and then Yaki can provide some color. When we look at the contribution in Q1, it was definitely driven by new customer acquisitions, and that's why we highlighted the acceleration on the new logo side. But as I mentioned before, we saw very encouraging signs in terms of our platform ability and our additional upsell opportunity throughout the year and our ability to go back to SaaS customers and sell to them additional licenses, both the SaaS offering that we have and some of the additional tuck-in acquisitions that we have made. So I think when we look at the holistic view of that, the new customer was the encouraging part and the upsell was definitely there, and we think that it can actually do better throughout the year. Yakov Faitelson: In terms of just the Microsoft ecosystem is a very small part of the data. We are doing very well with all the SaaS applications, AWS, GCP, Azure, data on-prem, databases everywhere. So it's just AI consume data wherever it lives, and we protect it. But overall, Microsoft is starting to be a small portion of the entire information estate that organizations have. Operator: And moving next to Jason Ader with William Blair. Jason Ader: You guys talk a little bit more about the kind of the broader competitive landscape? I know that some of the cyber guys have some overlap with what you're doing and you have some of these start-ups. Maybe just talk through if you're seeing different players than you normally have seen? Are you seeing more people at the table during bake-offs? I mean you had a strong new customer acquisition quarter. Were those competitive deals versus what you've seen in the past? Just some more kind of specifics on the competitive landscape would be great. Yakov Faitelson: Yes. So obviously, now the platform is so much broader now. But if you look at what they call this [ DSPM ] market, this is not data security. We have a comprehensive data security platform that provides automated outcomes. So what there is in the market is data discovery tools that doing something that 20 times what's called sampling, the partial classifications, we see them from time to time. But when customers are [indiscernible] versus just data security and AI is pushing data security because you need to do automated remediation and understand abnormal behavior to data and understand the identity component, there is -- we just usually crush them immediately. On the interceptor, this is sometimes we can see just companies like Abnormal or Proofpoint. But primarily, we sell it with the platform. In the database activity monitoring, we're replacing the incumbent like Imperva and -- Imperva and Guardium. So this is really the dynamics that we see. But what happens is that the platform is starting to address more and more use cases. And what we're starting to see that is interesting, we can take budgets from point solutions, but we're also starting to get budgets from just AI. Digital transformation and security is such a key fundamental component out of it and these organizations that pushing AI hard understand that, first and foremost, they need to secure the data and have the observability to what's going on in the life cycle of the AI tools, and this is another source of budget for us. Operator: Moving next to Jonathan Ruykhaver with Cantor Fitzgerald. Jonathan Ruykhaver: I'm curious, Yaki, to hear your thoughts on where you see the boundary between Varonis and identity vendors, particularly given the convergence we're seeing between identity and data security strategies. There does seem to be a question related to who ultimately owns that control and governance layer around AI agents. So any color on how that strategy might be resonating? Any customer feedback or color on adoption of identity -- of your identity solutions would be helpful. Yakov Faitelson: Thanks for the question. I think what happened early on is that organizations thought that they can use identity solutions to solve the problem, but failed. The identity is critical. You need to provision an identity, understand how they are going to use it. But the identity itself, if you can see what data it's touching and if there is any abnormal behavior and exactly what are the AI tools they are using, you have -- you are very limited in the value that you will get and you can provision identity in the right way and then the agent will use the wrong tools and will access the wrong data, and it will end in a catastrophe. So I think what we benefited from in Q1 was actually the understanding that the identity provisioning is very important but limited. And what you need to do is really to manage this whole thing from -- inside out from one side is the data and one side is the pipeline and tools. And obviously, we coexist. Organization needs both of them. But to get the value, you need to connect it to data and the only way to do it to get the benefit without the downside is to do it in a secure way. You need very good brakes in order to drive fast in this AI era. Operator: And next, we have Erik Suppiger with B. Riley. Hearing no response, we'll go next to Todd Weller with Stephens. Todd Weller: Just a question on the expansion opportunity. Could you talk about the relative opportunity between data workload expansion versus cross-selling the new products you have? And then from a workload type perspective, what do you see driving kind of the strongest growth? Yakov Faitelson: So I will start from the end. The workload is everything. So if you really think about what applications are accessing and what users are accessing to do their job, this is what the agent needs to access in order to be useful. So most data in organizations and a lot of the time in order really to build this data estate and derive good conclusion, they also take a lot of historical data. So the overall data estate becoming very super critical, even data that is stale. So it's really everything. What the AI does essentially, it really drives -- it really drives to protect all data. And with that is whatever data you want to connect to your AI systems, this is how we can expand. And I also think that some use cases that were a bit more compliance driven like database activity monitoring becoming just a top priority for security risks because the consumption change with the AI usage. So this is really what we see. The data is everywhere, and these technologies are accessing all the data in just a neck break speed, and you need to be ahead of it with robotic value proposition. Operator: And we'll go back to Erik Suppiger with B. Riley. Erik Suppiger: I apologize for that. Congratulations on a nice quarter. Say, in your conversations with customers, how much of your new ARR is driven by the traditional threat of outsiders exfiltrating data versus how much of your discussion is focused on AI and securing agents? And then on the former, has the news that came out of Anthropic about enhanced capabilities for vulnerability, identifying vulnerabilities, has that made a difference in terms of some of the discussions with customers? Are they more looking at securing data in a more urgent manner in terms of some of these vulnerabilities coming out? Yakov Faitelson: I think that -- I think what the security concerns regarding information that we had with humans becoming it's the same concerns. But just if you think what happened in the agentic world, the probability that something will happen just increases by orders of magnitude, it's very easy. They start to deploy agents and especially something happened that really triggered the need for organizations to understand it. In general, with everything that is happening with these models that finding vulnerabilities, organizations understand that many times because you can find the vulnerability, it can be easier for bad actors to come in. And then when they are coming in, essentially what they want is data. If you had a breach and no one touch any data, nothing happened. If data was taken, you have what we call the lasting damage. So it's just -- it's -- everything works together, but it just amplifies the need to secure your data. And also there is an understanding that this needs to be completely automatic. Operator: Moving next to Shrenik Kothari with Robert W. Baird. Shrenik Kothari: Congrats on the solid quarter. So you sounded especially encouraged by the acceleration in the new customer contribution in the quarter driven by new logo with a lot of upsell expansion opportunities still in front of you. So just as the field is spending more time on true new and upsell rather than conversion, like how should we think about the current mix between the new and expansion? And over time, like in supporting your durable 20% plus organic growth algorithm you talked about, what does the steady-state balance of those new versus expansion look like? Guy Melamed: The ability to go to new customers with our SaaS offering is very clear to us, and we have seen it throughout the transition. But obviously, where reps had to focus on the conversion, we talked a lot about the cannibalization of time. And as we kind of move past the transition, they can go back and focus on the new customer sell. And we've definitely seen that with the offering we have, we can reach to new customers that we didn't have the opportunity to do it before. If you look longer term, the expectation is that the platform that we have, the majority of the ACV should come from the existing base. We definitely see that opportunity as a significant one with the offering that we have. And when you have such a large base, and when you think about the run rate that we have, we're expected to finish the year just under $850 million, that's a big base of customers, thousands of customers that you can go back and sell them additional products and protect them in a way that will give them the comfort to use AI and be able to address the needs. So if you look longer term, we definitely believe that the contribution from existing SaaS customers should drive our growth. But again, with a focus on new customers and when you look at the comp plan, we made sure that reps would focus on both new customers and existing SaaS customers, and that's how they can make the most amount of money because we believe that, that should drive our trajectory and growth in the years ahead. Operator: And moving next to Junaid Siddiqui with Truist Securities. Junaid Siddiqui: I just wanted to ask, what are you seeing from customers that are adopting Athena AI? Specifically, what are you seeing? How quickly are they adopt -- how quickly is adoption ramping up post deployment? And what's distinguishing customers who embed Athena into their daily workflows versus those where usage stalls after initial enablement? And is that -- are you seeing any change in deal sizes or close rates or post-sale expansion versus customers that are not using it? Yakov Faitelson: It's part of the product. And this is the key that you are able to use it in just natural language without any enablement, and it works very well for our customers. And big part of the platform and the automated outcome is what we call no touch value. That a lot of the value just from the remediation and threat detection and automated classification, everything is happening automatically. And when you need to do something, you can do it by just talking to the platform, and it works very well. But just part of day-to-day usage of the platform. Operator: We'll go next to Fatima Boolani with Citi. Fatima Boolani: Guy, I wanted to ask you about ARR contribution margin and how we should think about the linearity of that over the course of the year, understanding the ebbs and flows of how conversions are trending. But maybe if you can help us map it back to the Bull and Bear case as you framed it for conversions and the relationship to ARR contributions against what are appearing to be very responsible organic OpEx investments. Guy Melamed: Absolutely. We talked about the conversion kind of breakdown behavior throughout 2026. And the expectation is that a big part of the churn on the on-prem side will be related to Q3 because if you remember, that's the quarter with the largest federal and state and government. So the expectation was that a lot of the conversions would actually happen in Q4 towards the end of the year. Obviously, we will try to convert many of them before, and we're focused on that. But if you look at kind of the behavior throughout the year, I think it will be somewhat back-end loaded from a yearly perspective. And as such, the ARR contribution margin will look -- will kind of even out throughout the year with the contribution that you see on the conversion itself. So that's kind of the framework to think about. That's the way to think about generally kind of the profile there. And also, if you look at the actual -- regular seasonality of SaaS sales, we do have a significant portion of our sales that take place in Q4. So when you look at that as well, you can see that from a cost perspective, they are somewhat, I'd say, for the most part, relatively flat. And therefore, when you look at the profile margin in previous years, you would see that the biggest contribution does take place in Q4, and I expect that to be the case in 2026 as well. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Tim Perz for closing comments. Tim Perz: Thanks again for the interest in Varonis. Please reach out if you'd like a call back. We look forward to seeing everybody at the investor conferences this quarter. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good afternoon, and welcome to Landstar System, Inc. First Quarter Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized rip Officer; Jim Todd, Vice President; and CFO, Matt Dannegger, Vice President and Chief Field Sales Officer; Matt Miller, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Todd. Sir, you may begin. James Todd: Thanks, Arlene. Good afternoon, and welcome to Landstar's 2026 First Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate to Landstar's business objectives, plans, strategies and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2025 fiscal year described in the section Risk Factors and our other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to equally update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks. Frank Lonegro: Thanks, Jim, and good afternoon, everyone. We are excited to discuss our results this quarter given the overall sense of optimism, many in our network are sharing with us. It was great to spend time with many of our BCOs at the Mid-America Trucking Show in March and to celebrate the success of our agent network earlier this month at our annual agent convention. The tone and positivity I heard from my personal interactions with BCOs and agents of these events was the best I've experienced during my tenure at Landstar, and provides an emerging sense of confidence as we head further into 2026. Before diving into our results, I'd like to thank our BCOs and agents and all of Landstar employees who support them every day. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry. Their adaptability and dedication to safety, security and service for our customers is truly impressed. They are exceptional business leaders and key to driving the continued success of Landstar's business model. I'd also like to thank Derek Barrs, the Head of the FMCSA, who recently appeared at our agent convention and discussed many of the significant initiatives he is leading at the FMCSA. These regulatory efforts are having a real tangible impact on the trucking industry and have been very positive for Landstar. We look forward to continuing our dialogue with the USDOT and the FMCSA in support of these efforts. Amidst our improved operating performance, the 2026 first quarter was not without challenges that required our focus and attention. We are driving to incorporate AI into our business and do everything we can to mitigate any perceived industry-specific AI disintermediation risk. We were pleased to have Jim Applegate and Rick Coro, participating in the Goldman Sachs AI and Freight Forum in Chicago in late March, where they shared our AI road map and several in-flight initiatives across the network. We continue to be encouraged by the level of engagement we're seeing among agents and BCOs participating in our beta programs. That collaboration is already yielding tangible progress across a number of workflows, including customer quoting, carrier negotiations, dispatch decision making, automated tracking, appointment scheduling, network modeling and bid optimization. Importantly, these tools are being developed alongside our agents and BCOs with early pilots already live in production or in advanced testing. Initial feedback [ cost ] to meaningful time savings, higher shipment life cycle throughput and improved visibility across the net, empowering our entrepreneurs to spend more time on revenue-generating and relationship-driven activities. At the same time, we are advancing several AI-driven efficiency initiatives at the corporate level, including our Tier 1 ERP modernization proprietary fraud prevention and detection capabilities, service center workflows, BCO retention models and self-service analytics for operations and customer management. Across both the agent network and in our corporate offices, our focus remains on disciplined deployment and scalable adoption. We look forward to providing additional updates as these initiatives continue to progress. We, like everyone else, are monitoring the news on the geopolitical conflict in the Middle East and the related volatility in energy and diesel prices. We also continue to monitor the potential effect of tariffs and trade policy on our business, including the impact of the recent Supreme Court decision and tariff refunds from the federal government. Tariffs has certainly already impacted freight flows. For example, the 2025 first quarter reflected the desire by many customers to pull forward shipments in an effort to get ahead of potential tariffs. This contributed to a relatively tough first quarter volume comp for Landstar. We will also be closely monitoring any developments with respect to trade relations among the United States, Canada and Mexico this year. Against that backdrop, the Landstar business model performed well with revenue increasing approximately 2% compared to the 2025 first quarter, gross profit increasing approximately 14%, variable contribution dollars increasing approximately 7% and basic and diluted earnings per share increasing approximately 36%. As a reminder, earnings per share during the 2025 first quarter were unfavorably impacted by approximately $0.10 per share related to the previously disclosed supply chain for [ automatic ]. As JT will discuss in more detail during his remarks, the 2026 first quarter also experienced lower insurance and claim cost expense compared to the 2025 first quarter primarily due to the company's ongoing efforts to address strategic cargo test. These efforts help Landstar to achieve both a decrease in the frequency of cargo claims incidence during the 2026 period compared to the 2025 period as well as decreased severity of cargo claims incidence. One consistent highlight in our results remains the strength of our industry-leading unsided platform equipment business. This part of our business posted another strong quarter with an 8% year-over-year revenue increase driven by the performance of Landstar's heavy hauled service offering. We generated approximately $134 million of heavy hauled revenue during the 2026 first quarter, representing an 18% increase over the 2025 first quarter. This achievement reflected a 12% increase in heavy hauled revenue per load and a 6% increase in heavy hauled volume. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives, we are continuing to invest in the foundational work that puts Landstar in a great position to leverage improving freight market conditions. We also remain focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. Turning to Slide 5. The freight environment in the 2026 first quarter was characterized by relatively strong demand from a seasonal perspective and an improving price environment as we move through the quarter. We were encouraged to see the ISM index above 50 for each of the 3 months in the first quarter, a positive sign for our business as readings from the prior 3 years to often reflected a far more challenging economic backdrop. We were pleased to see sequential outperformance in the number of loads hauled via truck and truck revenue per load compared to pre-pandemic normal seasonal patterns. As noted in the press release, we were encouraged to see that overall truck revenue per load increased 6% compared to the 2025 first quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patient and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the 2026 first quarter, the company returned approximately $104 million to shareholders through our capital return programs. The company returned approximately $82 million in dividends to stockholders during the first quarter and deployed approximately $22 million to share repurchases during the first quarter. And yesterday afternoon, our Board declared a regular quarterly dividend of $0.40 per share payable on June 9 to stockholders of record as of the close of business on May 19. We continue to invest through the cycle in meeting technology and AI solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet and trailing equipment with a particular focus on investment in new van equipment. Turning to Slide 7 and looking at our network, the scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 20,261st quarter. JT will get into the details on revenue, loadings and rate for load in a few minutes. Safety, is crucial to our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day. and the agents and employees who work to reinforce critical importance of safety, security and service at Landstar. I'm proud to report an accident frequency rate of 0.64 DOT reportable accidents per million miles during the 2026 first quarter, well below the last available national average DOT reportable frequency rate released by the FMCSA for 2021, and slightly better than the 0.6 DOT accident frequency we reported during the 2025 first quarter. The company long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation. Our agents are able to highlight the discussions with our freight customers. We remain committed to driving a best-in-class safety culture. I'd also like to take a moment to recognize Landstar's 457 million-dollar agents based on our 2025 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 8. On a year-over-year basis, BCO truck count decreased approximately 2% compared to the end of 2025 first quarter and approximately 40 basis points sequentially. And it is important to note, however, that the 38 BCO truck decline experienced during the 2026 first quarter is significantly better than our experience in other recent first quarters, when on average, Landstar experienced a decline of 365 BCO trucks across the first quarter of 2023, 2024 and 2025. We are also very pleased to see our trailing 12-month BCO truck terminal rate dropped from 31.4% as of fiscal year-end 2025 to 29.5% at the end of the 2026 first quarter. This is a directionally positive trend that we hope to continue in the second quarter. Through the first 4 weeks of 2026 second fiscal quarter, the number of trucks provided by BCO independent contract is approximately equal to the end of the 2026 first quarter. I'll now pass the call back to JT to walk you through the 2026 first quarter financials in more detail. JT? James Todd: Thanks, Frank. Turn to Slide 10. As Frank mentioned earlier, overall truck revenue per load increased 5.6% in the 2026 first quarter compared to 2025 first quarter, primarily attributable to a 10.8% increase in revenue per load on loads hauled by unsided platform equipment and a 5.2% increase in revenue per load on loads hauled via van equipment. On a sequential basis, truck revenue per load increased 0.2% in the 2026 first quarter versus the 2025 fourth quarter. It is an unusual sign for truck revenue per load to be higher in the first quarter than in the immediately preceding fourth quarter as pre-pandemic normal seasonality would typically be expected to yield a 4% sequential decrease and revenue per load in a given first quarter compared to the immediately preceding fourth quarter. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2026 first quarter revenue per mile and unsided platform equipment hauled by BCOs was 2% above the 2025 first quarter, and revenue per mile on van equipment hauled BCOs was 3% above the 2025 first quarter. Delving deeper into seasonal trends, revenue per mile and loads hauled by BCOs on unsided platform equipment declined 6% from December to January was approximately flat January to February and increased 2% from February to March. Importantly, the sequential month-to-month performance as we move through the first quarter when compared against typical pre-pandemic trends suggest growing positive momentum in this aspect of our business. In fact, while the December to January change in revenue per mile in BCO loads hauled on unsided platform equipment underperformed pre-pandemic seasonal trends, January to February's flat performance outperformed pre-pandemic trends and the February to March increase outperformed pre-pandemic seasonal trends. Turning to van freight. Revenue per mile on van equipment hauled by BCOs was approximately flat from December to January, outperforming historical trends. increased 3% from January to February, also outperforming these trends, but decreased 1% from February to March, underperforming pre-pandemic February to March historical trends. Based on preliminary April BCO process revenue for load data, we expect the underperformance experience from February to March to reverse during fiscal April. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that van equipment. This relative volatility is often due to the mix between heavy specialized lows and standard flatbed volume. As Frank alluded to, we've been particularly pleased with the sustained strong performance of our heavy hauled service offering. Heavy hauled revenue was up an impressive 18% year-over-year in the first quarter, significantly outperforming core truckload revenue. Heavy hauled loadings were up approximately 6% year-over-year and revenue per heavy hauled load increased 12% year-over-year. This represented a mixed tailwind to our [indiscernible] side of platform revenue per load as heavy hauled revenue as a percentage of the category increased from approximately 33% during the 2025 first quarter to approximately 36% in the 2026 first quarter. Non-truck transportation service revenue in the 2026 first quarter was [ 19% ] or $16 million below the 2025 first quarter, the decrease in non-truck transportation revenue was mostly due to a 31% decrease in ocean volume, which we believe was partially driven by shipper pull-forward behavior during the first quarter of 2025. Turning to Slide 11. We've provided revenue share by commodity and year-over-year change in revenue by commodity, transportation and logistics segment revenue was up 2% year-over-year on a 4% increase in revenue per load, partially offset by a 3% decrease in volume compared to the 2025 first quarter. Within our largest commodity category, consumer durables revenue increased 1% year-over-year on a 7% increase in revenue per load, partially offset by a 5% decrease in volume. Aggregate revenue across our top 5 commodity categories, which collectively make up about 70% of our transportation revenue increase approximately 4% compared to the 2025 first quarter. While Slide 11 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top commodity categories from the 2025 first quarter to 2026 first quarter, total loadings on machinery increased 5%. Automotive equipment and parts decreased 4%, building products decreased 10% and Hazmat decreased 6%. Additionally, substitute line haul loading is one of the strongest performers first during the pandemic and one which varies significantly based on consumer demand, increased 1% from the 2025 first quarter. The decline in automotive, hazmat and building product loadings noted above was partially offset by a 23% increase in electrical volumes, a 17% increase in energy volumes and an 8% increase in government volumes. Even with the ups and downs in various customer categories, our business remains highly diversified with over 20,000 customers, none of which contributed over 8% of our revenue in the 2026 first quarter. Turning to Slide 12. The 2026 first quarter gross profit was $112.5 million compared to gross profit of $98.3 million in the 2025 first 1st quarter. Gross profit margin was 9.6% of revenue in the 2026 first quarter as compared to gross profit margin of 8.5% in the corresponding period of 2025. In the 2026 first quarter, variable contribution was $172.2 million compared to $161.3 million in the 2025 first quarter. variable contribution margin was 14.7% of revenue in 2026 first quarter compared to 14% in the same period last year. The increase in variable contribution margin compared to the 2025 first quarter was primarily attributable to an increase in the percentage of revenue generated from BCO independent contractors. Turning to Slide 13. Operating income increased as a percentage of both gross profit and variable contribution as we cycle the impact of the international supply chain fraud matter in the 2025 first quarter, lower insurance and claim costs in the 2026 first quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to larger gross profit and variable contribution basis. Other operating costs were $14.8 million in the 2026 first quarter compared to $11.8 million in 2025. This increase was primarily due to increased trailing equipment maintenance costs, increased trailing equipment rental costs and decreased gains on disposal of used trailing equipment. Insurance and claims costs were $35.6 million in the 2026 first quarter compared to $39.9 million in 2025. Total insurance and claim costs were 7.5% of BCO revenue in the 2026 first quarter as compared to 9.3% in the 2025 first quarter. The decrease in insurance and claim costs as compared to 2025 was primarily attributable to decreased net unfavorable development of prior year claim estimates, decreased severity of current year trucking claims in the 2026 period and a decrease in both cargo claim frequency and cargo claim severity, which reflects a significant decrease in expense related to strategic cargo effect in the 2026 period, partially offset by increased BCO miles traveled during the 2026 period. During the 2026 and 2025 first quarters, insurance and claims costs included $4.9 million and $11.4 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $61 million in the 2026 first quarter compared to $61.6 million in the 2025 first quarter. The decrease in selling, general and administrative costs was primarily attributable to the impact of the $4.8 million charge to selling, general and administrative costs during the first quarter of 2025, in connection with the previously disclosed international supply chain fraud matter and a lower provision for customer bad debt, largely offset by an increased provision for incentive compensation and increased employee benefit costs. The provision for incentive compensation was $3.4 million during the 2026 first quarter as compared to $1 million during the 2025 first quarter. Depreciation and amortization was $10.6 million in the 2026 first quarter compared to $12.2 million in 2025. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on our fleet of trailing equipment. The effective income tax rate was 25.2% in the 2026 first quarter compared to an effective income tax rate of 24.7% in the 2025 first quarter. The increase in the effective income tax rate from the 2025 first quarter to the 2026 first quarter was primarily due to an increased provision for state taxes, the impact of tax deficiencies on stock-based compensation arrangements during the 2026 period and the impact of nondeductible executive compensation on the 2026 income tax provision. Turning to Slide 14. Looking at our balance sheet. We ended the quarter with cash and short-term investments of $411 million. Cash flow from operations for the 2026 first quarter was $78 million and cash capital expenditures were $6 million. The company continues to return significant amounts of capital back to stockholders with approximately $82 million of dividends paid and approximately $22 million of share repurchases during the 2026 first quarter. The strength of our balance sheet is a testament to the cash-generating capabilities of Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and a volatile geopolitical and macroeconomic environment, the company will be providing second quarter financial and operational commentary rather than formal guidance. Turning to Slide 16 and looking at historical seasonality from Q1 to Q2, pre-pandemic patterns would normally be expected to yield sequential increases of 7% in the number of loads hauled via truck and 2% in truck revenue per load resulting in a top line that typically increases by a mid-single digit to a high single-digit change. It should be noted that with respect to the sequential truck volume increase during more recent history, it has been closer to plus 3% to plus 4%. The number of loads hauled via truck in April 2026 was essentially equal to April 2025 on a dispatch basis, while revenue per load in April was approximately 13% above April 2025 on a process basis. As a result, we view anticipated truck revenue per load in April is outperforming normal seasonality while anticipated April truck volumes are trending essentially in line with normal seasonality. Please also note that historically, the company has often experienced a 25 to 45 basis point compression in variable contribution margin from the first quarter to the second quarter, primarily driven by mix, as BCO revenue typically represents a larger percentage of overall revenue in the first quarter of a given year as compared to the immediately following second quarter. We're excited to build upon the positive momentum generated during the first quarter and are energized by the opportunity to support the best network of independent business owners in the transportation space in an environment that after nearly 4 years appears to be turning in our favor. With that, operator, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jonathan Chappell from Evercore ISI. Jonathan Chappell: Frank or Jim, heavy haul obviously doing really well and also in the backdrop of a narrative about unsided platform or flatbed being incredibly strong. but your 1Q volumes were down 2% year-over-year, 2% sequentially, clearly made up some of that in the rev per load. So can you just help us understand, is that market as strong as it's been portrayed? And if it continues to, say, strengthen or build momentum from here, does that start to show up in the loads as well as in the rev per load? Or is it mostly going to be represented in the price side? Frank Lonegro: Jon. So clearly, if we see an incremental uptick in demand, you're going to see it on the volume side. I think everything right now is being supply-induced on the capacity side and getting us higher rates. We do think we've got a competitive advantage in heavy hauled and honestly on the platform side. So when you see those ISM numbers and some of the ITP numbers in the kind of low single digits. We're pretty optimistic about how that's going to play through volumes and rate for us going forward into the rest of the year. And maybe either Jim Todd or Jim Applegate can comment on that. James Todd: Yes, Jon. No, good question. From the heavy hauled side, which did experience year-over-year volume growth, Jon, I would tell you, it continues to be very, very strong, broad-based strength. We had 17 individual heavy-hauled customers grow volumes less by at least 50 loads year-over-year in the 91-day first quarter. And those customers came from wide degree of industries of data center customers, energy, government, machinery, aerospace and defense, I think some of the softness to your point, year-over-year, if you look at some of the commodity categories we called out, building products, automotive, that kind of stuff on the standard flatbed, standard step has been a little weaker. One thing I do want to call out, Jon, from a pricing standpoint on the unsided platform, it's really been a heavy haul mix story, and that continued in the first quarter. but standard platform step deck pricing year-over-year in the fourth quarter was only up 50 basis points. that accelerated the 730 basis points year-over-year. So a meaningful lift in yields on the standard flats and standard steps from a pricing standpoint. Frank Lonegro: And Jim Applegate, you might just want to talk about the designation of heavy hauled as a strategic initiative and the things you guys are doing among [indiscernible], particular area. James Applegate: Yes. This is one of our areas that we really identified as far as Landstar goes, where we do the hard stuff well. This is definitely one of those areas that we can lean in. And we've invested quite a bit not only into leadership. We actually brought in almost a couple of years now, a new heavy hauled leader that's really kind of put his arms around that department, brought in some talent and laid out a strategy that's agent engagement, recruiting BCOs into the model making sure that we have the right equipment to go ahead and handle that those agent opportunities, investing in technology. You name it, we've got initiatives in place to make sure that our agents can be successful. Paired on top of that, we have a dedicated sales and marketing effort. We're really leaning into those markets with messaging and some sales support for our agents to help them grow in those different industries. And I think what's really nice about what JT laid out is the growth is broad-based. It's also a mix of new and existing customers. So we're seeing a lot of new customers come into the fold across the different industries that are seeing success right now. And we're seeing industries even outside of the data centers, you'll start to see oil and gas and some of the other industries that have been historically depressed starting to come back a little bit. So we see this as an area for continued growth, and we've been strengthening up that area over the last couple of years and expect it to continue to be strong for Landstar. Operator: Our next question comes from Scott Group of Wolfe Research. Scott Group: So your rev per load tends to lag industry spot rates by a matter of months, quarter or whatever. We're seeing it play out, do you think, is it realistic to think that we see a meaningful further acceleration from that 13% in April, as the rest of the quarter plays out. And if that's what's happening, how should we think about margin or a margin in a quarter like that. Frank Lonegro: Yes. So fair questions, Scott, as always, thanks. I'll let JT walk you through the sequential pricing through the quarter. I think the month-over-month trends are important to understand, and he's got that detail for you. I think if we look forward, assuming that capacity continues to exit and/or we see demand in a spring lock like we do in many years. If those two things happen, then the obvious impact on [indiscernible] is going to be favorable. I think when you see what JT is going to tell you in terms of January, February and February, March and honestly, March into April, I mean, clearly, we're going to have some level of lag, and we're seeing that come through the numbers. James Todd: Well said, Frank. And Scott, we are seeing above seasonal pricing strength here into April, both on the BCO side and the brokerage side. I would point out from a comp standpoint, last year's second quarter, we got a 320 basis point lift in pricing, and we typically get about 200 basis points. So the comps do step up a little bit as we get into May and get into June. Certainly, from a margin standpoint, I mean, we just printed the first variable contribution dollar increase since, I think, the third quarter of 2022. And if you do some back of the envelope on adjusting 2025 for the international fraud matter. I think the incremental push-through numbers were well above 70%. So that's where we'll be judging ourselves. Frank Lonegro: Obviously, when that comes through it's [ great ], it's certainly easy to drop it all the way down. James Todd: Absolutely right. Yes. And the final point there, Scott, the BCO utilization numbers, we've talked about in the last 3 quarters strong third quarter '25, accelerated in the fourth quarter '25, accelerated further first quarter '26. So we'll look for that trend to continue. Certainly, that has a big impact on the number of BCO loads that capture that rate increase in the second quarter. Scott Group: Okay. Helpful. And then on the volume side, it's interesting. You got BCO volume up 7% and brokerage volume down 9%, what do you think is driving such a big sort of mix difference? Is this -- are the agents or maybe the underlying customer? Are they saying we don't want to go through brokerage anymore and maybe tie this into how you think about like the outcome of this Supreme Court case, if you think this could exacerbate some of this trend between BCO and brokerage? James Todd: I'll give you my view, Scott, and then Frank will add on. I think, the agents are going to sell what they can sell. And certainly, we have some customers that will engage with us only as BCO only, and then cargo fraud environment. I think that has probably ticked up some. But I think it's a function of the agents that are going to market, servicing their customers and the BCOs have just really been stepping up in this rate environment, and we've seen it in the last 8 or 9 months or so. Frank Lonegro: Yes. And I think I'd like Matt Miller to comment a little bit on the BCO environment and all the things you're seeing on the BCO front, Matt. But broadly speaking on your Supreme Court question, I mean we're watching it like everybody else and we'll be prepared whichever way it goes. I think ultimately, Congress probably looks at this as a result of the Spring Court decision, whichever way it goes and tries to make policy legislative rather than through the court system, but we're actively looking at what's going to happen there. And I think what many people we would expect a decision sometime in the June, July time period. But Matt, maybe a little bit on the BCO. Matthew Miller: Yes, sure. I appreciate it. First quarter, typically, the most challenging quarter of the year for us when it comes to BCO truck count. And we finished the quarter, as Frank said, earlier, down 38 trucks. That was a better first quarter finish than we've seen in several years. A 100% of that decline happened in January. So that was followed by a positive result -- net result in February and a positive net result in March. So we're encouraged by the trends that we're seeing in net truck count as well as the trends we're seeing in the net weekly check average going to the BCOs after deductions, which more recently is the highest we've seen since the fourth quarter of and an indicator of improving financial health of the BCOs. In the quarter, gross truck adds were up 2.7% sequentially and effectively flat year-over-year. Gross truck cancels were down 7.8% sequentially and down 23.5% year-over-year. And this marks our ninth consecutive quarter of turnover improvement, where our high watermark on turnover was the fourth quarter of '23 at 41%. And we finished the quarter at 29.5%, just about in line with our long-term average of 29%. As Jim stated, we also saw a very strong BCO utilization in the quarter, up 10% year-over-year. And that comes on the heels of a really strong fourth quarter utilization, which was up 8% compared to the fourth quarter of '24. And then finally, sort of anecdotally, I'd like to add that we experienced strong interest from potential BCOs at the Mid-America Truck Show in March. And I think should we see sustained pricing, that level of interest and sentiment will be helpful for us as we move through Q2. Operator: Our next question comes from the line of Chris Wetherbee from Wells Fargo. Christian Wetherbee: I just want to kind of piggyback on the BCO kind of outlook. I guess, maybe what do we need to see from a spot perspective, have we seen enough, you think, from a spot perspective to begin to actually moved that up sequentially. It sounded like maybe April was sort of net flattish, I think, from what you said at the end of the first quarter was. But maybe you could elaborate a little bit on how we think about maybe that progress is going to trend throughout the rest of the year. Frank Lonegro: Chris, so yes, absolutely. When BCOs see multiple months in a row of sustained rate improvement, the word gets around pretty quick and the percentage pay model is a really attractive one as Matt Miller just mentioned. I mean, he and I were both at the Mid-America Truck Show, which is nickname [ Matt ]. So we were out there. And we have a good spot on the expo floor. And I think we had sort of a record take away there in terms of potential BCO candidates. I would say we have people there that are actively recruiting and people who are willing to say, yes, I'm interested, please follow up with me. I mean that was a bigger number at least that we've kind of kept on record over a bunch of years. So we feel pretty good about the interest. As Matt was just saying a little while ago, we're continuing to see hundreds of ads every quarter, and the cancels are coming down. So what he would tell you is the cancel to [ lead ] the ad. So you see better cancellations and then you see better additions, but I'll let you pick up the thread from there. Matthew Miller: No, I would just echo what you said, Frank. Generally speaking, if you look back in history, as the cancels slow and utilization picks up, word starts to spread and it spreads fast. And so that's what I would say as a takeaway. This is pretty much a leading indicator for us on when ads start to turn. And that first quarter tends to be, as I said, a very challenging quarter, and that finish was pretty strong given the backdrop over the past several years. Christian Wetherbee: Okay. That's very helpful. I appreciate that. And then just maybe one quick one on sort of van demand as we think about loads as we go through the second quarter and I guess, trends from an April standpoint. Any sort of indication of if there is some improvement in various end markets kind of towards the end of the month? Just trying to get a sense of whether or not, obviously, the pricing side is really accelerating here. Just want to get a sense of what your view broadly speaking about demand. Frank Lonegro: Chris, so I think there's a couple of things that happened naturally this time of the year. I mean, building products unlocks on a sequential basis because you're cycling out the January, in the February and you're adding in the May and the June so to speak. So there are certain ones that are much more seasonal in nature Q1 to Q2, which is why you generally get some of the lift on a sequential basis. But then there are things that right now are just not being heavily supported by the interest rate environment. Automotive would be an example of that. But look, I think the demand that we're seeing right now certainly supports rates where they are, but it's more a reflection of where the capacity is. If we happen to get a couple of points of GDP, IDP type growth, when supply is coming down like our chances this year. Operator: Our next question comes from the line of Jordan Alliger from Goldman Sachs. Paul Stoddard: This is Paul Stoddard on for Jordan Alliger. I guess the First question I have is, so is the mix gets weaker with BCOs going into the second quarter. How did the mix in the first quarter compare historically? And as rates are increasing in the marketplace, could we see brokers come back into your network and potentially see more compression happening from the first quarter to the second quarter? James Todd: Yes. Paul, happy to field that one. So if you recall in the January conference call, we did not want to bake in the full variable contribution margin expansion that typically happens fourth quarter to first quarter. There were two reasons for that. One was the utilization number in the fourth quarter was very strong. And two, we did not think winter storm activity would negatively impact loadings. However, when a BCO is down for a week because of storms, we have seen in quarters past and years past where that could hurt from a [ BCM ] standpoint, that clearly did not happen, right? Utilization accelerated further, and we did get our typical or standard fourth quarter, first quarter variable contribution margin expansion. In the scenario that Frank laid out, right, of what's normal from a spring peak standpoint and use round numbers, about a 7-point lift in volume sequentially first quarter to second quarter. I would note the last 2 or 3 years, we've not seen that degree of lift. But if we were to get that it would disproportionately come from third-party trucks, right? Because as much as we'd love to grow the fleet 7% on 8,500 trucks in 90 days, that's just not going to happen. So that's really what drives the historical compression. It's just there's more volume flowing into the network, and we've got to utilize brokerage more. Paul Stoddard: Makes sense. And then I guess kind of a follow-up to the discussion on the Montgomery Supreme Court case. With your unique structure with the BCOs and having insurance already within your model, how does that set you up versus peers depending on how the decision might go? Frank Lonegro: Yes. I mean, I think the insurance tower we have, it covers BCOs while they're loaded. We also have other insurance programs that cover BCO-type and non-BCO-type issues. I think the entirety of the brokerage population is going to have to look at insurance very differently if the decision goes against the industry than they do today. And right now, they essentially look at F4A and say we're immune. And the truth of the matter is if Supreme Court goes against it, they're going to have to get coverage. I think it likely create a situation where your smaller players are going to get priced out of the market because of the cost structure going up. And I think you've got so much fragmentation in our industry on the brokerage side. that may not survive in an environment where you got to have $5 million or $10 million of insurance just to cover our single incident. Operator: Our next question comes from the line of Bruce Chan from Stifel. J. Bruce Chan: Maybe just to start, you've talked about the tailwinds from data center exposures on, I think, at least a couple of calls, and I know that you've got exposure there in several of your end markets. But I don't think you've ever talked about an explicit revenue percentage. Any sense for what that is today and maybe how that's trended versus prior periods? Frank Lonegro: Yes. So it's fine. We're sort of smiling at each other because we were looking at this earlier today. So think about it broadly as a data center ecosystem, and I'll let Jim Applegate handle this one in a sec. But you got to look at it not just at the data center itself, but all new [indiscernible] to it. So it's got to have generators for power, it's got to have batteries for power. It's got to have chillers to make sure that the raised floor is cooled and then it's got all the stuff that goes inside of the data center, but if you can give us a sense of kind of what that business looks like. James Applegate: With our top 100 customers, and we look at this, we look at our exposure, we have 9 of our top 100 fall within directly data center related. It represents about 12% of our total revenue. So from an exposure standpoint, that's what you're looking at. But even if you look at this big build-out and what's been happening and even what's in place today, it's not just the constructing and the actual data center players today. There's real energy needs. There's real kind of side benefits that you get as you're seeing this big build-out happen. So from an exposure standpoint, we feel like it's a limited exposure from that standpoint. And we've got a lot of other kind of side benefits that are happening just because of the macro environment that's been created here. Frank Lonegro: That environment is still growing. And then you have all of the refresh and replacement of all of those things over time. So we're pretty bullish on continued investment in maintenance investment on a going forward basis there. J. Bruce Chan: Okay. Yes, that's super helpful. And then maybe just one final question here on the supply environment. Obviously, we've heard a lot of commentary about regulatory changes I think a few carriers talked about an affected OTR population somewhere in the 15% range. Any sense for what the noncompliant population would be in unsided and maybe how fungible those two populations of drivers are in your network? Frank Lonegro: Yes. I don't know that we have a great read on exactly what that looks like. I mean the interesting thing from a Landstar perspective is we don't have language proficiency challenges. We don't have non-domiciled CDL challenges. All of our folks are professional drivers, average age is 51 years. I mean they suppose to be driving a long time. They are [indiscernible] operators. I mean I can go on and on and on. And I'm sure Matt Miller will have some commentary here, too. But at the end of the day, there is capacity coming out of the environment. It's generally what I believe is coming out of the lower end of the environment, and you're ultimately going to have a much safer and much more professional environment given the work that USDOT and FMCSA are doing. Matt? Matthew Miller: Yes. No, I'd agree. When you think about English language proficiency, the non-domiciled CDLs, the CDL mills, the ELD technology. We applaud the actions of Secretary Duffy and FMCSA administrator, Derek Barrs. And we find ourselves virtually unimpacted with our BCOs because of a focus on safety, security and service. And I think there's more to come here. They're sort of telegraphing if you saw the 60 minutes piece on Chameleon carriers, my suspicion is that's probably the next target, and that just serves us very, very well in the grand scheme of things. Operator: Our next question comes from the line of Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I actually -- I had a question, but I'm going to ask a different one now just based on this prior question. Maybe just for pure visibility here. I guess, maybe just talk a little bit kind of specifically looking at the [indiscernible] law and really just the use of foreign dispatch and administrative services. So I think in the past, you guys have disclosed having some foreign brokerage. So maybe just talk a little bit about that, if that's still the case. I think this was several years ago, so I could be out of date here. But maybe just if you could talk a little bit about any foreign dispatch that you might have. Frank Lonegro: Fair question. All of our agents are U.S. domiciled agents. We do have a handful of agents who do some back office work overseas, but we don't believe we have any exposure under our reading of any of the draft in the [indiscernible] law under the phrase that you mentioned. Stephanie Benjamin Moore: Okay. That's really helpful. Well, then my actual question here. Maybe just talk a little bit about -- as you think about just your -- as you think about this next cycle, if we are in fact at the beginning of an up cycle. Maybe just talk a little bit about how you think Landstar is positioned from a competitive standpoint to maybe gain share or drive better margin and the like, just as we kind of think through investments that have been made over the course of this down cycle, just how you're in a different position on this up cycle versus past? Frank Lonegro: Yes. No awesome question. So a couple of different reads from my perspective. I think on the last conference call, I said it was hard to tell whether or not we were at the beginning of the end or the beginning of the beginning. I feel pretty convinced we're at the beginning of the beginning. As we look at the last few months, and our results would prove that out. I think we've done a lot in the last couple of years clearly designating the strategies and the strategic growth areas that we put forward. You know those as heavy all in U.S. Mexico cross-border and things like that. I think we've done the right work internally to put the right leadership there and the right investments as Jim Applegate, referenced a few moments ago. I think on the BCO side, the work that Matt Miller has done in looking at BCO qualifications and time to qualify and the sort of reduct of orientation and what we call the cabs class. I mean there's a lot of things that are happening there. I think that is showing through in the way that BCOs are sticking with us even in more difficult times at the end of last year, the Q1 numbers in terms of the BCO count looked really, really good. I mean they were 10x better than they were in the last 3 years. So that makes you feel pretty good. I think the work that we've done in working with the regulators over the last year or 2. I think our relationships are a lot closer with USDOT and FMCSA than they've ever been. I think we have the ability to talk with them about the realities of our industry and what needs to be done and they're moving at pace that I don't think any of us have ever seen. I've said an open company a number of times that, we've never had a more favorable administration to the U.S. trucker than we have right now. And again, as I mentioned earlier, it's making it a safer and more professional environment. And I think those are the important things. That's what Landstar has always been about. I mean we are independent owner operators, who are out there doing a great job for us every single day. And those are the folks who are going to win in this environment. There's been a bit of a flight to quality. I mean we're getting bids back that, freight back that we maybe lost on rate over the last couple of years because of safety, security and service and customers wanting to make sure that their loans get there on time and the load is secured and not stolen and the track and trailers are not over turned in the side of the road. I mean those are the things that we're really good at. So I think we're winning in the marketplace with respect to that on the flatbed and heavy haul side, clearly, our numbers over the last 2 years would indicate that we're doing really well relative to that market, and we're going to continue to recruit drivers. We're going to continue to invest in the fleet. We're going to continue to designate the hard things as strategic initiatives, and I look forward to that future. Operator: Our next question comes from the line of Brian Ossenbeck from JPMorgan. Brian Ossenbeck: I just want to see if you can get a little bit more detail on the AI initiatives that you guys listed out here in the back slides, both maybe separate the Landstar corporate for the scale network of entrepreneurs. But maybe more generally, do you feel like you can scale some of these productivity initiatives that we hear about across the industry when you have some of the business, it's a little bit more centralized with either corporate or brokerage, and then you've got agents that are a little bit more decentralized, of course. So I would like to get a little bit more specifics on that, including what's the -- you talked about the CapEx budget here being about AI being about half of the IT capital budget. But what's also running through the expense line there? Frank Lonegro: Good question, Brian. Thanks, good to hear your voice. I think the AI work we're doing, as we disclosed in the Q4 call, those 2 slides are really replicas of what we did in the main deck in the Q4 call, we wanted to put it in there to make sure that everybody had an opportunity to see those that may not have been on the Q4 call. Jim Applegate is the business side of AI. We've obviously got Rick Coro, our CIO, that's on the tech side as we did mention to you a good point. We sort of laid down the expectation that more than half of our capital budget on the IT side will be AI. We met that. My belief is if you in arrears sitting at 12/31/26, it will probably turn out to be more than that as we revisit the other half of the capital that IT spending, just to decide whether or not we truly do need systems versus a top of the existing systems. So I think you'll see that more over time. And certainly, we'll look at a higher expectation as we turn the page into 2027. On scalability and adoption, as I mentioned in my prepared remarks, are clearly what we're trying to make sure we're accomplishing by virtue of, for example, the pilots that we're doing. Jim Applegate to get you into some details there. We're doing very active agent pilots were working with half a dozen or so AI companies that some of those will be, I'll say, household names. Some of them will be more on the startup side. I mean you've got to make sure that you're playing the field a little bit here. They're doing pilots with about a dozen or so of our agents. And therefore, we are in the agent office working on AI, which clearly gives you the replicability across the age environment. There are things that agents do different, but there are an awful lot of things that agents do similarly that have to be part of the shipment life cycle. But I'll let Jim Applegate pick up the... James Applegate: Thanks, Frank. And Brian. I love the way you posed the question separating the corporate from the agent. As you know, corporate is a little bit easier to get your arms around. It's a little bit easier to control with over 1,000 agents in our network. We've got to be a little bit more deliberate on how we go about it, and it's got to be a scalable solution that fits our entrepreneurs, which is really a lot different. I look at the benefit of what Landstar brings to the table, it is our entrepreneurs and pairing our entrepreneurs with technology, I think, is what wins in this market is one for Landstar in the past. We feel in this next run with AI, it's going to help us win even more so with the motivated agents that we have and given the right tools to compete. As Frank mentioned, we have several pilots going on right now. We have 7 active pilots. We're hitting all stages of our shipment life cycle. We started off with 6. [ Now we ] got about 10 stages that we're going to get within the shipment life cycle. And when I say that, those are things like how our agents market sell, how they price how they actually find capacity and manage that capacity, assign that capacity, dispatching that capacity, making sure that they're tracking and tracing those shipments within the network. And we're hitting that right now. We've got about a dozen agents that are in active pilots. And as Frank mentioned, we've got household names, and a lot of new start-ups that we're working with from a pilot standpoint. Those start-ups are going to sit up on top of our technology stack. And we're right now working with our agents to identify the workflows and to implement a agentic AI bots over at the agent office within those different shipment life cycle categories that I mentioned. We've got a lot of excitement right now with the agents that are using it. We're identifying really a lot of the business cases that you hear out in the industry that's applying directly for our agents. We're getting a lot more shipment life cycle throughput. They're doing things faster. They're able to do more, and we're actually seeing more wins as well, too. It's very early on. As far as how that actually deploys across the network, we're going to get to a point where we say, hey, these pilots are done. We're building out our use cases, and we'll identify the right vendors to work with, and they will also identify how we want to go out to the market to [indiscernible] an agent family. And if you really look at it, Brian, it's a little bit different. You can't really push that down into the network. It is more influence and control. So part of our plan is to actively look for agents that are going to adopt that technology, we'll do an assessment and we've got agents that want to grow and they want to use their resources to grow, we'll start with them. We'll do that outreach. We'll get them excited about what we're doing. And then from there, there's a consultation and design that we need to do at each agent office. We need to take a look at their business, the types of customers that they actually operate with and we did design the workflows along with the agentic solutions that we put in place specific for those agents. And then behind that, we're going to be easy behind that. We're going to make sure that we do it safely. We're going to make sure that they have the right resources in place and we're going to be monitoring along the way. Brian, we've done this before. We've done this with our rollout with our different technology tools. We've been doing this since 2014. I don't see it a big difference from what we've done over there, but it's going to be a lot more integrated within our agent offices and is very excited about where we're going. So more to come on that, but thank you for asking the question. I think it's very fitting for us to be able to tell our story specific to Landstar because I think we've got a great story to tell there. Operator: We will take the last question from [ Harrison Beller from Soskiania. ] Unknown Analyst: Great. You guys have talked extensively about the BC capacity dynamics. But your third-party brokerage carrier side, approved carrier count there was down significantly around 20% year-over-year, although up a little bit versus last quarter. Can you walk through what's changed in your carrier vetting and approval process, and then maybe connect that to how you could help decrease your expenses related to cargo theft, fraud and then maybe insurance costs and then tie that into how technology might be helping that expense line as well. Frank Lonegro: Thanks, Harrison. I think you actually answered your own question. You're absolutely right. We have, I'd say, put a higher degree of rigor around vetting our carriers, and it is largely because of the advances that we've made in technology and AI and then some of the relationships that we have with some of our vendor partners and what they're doing to make sure that we have a good understanding of who owns the entity, what is their safety record, whether or not they've involved the double brokering, whether they've been involved in cargo theft incidents like all those things and many more are part of that analysis. I'd say that we probably got religion a little bit earlier than most because we did have [indiscernible] about a year or so ago, we had a tough cargo that quarter. And so we started down that path before many, and even before that, we had started creating our anti-fraud department and putting resources and technology with 1 of our early AI projects. that we deploy to make sure that we could understand what the parameters that will potentially lost load would look like so that we could try to prevent it before it happened. Part of that is making sure that we're doing business with carriers who are reputable carriers. Matt, why don't you pick it up from the... Matthew Miller: Sure. Sure. I appreciate the question. And I would say if you went back in time, we had probably three attributes that we used to determine if a carrier was eligible to be approved our network. And with the advent of fraud and strategic theft and everything that's happened over the past several years, we've invested heavily. We invested in people, stood up a fraud group. We invested in the process and refining that process and we invested in technology. I don't expect that to stop anytime soon. But we continue to add layers upon layers of attributes. We're up to, say, dozens of attributes that we're looking at to scrub that area database to do our best to mitigate to prevent [ detect, ] any sort of anomalies and the tools that we've invested in are proving to be working, as you saw on the first quarter results. But this is something that today is a constant defense, and we're continuing to find ways that we can mitigate against it. It's very sophisticated bad actors out there, so you have to remain vigilant, but the technologies that we're adopting are proving very, very valuable and would expect that sort of rigor to continue for the foreseeable future. Operator: At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks. Frank Lonegro: Thank you. In closing, the management team has been energized by our interactions with our BCOs and agents thus far in 2026. And we are all encouraged by the current pricing environment and what we believe is the strongest heavy haul service offering in our industry. And regardless of the economic environment, the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to capitalize on improving conditions and gathering momentum in freight markets. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 second quarter earnings conference call in late July. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time.
Operator: Ladies and gentlemen, thank you for standing by. My name is [ Krista ], and I will be your conference operator today. At this time, I would like to welcome you to the Omnicom's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Greg Lundberg, Investor Relations. Please go ahead. Gregory Lundberg: Thank you for joining our first quarter 2026 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omc.com, you will find a press release and a presentation covering the information we'll review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements. These represent our present expectations and relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2025 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results. And after our prepared remarks, we will open the line for your questions. I'll now hand the call over to John. John Wren: Thank you, Greg, and good afternoon, everyone. Thank you for joining us today. I'm pleased to share highlights from our first quarter as the new Omnicom. Since closing the Interpublic acquisition just before the holidays, we've seen momentum and cohesive growth across the organization. Our steady progress is reflected in our strong financial performance in the first quarter. As you'll recall from our fourth quarter call and Investor Day, we've strategically repositioned our portfolio for growth. As part of the portfolio realignment, we identified planned asset sales and disposition of businesses with approximately $3.2 billion of annual revenue, of which approximately $1 billion was disposed of in the first quarter. Our plan is to sell or exit the remaining assets in the next several quarters. To clarify our focus on the operations that will drive growth we've excluded assets held for sale and planned disposition from our core operations. Revenue from core operations was $5.6 billion in the first quarter, which increased $345 million when compared to Q1 2025 revenue from core operations for the combined Omnicom and Interpublic. Organic revenue growth was 3.9%. We also updated our revenue reporting to reflect our integrated operating model, which is central to driving our growth. Phil will walk through the details of our reporting changes in his remarks. One point I wanted to discuss was the increase in EBITDA performance. Our adjusted EBITDA margin increased 240 basis points to 14.8% as compared to the combined operations for Q1 2025. Our non-GAAP adjusted EPS in the quarter, which excludes after-tax costs for repositioning, dispositions and acquisition, integration expenses and amortization of intangibles, was $1.90 per share, an increase of 11.8% versus Q1 2025. Our solid performance for the quarter was the result of us realigning our portfolio for growth and moving decisively on our integration efforts. By integrating our capabilities upon closing, we merged or sunset more than 20 major agency brands with a long tail of smaller brands. This allowed us to quickly bring together the best talent from across the new Omnicom. Combined with our integrated client leaders and new strategy and growth teams, our efforts have translated into new business wins. In the first quarter, these include IBM, GSK, John Deere, Little Caesars, Acadia Pharmaceuticals and Baileys. We're not just winning new clients, we're expanding our relationships with existing ones. Our integrated approach is making it easier for clients to access all their marketing and sales needs from a single partner. This model has gained traction across a number of our clients, including Clorox, Dyson, Delta, Exxon, Kroger, Merck and Unilever. Our growth from integrated services is helping to diversify our revenue streams and deepen our client relationships, underscoring the strength of our offerings. As we discussed at our Investor Day last month, Omni, our AI-enabled intelligent sales and marketing platform, is connecting our talent, data and services. We've scaled our next generation of Omni across the entire organization in Q1, putting the latest Agentic AI tools in the hands of all of our employees. The new Omni is delivering on multiple fronts, driving stronger media performance, greater addressability and improved measurement, increasing speed to activation and enhancing ROI with Acxiom's Real ID, improving performance across retail and commerce channels and enabling more effective marketing and client outcomes. through deeper integrations with partners like Adobe and Amazon. We also made significant progress to accelerate collaboration across the group. Throughout the quarter, we continued to move into hub building locations, deploy common HR and IT platforms and migrate teams to shared workflow systems. As we look ahead, we will continue to work towards the initiatives we've communicated in our prior calls, including $900 million in 2026 cost reduction synergies and $1.5 billion by mid-2028, $5 billion in share repurchases over the next 12 months, including a $2.5 billion accelerated share repurchase program currently being executed. Through the ASR and open market purchases, we repurchased $2.8 billion of shares through the first quarter. Planned asset sales and dispositions of businesses with approximately $3.2 billion of annual revenue, dispositions with approximately $1 billion in annual revenue have already been completed. We will continue to evaluate our portfolio to ensure we remain positioned for growth. Overall, I'm pleased with how we've executed in the first quarter. Our results clearly demonstrate the significant benefits of the combination for our people, clients and shareholders. While we remain bullish about the combination for the year ahead, we're also mindful of the broader geopolitical environment. The ongoing conflict in the Middle East, which represents less than 2.5% of our revenue, continues to create uncertainty in the region and across the world. As always, we are prioritizing the safety of our people in the region and monitoring developments closely so we can adapt quickly to changes that impact our business. Before I close, I want to thank every member of the Omnicom team for their outstanding efforts. None of this progress would have been possible without the exceptional commitment and hard work of our people over these past few months. With that, I'll turn it over to Phil to walk through our quarterly financial results. Philip Angelastro: Thanks, John. This is our first quarterly report as a new Omnicom with Interpublic's operations included for the full 90 days of the quarter. We started the year with strong performance in revenue growth and cost reduction with a meaningful amount of synergies flowing through to EBITDA, while we continue to invest for future growth. We're making significant progress integrating Interpublic's operations and positioning our portfolio for growth. I will start on Slide 3. We know that there are a lot of moving pieces right now, and we want to make things easy for you to understand. This slide should help. It presents what we call our core operations. Our core operations are comprised of our operating businesses, excluding dispositions and assets held for sale. To ensure it's clear, our main focus in driving the company forward is on our core operations. As we talked about at Investor Day, our core operations are the result of our ongoing strategic repositioning of the portfolio for growth and reflect our sharpened focus on the highest growing, most connected parts of our business. Businesses included in the dispositions and held-for-sale category will be sold in 2026, and they represented less than 5% of our adjusted operating income in the first quarter. And our only priority regarding these businesses is to complete these disposals in a timely fashion. This slide also presents operating income and EBITDA on a non-GAAP adjusted basis, excluding severance and repositioning costs, loss on dispositions and acquisition integration costs. For comparison purposes on this slide, we've included 2025 prior year combined amounts prepared on a similar basis. As you can see, revenue from core operations grew 6.7% in total. Adjusted EBITDA grew $180 million or over 27% and adjusted EBITDA margin increased to 14.8% from 12.4%, primarily driven by cost reduction synergies from the acquisition of Interpublic. We are pleased with this strong performance on both revenue and adjusted EBITDA, and we are on track to achieve our operating plans and targets for the year. Turning to Slide 4. We present our reported results as we traditionally have as well as the related non-GAAP adjusted amounts. This slide presents our reported results, including all entities, core operations, dispositions that occurred during the quarter for the period that they were part of Omnicom and entities that are classified as held for sale. Since these are reported results, the 2025 presentation reflects the prior year results of Omnicom and does not include Interpublic. The center column for each period shows the applicable non-GAAP adjustments. In the first quarter of 2026, we recorded integration-related costs of $59 million, which are recorded on the SG&A expense line. We recorded a loss on dispositions of $34 million, and we recorded severance and repositioning costs of $4 million. When considering the change in operating income on both a reported and adjusted basis, note that it includes $117 million of amortization expense related to the intangible assets acquired from Interpublic, an increase of $96 million compared to 2025. The change in operating income also reflects a $16 million increase in depreciation expense. Below operating income, net interest expense increased to $72 million from $29 million in Q1 of 2025, an increase of $43 million, primarily resulting from assuming Interpublic's debt of approximately $3 billion in Q4 2025. Interest expense in Q1 2026 increased by $60 million, primarily from interest expense from Interpublic, which added approximately $47 million, of which $3 million is noncash interest and higher interest expense resulting from refinancing activity completed during the first quarter of 2026, which resulted in approximately $1 billion of incremental long-term debt. Note, Q1 includes one month of the incremental interest expense from the new debt issuance. Additionally, interest income increased this quarter by $17 million to $47 million, primarily due to interest income earned on higher average cash balances, including cash acquired with Interpublic. Our adjusted tax rate of 26% was down slightly from 26.7% in 2025. For 2026, we expect our annual tax rate to also be 26%. Income from equity investments and noncontrolling interest declined by $4 million in total. Finally, non-GAAP adjusted diluted EPS grew 11.8% to $1.90 from $1.70 last year. Our fully diluted weighted average shares outstanding for Q1 2026 were 299.2 million. Actual shares outstanding at March 31, 2026, were 285.3 million compared to 313.4 million at year-end December 31, 2025, and compared to 196.1 million shares at March 31, 2025. On a year-over-year basis, our share count increased from last year due to shares issued for the Interpublic acquisition, but they also declined as a result of our share repurchase activity, which I will discuss later. Now let's review our business in more detail, beginning with the components of our revenue change on Slide 5. To assist in understanding the drivers of our underlying business, we've included an analysis of our growth beginning with core operations, which excludes businesses that have been disposed of or are classified as held for sale. In the first quarter of 2025 presented on a combined Omnicom Interpublic basis, revenue for Q1 2026 increased by 2.7% from positive foreign exchange rate changes and by 3.9% from organic growth. We expect FX will continue to be positive in 2026. And assuming recent FX rates stay the same, will benefit our reported revenue for the year by approximately 1%. Relative to our traditional presentation in this table, there is no row for acquisition and disposition revenue because there were no acquisitions during the quarter. And as we have noted, dispositions have been removed from the opening balance of core operations revenue. Turning to Slide 6, you can see our core operations revenue by discipline. Presentation of our disciplines has been updated from 2025. As we discussed at Investor Day, the strategic reshaping of our portfolio through the Interpublic acquisition will result in a business with more than half of our revenue coming from the faster-growing integrated media business. Integrated Media includes our media, commerce, data, CRM and consulting and content automation businesses. Revenue from our core operations in the first quarter of 2026 for Integrated Media was approximately 52% of our revenues. And for advertising was 17% Health, 10%; PR 12%; and Experiential & Other, 10%. Q1 revenue growth from core operations was as follows: Integrated Media led the way with very strong growth in the high single digits. PR and experiential and other grew in the quarter mid-single digits. Health had positive growth and advertising was down in Q1. We're not providing detailed prior year combined revenue balances or organic growth by discipline or region because our integration process is ongoing, and we continue to evaluate the portfolio. Slide 7 shows our core operations revenue by region. As we highlighted when we announced the Interpublic acquisition, the transaction gives us greater relative exposure in the U.S., which was 61% of revenues this quarter. Together, the U.K. and Europe were 21%, followed by Asia Pacific at 9%. In Q1, revenue growth in the U.S. was strong and delivered mid-single-digit growth. Europe, Latin America and Asia Pacific were also up low single digits. And the U.K. and Middle East and Africa declined. Slide 8 is our revenue weighted by the industry sectors of our clients. Because the first quarter of 2026 reflects a full quarter of Interpublic, there are some changes worth noting relative to the prior year Omnicom 2025 amounts. The largest changes were the pharma and health and auto categories. There were small changes to our other categories, which moved up or down 1 or 2 points with increases in financial services, retail and services and decreases in food and beverage, travel and entertainment and government. Now please turn to Slide 9 for our year-to-date free cash flow summary. The 70% increase relative to last year was driven by the addition of Interpublic and improved performance in Omnicom's business. Free cash flow definition excludes changes in operating capital, which is seasonal with the first quarter generally the largest use of cash during the year. There's a reconciliation in the appendix that shows the change in operating capital for the quarter was flat compared to the change from the first quarter of last year. For the 3 months ended March 31, 2025, our primary uses of free cash flow included $252 million of cash paid for dividends to common shareholders and another $12 million for dividends to noncontrolling interest shareholders. Dividend payments increased year-over-year as a result of the shares issued for the Interpublic acquisition and an increase in our quarterly dividend payment. Quarterly dividend payment approximates the combined dividend payments made by Omnicom and Interpublic in Q1 of 2025. Capital expenditures were $61 million, higher than the prior year due to the Interpublic acquisition, but at the same overall level relative to the size of the business. Total contingent purchase price payments and payments for the acquisitions of noncontrolling interests were $16 million. Finally, our share repurchase activity for the first quarter was $2.8 billion, excluding proceeds from stock plans of $16 million. The majority of this resulted from our accelerated share repurchase program, which drove a significant reduction in shares outstanding to 285.3 million as of March 31, 2026, a reduction of 28.1 million shares from December 31, 2025. We have significant remaining capacity under our $5 billion total share repurchase plan, and our plan is to complete the $5 billion over the next 12 months or by the end of April 2027. We estimate that relative to our shares outstanding at December 31, 2025, of 313.4 million shares, we will see our share count decline approximately 11% to 12% by December 31, 2026, and that weighted average shares outstanding for the year will decline approximately 8% to 9%. Slide 10 is a summary of our credit, liquidity and debt maturities. At the end of Q1 2026, our gross long-term debt was $10.2 billion. Since December 31, 2025, our debt is approximately $1 billion higher, reflecting the retirement of our $1.4 billion, 3.6% senior notes due April 15, 2026, and the issuance of new senior notes totaling $2.3 billion, including $1.7 billion of U.S. dollar-denominated notes at a weighted average coupon of 4.9% and $600 million of euro-denominated notes at a 3.85% coupon. The maturities range from 3 years to 10 years, which you can see in the maturity chart on this page. Our next maturity is not until July of 2027. Net interest expense is expected to increase by approximately $200 million in 2026 compared to 2025. Of this increase, $13 million is noncash interest. The change is primarily driven by higher interest expense from the inclusion of Interpublic's debt, the refinancing I just described as well as interest on incremental commercial paper borrowings of approximately $10 million and lower interest income on cash balances of approximately $20 million, primarily due to lower forecasted short-term interest rates on invested cash. Please note that the total and net leverage ratios on this slide, which compares the last 12 months ended March 31, 2026 and 2025, reflect the full assumption of Interpublic's debt, but only [ 4 months ] of Omnicom's EBITDA results, including Interpublic. However, at March 31, 2026, we're in compliance with the leverage ratio covenant in our credit facility, which makes pro forma adjustments for the impact of the acquisition. The calculation of total debt to pro forma adjusted EBITDA done in accordance with the definition in our credit agreement results in a total leverage ratio of 2.5x. Our cash equivalents and short-term investments at the end of the quarter were $4.3 billion. Our liquidity also includes an undrawn $3.5 billion revolving credit facility, which backstops our $3 billion commercial paper program. In closing, we completed our first full quarter as the new Omnicom. Our operations delivered solid top and bottom line growth. We are realizing significant cost reduction synergies while investing for future growth. Our balance sheet is strong, and we are deploying capital for the benefit of shareholders in the long run. I will now ask the operator to please open the lines up for questions and answers. Operator: [Operator Instructions] Thank you. Your first question comes from Steven Cahall with Wells Fargo. Steven Cahall: First, I was wondering if you could talk a little more about some of the revenue by discipline. So I was just wondering if we could get some underlying trends or even growth rates, especially of what you're seeing in integrated media versus advertising versus health to kind of understand the trajectories. You talked a lot about those disciplines at the Investor Day. So I would love to understand how they're trending. And then, Phil, I was just wondering if you care to provide any additional update to the adjusted EPS growth guidance. I think the prior guidance is double digit. I mean you said that the share count alone gets you to 8% to 9% this year. So it seems like it's going to be a very, very healthy interpretation of double digit, and we saw some of that in the first quarter results. So I was wondering how we can think about maybe some guardrails around where EPS growth can come in for the year. Philip Angelastro: So I'll give some detail and then John can add some color. But as far as the disciplines go, as I said in my prepared remarks, Integrated Media certainly led the way in terms of growing high single digits. PR and experiential and other grew mid-single digits. Health was positive for the year, low single digits and advertising was down. I think there's an awful lot going on as we integrate all these businesses, and we're certainly pleased with our progress to date and the growth to date. But in terms of additional details with specifics, that's about as specific as we're going to get this early in the year in our first full 90-day quarter. In terms of trends, you want to give some comments, John? John Wren: Yes. Steven, the only thing I would add to what Phil said was -- and I mentioned this in my comments, we remain very healthy in terms of competition, in terms of winning our fair share of new business. And that's great considering we're bringing 2 big organizations together in such a very short period of time. We're functioning very well. But if there's an underlying trend that's out there, it's really clients, especially with the change in the landscape of the industry, clients are becoming more focused on selecting a single provider to take care of most of their needs. And we saw during the quarter that we were able to extend the multiyear contracts with quite a number of clients, and that's a focus that we're going to continue to work on as we get further and further into the year. That gives us security and that gives us a better ability to plan as we move forward. And it's our size, it's our influence that is contributing to all this, not to mention the state-of-the-art investments we've made in terms of Omni AI and the breakthroughs and the contributions we're making there. So that's all I would add to the color that Phil mentioned. Philip Angelastro: Yes. Then I'll answer the EPS question. So certainly, we're pleased in the first quarter. Diluted EPS grew almost 12%. I think as we go through the rest of the quarters for the year, when we talk about double digit, I think at this point, we'd certainly say we expect probably the quarters as they roll out are going to be higher double digits than the first quarter performance. I think at this point, we're going to leave it at that. But we're certainly pleased with the quarter, and we expect good performance to continue on that front. Operator: Your next question comes from the line of David Karnovsky with JPMorgan. David Karnovsky: John, just with the integration, I wanted to see if you could comment a bit more on healthcare and PR. I think these were 2 areas you talked in the past about the scale of combining with IPG and the opportunity going forward. So kind of what's been the experience to date? And what are you seeing generally across these disciplines? And then, Phil, I'll revisit the Investor Day. Also, you guys had provided an expectation of 4% constant currency growth for the core businesses. That was well within the kind of macro volatility we've seen, but just I was curious if there was any update there to give. John Wren: Sure. The healthcare business, the combination of both the size that IPG had as a business and we had a business is extraordinary. We clearly have an incredible amount of talent and representation across the whole pharma business. And what leads that -- lets us attract the best and smartest people and makes us -- every single pharma company has to come and speak to us if they want to do something in terms of their marketing. In terms of PR, PR is a different type of business. We've been able to continue to grow it. In the past, we've been affected by elections, but any negative news is behind us from '25. And so we have good comps coming forward. And I think the only real comments I made is that I'm happy with the performance of those units as we go forward. There's a lot of combination there, too. And there's synergies that are going to come out of probably the PR business more than the healthcare business. But -- so it's all quite positive. It's a very solid contributor to our overall growth, and we expect it to continue that way. Philip Angelastro: Regarding the question on organic growth at Investor Day and the 4% reference, certainly, as I said in my prepared remarks, we're on track to achieve our operating plans and targets, and that would include the organic growth reference as well. So we're not changing that expectation at this point in time, but we're certainly comfortable with what we said at Investor Day. Operator: Your next question comes from the line of Jason Bazinet with Citigroup. Jason Bazinet: I just had a handful of questions around the disposed businesses and core operations. I guess the first one is, why did you decide to sort of focus the [indiscernible] on core operations? Why do you think that's the right way to look at the business? John Wren: Sorry. No, no, you go right ahead. Ask your questions. I'll write them down and then I'll try to answer them. Jason Bazinet: All right. I think and maybe I'm misremembering, you guys gave a rough benchmark of about 10% EBITDA margins for the disposed businesses. And if I'm looking at the Slide 3, which is quite helpful, it looks a bit lower than that. And then third, I was just struck by the disposed businesses, if I'm doing the math right, it looks like they shrink, I don't know, 16% or something like that year-over-year, which is far worse than I would have thought any business would be performing even a bad business to put it that way, that you might be disposing. So those are my 3. John Wren: I mean you could repeat that, the last question, you're talking about the performance of the disposed businesses? Jason Bazinet: Yes, it's just -- it's shrinking much more than I would have thought. Philip Angelastro: Which numbers are you looking at, Jason, because I think -- when you look at the year-over-year -- go ahead. Sorry. Jason Bazinet: $748 million versus $627 million. Philip Angelastro: Yes. So some of those businesses that we're disposing of were actually disposed of. So there was a meaningful -- as we said on the year-end call in February, we had closed on the sale of an experiential business, Jack Morton kind of the day before February 15. So the first quarter in that example, has 1.5 months of their revenue, but it doesn't have the second 1.5 months in the quarter. So the revenues are down because the business was sold. So it isn't a performance, it's just a timing of when the dispositions occur. John Wren: And Jason, I'm glad you asked the question, I really am. What we decided when we closed the transaction and looking at our businesses is which of the businesses that are going to grow, continue to grow and which are contributing a fair margin for the efforts that we're putting in. And the way we developed the initial list of the $3.2 billion of companies that we were going to hold for resale is based upon poor margin performance and unreliable growth and then after we went through that filter, the second filter, which was the governing filter was, is this necessary for our clients? Is this what our clients are asking for? And we reached the conclusion that, no, they weren't. Now there's a number of businesses in there. Some of them not terribly large, but there's a lot of units because we're spread out throughout the entire world. And what we're doing is we're working to dispose of them and if there was another way to get them out of our financial statements, we would. But there isn't. We have to -- until we get rid of them, we have to account for them, and that's why we decided to put them in the columns that are reflected on Slide 3. And we -- maybe we were being a little optimistic or nice at Investor Day when we said the margins for these businesses are 10%. It turns out that the margins of these businesses are probably not 10%. They're probably something less. So the sooner -- and because -- and what was interesting is coming out of Investor Day, you could see that we had not clearly communicated that this distinction that what we're calling core now are the operations that we're planning to focus on and will contribute to the ongoing growth of Omnicom. And the noncore assets that you see will hopefully disappear as we dispose of them throughout the rest of the year. Philip Angelastro: Yes. Well just one other piece of input in terms of the margin. Certainly, the margins will likely vary by quarter. So as we get through the year and we get through this process, the historical reference is what we made. The historical reference was about 10% for that group. We'll see how each of the quarters play out. But certainly, it's a focus of ours to move expeditiously to complete those dispositions. John Wren: I can't wait for the day that you never have to ask me that question, but I do appreciate you asking it. Operator: Your next question comes from the line of Tim Nollen with SSR. Timothy Nollen: I've got a couple actually related to really what a lot of people would think of as your core businesses, which are the media planning and buying businesses and then the creative business. On the media planning, John, you made a brief reference to Agentic AI. And I wonder if you could talk a little bit more about as these LLMs come more and more to market and enable direct communication amongst the various parties in the value chain. And as Omnicom is doing a lot of principal media buying itself, can you more directly go to publishers yourselves in ways that you have not before? And then on the creative side, I just want to push again why the advertising business was down. And I'm wondering if there might be something of a trade-off with production, which I think you hold in your integrated media business, which you said was growing high single digits. Is there maybe a little bit of a trade-off between creative advertising and production? John Wren: There's a couple of very interesting questions. I'm going to answer some of them, and then I'm going to refer to Paolo, who leads our AI work to answer some of it too, Tim. Yes, it's interesting that the quest right now, and I think every major -- there aren't too many major groups that are working on it is looking to have direct -- more direct relationships with the publishers. That is an aim and it's an objective, and it's something actually that we're investing in as we sit here today. When you look at I'd be dating myself if I went back to the Internet days of the '90s, but there's always a messy middle between the client, the advertiser and what they pay for the media and reaching the consumer and a lot of MarTech and stuff, which becomes exciting for a moment or 2 and then fades away. Most of those businesses don't last very long. And there are intermediaries today, they stand between us and the publishers, and they take a toll. And the toll is paid for by the clients and by the industry itself. So that is something you can continue to ask me about in the future because that is something we're clearly working on. The second part of your question, as what happens with the quality, and now I'll turn it to Paolo of our platform in addition to being a common way for our people to communicate to both the clients and to look at problems and the quality of our data gives us more information, data itself doesn't mean too much unless you use it properly. And we have -- we think, the best data at the moment in the industry, and it allows our creative and really smart thinkers to come up with some really different ideas and explore different opportunities. Part of the Agentic revolution and what's going on is it reduces the need for what was previously manual work that was -- or semi-manual work that was required to put together Excel spreadsheets and to do a lot of other things in the simplest terms, and it makes us more productive. And we believe that the contribution that our creative people can make and the contribution that our media cloud size and influence can make will maintain and help grow our profits in certain parts of the business, exceeding any declines that come in because of the automation or efficiencies that we go through. And the quarter proves it. We grew 4% in a complicated world with a company that we've just been together for 90 days. I don't know, Paolo, if you want to add anything to. Paolo Yuvienco: Sure. Tim, I can address the Agentic media buying. So as we mentioned in Investor Day, Omnicom is really leading the charge from our perspective on Agentic media and the Agentic media ecosystem. We're first to market with things like AdCP, which is a protocol that's being defined and being evolved around Agentic media buying. What I also mentioned in Investor Day is that we had already tested the pipes and been able to have money flow through to actually buy inventory available on certain publishers. Since then, we've actually executed real media buys for several clients using our agent framework, doing agent-to-agent buying, which is all in service to shortening the media supply chain, as John articulated. How do we get -- drive higher value for our clients, deliver a greater amount of working media dollars for our clients and ultimately making the entire process more efficient and effective. Philip Angelastro: If you have a follow-up for Paolo on that, go right ahead. Timothy Nollen: Yes. Can I just ask a follow-up then, which is I wonder -- everything you're saying makes sense. I wonder what happens to your pricing models and your ability to price for your services in a world where, as you said, Paolo, the media supply chain is shortening. I mean, are you in a position of strength to leverage to gain better pricing terms for your clients and to -- I mean, so far, you seem to be doing well for yourselves as well. John Wren: Yes. The whole environment expands, Tim, and we will be rewarded as a result of that. And what we're talking about taking out in effect is the lower cost type of efforts, which contribute to our revenue. And increasingly, we're moving towards performance. That's a change, it's ongoing. Nothing is overnight, even though I know everybody likes everything to be overnight. It's not overnight. And the higher quality -- people with a higher quality approaches and reaching more customers and selling more product, and building better brands. That's where we sit. That's where our clients trust us. That's why they buy our products. And as a result, we will get paid a very fair price for the efforts that we put in because we've made these investments. I don't know if. Philip Angelastro: Yes. In terms -- just to close out on the production question, relative to our $23 billion annual base, it's just not a substantial component in terms of dollar value. The key to the portion of the business that's in integrated media is the intelligent content automation business, which is closely integrated with media and our platform. So that's what we were distinguishing at Investor Day. Operator: Your next question comes from the line of Michael Nathanson with MoffettNathanson. Michael Nathanson: I have one for John, Paolo and then one for Phil. John, I've got to date myself. I remember when Interpublic bought Acxiom and I asked you about that strategy of buying Acxiom, and it wasn't the right time for you to buy it. Now it is the second bullet point on the momentum of your company. So what have you found 4 months into owning Acxiom? How has the integration helped you? And how does that give you an edge from maybe where the asset was used previously at IPG? And then for Phil, on Page 14, thanks for all the color. But would you ever put out a core and pro forma operating expense details so we can actually build models that work on a pro forma basis on a core basis, too, on the cost side? John Wren: I can't go back completely to 2018 and remember everything I was thinking, although I'm accused of remembering every number that I see. At Acxiom, I think Interpublic at the time paid $2 billion for the company. 5 years later, I paid $9 billion for all of Interpublic. So I think my waiting paid off from an economic point of view. And -- but most importantly is the -- and this was true then, and it's certainly true now is the quality and the fidelity of the data that Acxiom gathers has not changed in that 5- or 7-year period. They -- because they've worked principally for regulated industries in the finance sector and the pharma sector, their data is not as haphazard as consumer data can be. And it has to have fidelity because there's a lot of laws and regulations that go around it. And so we're able to ingest and use this to develop our Acxiom customer ID methodology, and I'll let Paolo even comment a little bit on that. And it's been a real contributor to our overall efforts. Now if I want to be really fair, we probably weren't ready for it in 2018, but we're certainly ready for it when we bought it now. Paolo Yuvienco: Yes. I would add to that, Michael, that especially now with kind of the proliferation of artificial intelligence and more specifically generative AI and how we've incorporated into almost every facet of the marketing life cycle, the ability for us to actually drive value from that data is greater now than it's ever been. And it is exponentially more powerful for our clients. Philip Angelastro: So just on the specific question, you asked, Michael. Given the size of the acquisition, not every number of schedule related to the prior year data is perfectly comparable. That certainly, we understand, and we're working towards that. We're happy to take any follow-up questions that you have on the detail, certainly offline, no problem. Operator: Your next question comes from the line of Adrien de Saint Hilaire with Bank of America. Adrien de Saint Hilaire: Two of them. Do you have any better visibility on how much proceeds you think you're going to get from the planned disposals? I can see you've fetched $152 million in Q1, but interested in your views for the year. And then maybe for John, in terms of new business, one of your peers seems to have a bit of a revival of late. I'm just wondering if you're seeing a bit of a change in the pricing dynamics? Are you seeing potentially any pricing pressure around those pictures more so than usual? I understand there's always a bit of price pressure around those. John Wren: Sure. With respect to your first question, restate it for me, please, Adrien, just so I answer it properly. Philip Angelastro: I think it's visibility on the pricing. Adrien de Saint Hilaire: On the pricing... John Wren: On the pricing. Yes, yes. No. As you saw, if you looked at our cash flow statements, there was money made on the sale of... Philip Angelastro: Principally Jack Morton. John Wren: Principally Jack Morton. And there's a number of companies that we expect to receive proceeds from the sale of significant number of those units that we're holding in that bucket. There's some that are just disposals. There are things that we have to go through the process because they are very low growth. They've been around for a long time, but they happen to be in some instances in countries where the exercise of going through and shutting them down or paying out the proper severance and things to people cost us money. We've accrued for the downside as best we could. And so we're looking to sell and generate positive cash flow. But I don't think it's going to add to our net income for the year so much as it is it will generate additional cash. Philip Angelastro: Certainly, we have an expectation, but it's really very difficult to estimate what those proceeds are going to be. And we certainly don't want to give you any inaccurate expectations regarding what they're going to be. And when those deals happen and proceeds come in, we're certainly going to keep you updated and let you know. John Wren: And Adrien, after listening to me for years, as I said earlier to our question, I'd love to see these things off of my P&L and not talk about them anymore, but that's not going to make me give them away either. So we're pretty confident that over the next several quarters, we can get through most of them. And we have teams doing this and outsiders. We're focused on new business and growing our business and getting the teams that we brought together functioning in a proper way. So that's why we even call them core assets. That's where most of our focus is. There's a bunch of accountants running around trying to sell these things. And what was the second question? Adrien de Saint Hilaire: Yes, it's on the new business environment. John Wren: Competitive pricing. Yes and I certainly know the ones you're talking about, there's been 2 or 3. Everyone strikes me as if I've just been defeated because I hate losing. And some of it has to do with competitive pricing, but we win more than our fair share, and we'll continue to win more than our fair share. And every loss, there's no such thing that's coming in the second. Believe me, I do a root-cause analysis of why we lost it to try to cure for the next opportunity that we have. So yes, we lost but not much, and I'm not happy about it. Operator: And that concludes our question-and-answer session, and that does conclude today's call. Thank you all for your participation, and you may now disconnect.
Operator: Greetings, and welcome to the Ribbon Communications First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Fahad Najam, Senior Vice President of Investor Relations. Please go ahead. Fahad Najam: Good afternoon, and welcome to Ribbon's First Quarter 2026 Financial Results Conference Call. I'm Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Community cases. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the second quarter of 2026 and beyond are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today. as well as in the supplemental financial information we prepared for this conference call, which again, are both available on the Investor Relations section of our website. And now I would like to turn the call over to Bruce. Bruce? Bruce McClelland: Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter results and outlook for the rest of 2026. As highlighted on our last earnings call, we ended 2025 with a broadening customer base and increasing backlog, and we continue to expect a much stronger second half with meaningful improvements starting this quarter. Our first quarter revenue was in line with our expectations and consistent with the industry dynamics we outlined back in February, causing us slower than normal start to the year. Visibility into our customers' plans for the rest of the year and confidence in second half growth has improved since the beginning of the year, particularly around the specific areas we highlighted where we were being cautious. Sales in the first quarter were near the midpoint of our guidance but with stronger-than-expected demand in India, particularly with Bardi Airtel, who was a 10%-plus customer in the quarter. This was offset by lower sales than we anticipated the U.S. Tier 1 service providers, which I'll comment on more in a minute. This shift in mix resulted in lower gross margins and earnings for the quarter. When comparing year-over-year, as we expected, sales were lower in both of our segments with Cloud and edge down 8% and IP Optical Networks down 14% in the first quarter. From an end market perspective, the majority of the year-over-year decline was due to lower sales to service providers in multiple regions. Within the Cloud & Edge segment, sales to service providers declined approximately 5% year-over-year, primarily in the U.S. region across a number of smaller customers. Horizon remained a 10%-plus customer in the first quarter. And while voice network transformation activity was lower than we had expected, impacting our first quarter results. Deployment rates are increasing, and we anticipate a much stronger second half in 2027. Expansion into the Frontier footprint remains a significant incremental opportunity. Within the IP Optical segment, sales to service providers in the Asia Pac region were down year-over-year following a strong performance from the region last year. Demand in India was stronger than we initially expected, and we are increasingly confident in our outlook in that region for the year ahead. IP optical sales in Europe in the first quarter were lower year-over-year primarily due to the completion of a long-term support and maintenance contract with a Tier 1 service provider customer, reducing our IP optical maintenance revenue, partially offset by maintenance increases with our growing installed base. Importantly, IP optical bookings in the quarter were strong at 1.5x, indicating a much improved quarter ahead. Within the enterprise market vertical, aggregate sales to enterprise defense and critical infrastructure customers declined approximately 6% in the first quarter versus last year, with lower cloud and edge sales to U.S. government agencies partially offset by increased IP optical business with international defense agencies. Voice network modernization projects with several U.S. federal agencies continue to progress towards full deployment in the coming months. and we expect further capacity expansion and new projects in the second half of the year. These modernization projects are mission-critical to our Department of War agencies as these legacy infrastructures are becoming increasingly expensive to maintain. Consolidated gross margin in the quarter was approximately 300 basis points below our expectations, primarily due to the lower network transformation professional services revenue with elevated service expenses. We believe voice modernization initiatives remain a strategic priority for service providers such as Verizon, and we expect activity to accelerate in the second half of the year. In order to support the increased work, we are deliberately retaining key resources and expertise, even though revenue is lower in the first half. While this decision impacts gross margins and near-term profitability, we believe it positions us well to execute efficiently as volumes increase later in the year. This is a deliberate investment in execution readiness. Adjusted EBITDA for the quarter was negative $8 million, below our guidance range to lower gross profit dollars. Overall book-to-bill in the quarter was 1.1x with IP optical at 1.5x and supporting the increased expectations in Q2 and second half of the year. Now a few more highlights in each of our operating segments. In our IP Optical Networks business, we had a number of key wins in several strategic areas, including in the rapidly growing data center interconnect space, we had 3 new wins across multiple geographies, including Europe, the U.S. and Asia. Two of the projects involve a regional service provider expanding their network to support data center connectivity in their regions. And 1 of the projects is a major biotech company, connecting all of their major data center locations with a new high-capacity optical network. It's great to see our momentum picking up in this crucial high-growth area. Similarly, we had 5 new project awards in the quarter from major energy producers and distributors in countries such as Germany, Vietnam Singapore and Colombia. They are all focused on building of secure, private, command and control networks to keep pace with the critical nature of their business. In fact, 2 of the new 400-gig networks are leveraging Quantum Key Distribution encryption for enhanced security using our Apollo optical transport platform. In Africa, we have received an award for a major fiber network expansion across 3 countries, which we expect will exceed over $10 million with first revenue in the second quarter. And here in the U.S., we now have more than 30 customers who have already deployed our IP and optical products that have been awarded bead grants, where we expect incremental new business once funds are finally distributed. Similarly, in our Cloud Edge segment, we had a lot of activity in the first quarter around several strategic areas. One of the key areas of focus for any enterprise and service provider customers is the adoption of cloud native technologies to lower costs and reduce complexity, whether in their own private data centers or in public cloud. We reached full commercial deployment of our cloud-native SBC solution with a leading service provider in Japan in the first quarter and have a very extensive program underway with a Tier 1 provider in Europe. This is a fundamental shift in how networks are designed and how software is managed and deployed to achieve higher degrees of automation, elasticity and reliability. Public cloud is the ultimate destination for many customers, which is why we've established a new partnership with Amazon Web Services that we recently announced at MWC in February. Our first 2 customers are now live and providing commercial service with our cloud-native SBC running in AWS. This is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure. Over time, we see opportunities to help enable emerging Agentic AI platforms to seamlessly support voice within their application environment. In the enterprise market, the financial services vertical is a key focus area for us, where we are widely deployed across many of the leading banks and insurance companies. Within the quarter, we were excited to further expand our presence and in a new top 20 bank to our customer base in the U.S. as mentioned on our last earnings call, we had significant voice network transformation orders in the fourth quarter, and we are executing against these new contracts. These programs typically convert to revenue over 6 to 12 months or longer on large deployments, which positions us for a strong second half. Finally, we continue to make good progress preparing to launch our new AI Ops and automation platform, acumen with lead customer, Optimum, which we expect to go live later this quarter. We have a growing pipeline of customers spanning a number of different use cases, including mobile and fixed wireless services, emergency E911 services, fiber to the home Internet service assurance and several others. With that, I'll turn the call over to John to provide additional financial details on our results and then come back on to discuss outlook for the second quarter. John? John Townsend: Thanks, Bruce, and good afternoon, everyone. Let's begin with financial results on a consolidated level. In the first quarter of 2026, Ribbon generated revenues of $163 million, a decrease of 10% from the prior year. driven by the factors Bruce outlined and which I will touch on shortly in the segmental discussion. Consolidated non-GAAP gross margin was abnormally low in the quarter at 45.8%. And down 280 basis points year-on-year, primarily due to lower professional services revenue with continued higher costs to support the anticipated ramp in the second half. Non-GAAP operating expenses were $87 million, an increase of $1 million year-over-year, driven by FX headwinds of approximately $4 million, offset by expense savings. This resulted in marginally higher R&D costs. Most of the FX impact was a result of the strong rate shekel. Adjusted EBITDA was a loss of $8 million, a $14 million decrease from the prior year, driven principally by the low revenues and gross margins. Net interest expense in the quarter was $10 million. Quarterly non-GAAP net loss was $8 million, $4 million worse year-over-year, this generated a non-GAAP diluted loss per share of $0.05, which was a decrease of $0.02 versus the prior year. Now let's look at the results of our 2 business segments. In our IP Optical Networks results we recorded first quarter revenues of $63 million, a 14% decrease versus the prior year, which was driven principally by lower sales in Asia Pacific and lower maintenance revenue. Encouragingly, we had stronger IP optical bookings in the quarter with a book-to-bill ratio of 1.5x, underpinning our expectations for improving top line performance as we proceed through the year. First quarter non-GAAP gross margin for IP Optical was 28.4%, similar to last year, but lower than our target level due to the higher mix of India revenues and also fixed cost absorption. We expect this to improve materially in the second quarter and for the rest of the year. IP Optical Networks adjusted EBITDA for the quarter was a loss of $16 million, a $1.7 million higher loss than the prior year driven by the lower revenues. Now on to our Cloud and Edge business. We generated first quarter revenue of $100 million, down 8% year-over-year. Non-GAAP gross margins were 56.8% and down 575 basis points from the prior year, primarily due to lower professional services revenues while carrying higher service costs in readiness for the anticipated second half ramp in voice network transformation deployments. As a result, adjusted EBITDA for the segment was $8 million or 8% of revenue and down $12 million year-on-year on the lower revenues on gross margins. Cash flow from operations was a usage of $22 million in the quarter, resulting from the lower billings and typical seasonal employee-related expenses. Closing cash was $70 million, and our net debt leverage ratio was 2.9x. Total CapEx spend in the quarter was $3 million, and this is in line with our normal run rate. In conclusion, we remain focused on operational execution and cost management and are confident that we will see meaningful growth in the second half of the year, improving both revenue and margins in both segments, which we expect to drive stronger profitability. And with that, I'll turn the call back to Bruce. Bruce McClelland: Great. Thanks, John. As we move forward through the balance of the year, our confidence in the broader setup for the business continues to improve. While first half results remain influenced by customer timing dynamics, the demand environment across our core markets is strengthening, and our pipeline continues to expand. We are making targeted investments in execution readiness that we can capitalize on the opportunities already in front of us. Importantly, we ended the year with solid momentum reflected in the strong bookings over the last 6 months and a healthy pipeline across service provider, enterprise, EMEA and Asia Pac markets. Looking ahead to the second quarter, we expect meaningful revenue acceleration from enterprise and EMEA customers, continued sequential improvement at our major Tier 1 service providers and ongoing strength in India. In the second half, we anticipate growth across practically all regions and broad-based improvement across most of our markets, including a return to higher deployment levels at Verizon. Beyond that, we remain well positioned to capture incremental growth opportunity from increasing traction in key growth pillars of our business. The largest market opportunity continues to be the replacement of legacy voice communication infrastructure within service provider networks with modern cloud-based technology. In addition to the large Verizon project, in the fourth quarter, we had more than $50 million of bookings from more than a dozen service provider customers, where we were replacing legacy voice switch infrastructure with modern software-based systems. These projects will continue for most of the year, and we anticipate a reacceleration of our Verizon program in the second half of the year. In a growing number of cases, customers are choosing to move to a cloud-native technology stack, either deployed in their own private data centers or in a public cloud environment. Ribbon is certainly the technology leader in this area. The second key focus area of growth for Ribbon this year is in the enterprise and government market sectors where we are uniquely positioned with our voice and data portfolio. We expect this to be a very strong segment for us this quarter with a number of large enterprise projects across both our IP Optical and Secure Voice portfolio. Within the U.S. government sector, we have several large voice modernization projects underway where we are heads down the first half of the year, migrating end users onto a new cloud-based platform and anticipate new opportunities and further capacity growth in the second half of the year. Our third major focus area this year is the exponential growth in data traffic and the massive investment in broadband infrastructure. We have a significant number of projects already underway in the second quarter as highlighted by the strong book-to-bill in Q1. This includes several major network upgrade projects in Europe and Africa, further growth in India, large projects in the Asia Pac region and continued strength with defense agencies in Europe. Finally, our Acumen AI Ops initiatives continue to generate strong customer interest with several proof-of-concept discussions progressing well across multiple target use cases and integration of secure carrier-grade voice capability with emerging AI and a genic AI platform is gaining traction. This is an area where Ribbon is uniquely differentiated. Our recently announced partnership with Amazon Web Services is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure. This partnership is already generating increased customer engagement and pipeline activity. Overall, we remain confident in the broader setup for the year and continue to expect stronger performance starting this quarter. Based on the foregoing, for the second quarter, we expect revenue in a range of $185 million to $195 million and adjusted EBITDA in the range of $9 million to $14 million. In summary, the market dynamics we discussed 90 days ago were unfolding as anticipated, and we remain confident in our outlook for accelerating performance in the second half of 2026. Before we open up for questions, I just wanted to take a moment to highlight. We have also made an announcement this afternoon that John will be leaving the company for another opportunity back in the Telecom Services segment. While I'm sorry to see John leave and fully understand his decision, I'm very excited to announce the promotion of Rick Marmurek to the role of Ribbon Chief Financial Officer. Rick has been an important leader in the company for more than 15 years, playing a key role in building our global finance organization. He is absolutely the right person for the job and will help drive the next phase of execution for the company. John, we wish you well on your next endeavor. John Townsend: Thanks, Bruce. And I'd really like to say I've enjoyed my time here at Ribbon. I remain confident that the company has a bright future. And Rick, I know you'll do a great job. Congratulations. Unknown Executive: Thanks, John and Bruce. I'm very excited about this new opportunity and look forward to continuing to work closely with the teams across the business to drive sustainable growth and operational excellence. Bruce McClelland: Great. Well, thanks, Rick. And operator, why don't we now open up for a few questions? Operator: [Operator Instructions] Our first question is from Michael Genovese with Rosenblatt Securities. Michael Genovese: First, let me just say, John, congratulations on the new opportunity. And it was a nice working with you at Ribbon, and just look forward to staying in touch. I guess, Bruce, the question that I'll start with is you seem to have a lot of confidence of improvement in the second quarter. But then the Verizon cloud and edge sounds like it doesn't really get meaningfully better until the second half of the year. Can you just talk more about the timing of Verizon's being stronger in the second half of the year than the first half of the year and just more detail on that? Bruce McClelland: Yes. Mike, and I know what -- John says thank you, by the way, he's with me. So I think you read it correctly. We don't expect a significant increase in revenue here in the second quarter with our top customer although I think the improvement in deployment rates will progressively improve throughout the quarter. The growth in the second quarter is focused in a number of different areas. In particular, we expect a very strong quarter from enterprise customers in North America. We've got a great set of programs there that are both in the cloud edge piece of the business as well as in our IP Optical business, around some of the critical infrastructure deployments we have going here in the North America market. So that's a big part of the growth. And then the EMEA region, both kind of Continental Europe as well as Africa. We're looking forward to a pretty strong quarter. So I think that's where the step-up is coming from here in the second quarter. And then as we get into third and fourth quarter, in addition to growth around Verizon growth relative to the first half of the year, obviously, we've got a variety of different increases expected from U.S. federal market and additional capacity expansions there. Growth in the Asia Pac region and again, even a stronger second half in Europe. So it's pretty broad-based and a nice funnel ahead of us this year. Michael Genovese: Great. Okay. Great. I noticed on your presentation, there is a slide about the number of data centers and rural areas, which I find interesting. But I'm wondering about the correlation between that and it seems like what would be more compelling is not the location of the data centers, but how many are being built by sort of regional service providers versus hyperscalers. So I'm just curious is there a relationship there between the location being rural and the regional service provider. I mean, are we supposed to draw -- like can you just help me drive these conclusions? Bruce McClelland: Yes. I think the correlation isn't so much the regional service providers building the data center it's leveraging the network infrastructure they're putting in place for their fiber-to-the-home and capacity expansions to then pick up additional traffic and interconnect into more regional data centers as they build out into those areas. As you know, I think that's kind of our sweet spot is with the regional operators. And I even mentioned the growing opportunity around bed where funding is available to be able to build out middle mile capacity. And then it's a matter of how do you put as much traffic on that as you can. And so we see that in the North American market. And then we see it in a variety of international markets as well, where the fiber connectivity is coming from an operator or a service provider, not necessarily just dedicated dark fiber circuits. Michael Genovese: Great. And then finally for me before I pass it on. Could you just flesh out more for me the Agentic opportunity and how you guys support that and play into Agentic AI? I'm -- it's a little bit of a newer part of the story. So I'd like to be brought up to speed there. Bruce McClelland: Yes, I think -- I'd like to think of it in kind of 2 different aspects. So 1 is certainly this new platform we're launching called Acumen where we're basically working with our current customers to add an genic AI-driven operations center, if you will, to help them manage their network, create their own agents to be able to automate what today is done in a more human way into a much more automated way. And we're building on top of a couple of different platforms we already have deployed in particular, our analytics platform, which is pretty widely deployed, collecting vast amounts of information off the network and then feeding that into an Agentic layer into a large language model and basically learning different characteristics of the network and being able to take advantage of that. So that's 1 aspect of it. And as I mentioned, we're launching late this quarter kind of commercially with our lead customer Optimum here in the U.S. The second part of how we see an opportunity for us is as the use of Agentic AI becomes more prevalent in enterprises. We think the connection between the user and the Agentic applications will be voice driven. And so there's a need to basically protect that boundary and be able to facilitate the voice traffic similar to what you would do in a Microsoft Teams or Zoom or Webex type application. And so we are able to repurpose our voice platforms into that type of use case and the first launch customers on the AWS deployment that I talked about are effectively using our session border controller in that way to interconnect into their Agentic AI applications. And so we think there's a real opportunity there as new types of Agentic AI platforms are deployed for us to have a play there, again, very similar to how UCaaS platforms are working. Operator: [Operator Instructions] Our next question is from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Sorry about that. You talked about, hey, a couple of the product drivers for the Q2, the sequential growth in Q2, but I don't know if you talked about that from a segment standpoint, whether you expect a meaningful difference in growth rate by segments you've had book-to-bills in each of them in the last quarter or 2. But any color there and then I can follow-up. Bruce McClelland: Yes. No, good question, Tim. So we expect growth in both segments here in the second quarter versus the first quarter. And as you just pointed out, the bookings over the last 6 months combined have been very solid for us. So we're expecting both segments to be growing. I do believe that IP Optical segment will grow more than the Cloud and Edge segment in the second quarter. As I mentioned, in North America, we've got a number of great opportunities for growth here in various different markets I mentioned. So I highlighted a number of kind of interesting wins in the first quarter that helped build the backlog some around data center interconnect as we start to deploy our new 948 transport, optical transport platform into that market and then a number of critical infrastructure again, kind of a broad range of different customers, Columbia, Vietnam, Europe, Germany. So all of those are kind of contributing to the growth here in the second quarter. I think Cloud and Edge would obviously be growing faster as the Verizon deployments kind of picked back up again, and that will be a key part of the growth into the second half of the year. Timothy Savageaux: Okay. Just as an aside, I just want to check in, those sound like absolute dollar comments, I ought to go smaller. So I want to check on that versus percentages. But the main follow-up question was, if we look at Q1 results, is it fair to look at the year-on-year declines in Cloud Edge. Is that mostly Verizon or not at all? I know they stayed on the 10% list, but I assume they are done pretty good. And then maybe a little more in depth on the IP Optical decline year-over-year in terms -- I guess India was up. So what was the real weakness there? Bruce McClelland: Yes. So 3 good questions. So the first 1 around dollars versus percentages for second quarter, I think from a dollars perspective, the IP Optical business will be up more from a dollars or revenue perspective. And I think that translates probably into a larger percentage increase at the same time. So for -- yes, we don't guide each individual segment, but I think that's the trend we're expecting to see in the second quarter. The question on kind of year-over-year, what was down in the first quarter? Was it Verizon versus other things. Actually, Verizon was perhaps the smallest piece year-over-year from Q1 last year to Q1 this year. It was really actually not 1 specific thing. It was a number of kind of smaller projects that we had with different service providers. I think we were down 5%, 6% in the first quarter on Cloud and Edge. So it wasn't a big drop, and it wasn't 1 individual customer, kind of a series of smaller things. I think in the last question, which was similar around the IP Optical decline. The Asia Pac region in the first quarter, including India was fairly consistent, maybe off $1 million or $2 or something like that, so very consistent year-over-year, with India being the strongest piece of that market for us. So the weaker parts was really around the European market and a little bit in North America as well, but I think Europe was the kind of the largest contributor to the decline in the first quarter. And our business in Europe, in particular, is concentrated with a whole variety of different types of critical infrastructure customers, railways, oil and gas, big in defense. And those projects tend to be project based. You win something, you complete it and then you go find the next program. So it can be a little bit lumpy. As you see now, with the bookings metric, clearly, that was a real positive and sets us up for stronger growth here in the second, third quarter. Timothy Savageaux: And that was my last question actually, talking about that IP Optical, book-to-bill, and you guys highlighted what's happening, data center interconnect-wise, pretty significantly here in the report. Say you gave us an order of magnitude, I think, on this contribution from your big Africa deal. I wonder to what extent do you see either what you've booked order wise or the opportunity pipeline or however you want to term it in terms of additional color, how you would look at this DCI opportunity in terms of materiality relative to either book-to-bill or the overall IP Optical business? Bruce McClelland: Yes. So the data center interconnect space was not a big focus area for us, say, 3 or 4 years ago. We really, as you know, have been very focused on. We can't do everything. So we're focused in on critical infrastructure segment where highly secure, robust capabilities are really crucial. So that was a real sweet spot. And then building out our capabilities around middle mile IP MPLS in the access and aggregation layers of the network, which is 1 of the big strengths in our India deployments. So the third leg in the stool really for us is around data center interconnect, and we kind of started in full earnest last year with the launch of 2 new platforms, our 2700 series which is a very dense aggregation platform for aggregating 400-gig IP clients and the other optical transport platform, which was built for the data center, basically built for enterprise, different form factor, a compact modular flood design that allows us to leverage pluggable optics and -- so those were the 2 new products that we launched last year focused around data center. And so that's allowed us to start to generate wins and kind of grow into that market. Relative to the first 2 markets, it's small for us today, but we've improved our go-to-market to match the new products that have come out, and we do think it's a stronger growth path for us. It's a little hard for us to forecast revenue yet at this point because we're kind of building wins as we go. But I think you'll hear a lot more about it from us in the future. Obviously, there's a ton of spend going into data centers, and we want to be able to go after that market, both through our service provider customers as well as direct into different types of data centers. Operator: There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks. Bruce McClelland: Okay. Great. Thanks, Paul for -- maybe Russ has squeezed in on the question line, Paul, if you can check with them. Operator: Our next question is from Rustam Kanga with Citizens. Rustam Kanga: Is it fair to say, Bruce, that visibility into the sustainability on the India CapEx side, has improved since last quarter, and that's largely intact now? Bruce McClelland: Yes. On the last call, I talked about really 3 different areas that we were being cautious on around the growth in India around plans with Verizon and others around network transformation. And we feel like we've got better improved visibility. Clearly, the India market is remaining very strong. In fact, it was a it was a catalyst for us to do well in the revenue line for Q1. So I think we're feeling better. I think the enterprise market, both critical infrastructure on our IP optical side, and then large enterprise around our secure voice looks really robust for the rest of the year. And then the final area that I've been just cautious on is around the U.S. federal space. I mentioned we have a couple of large programs that need to get into full deployment, so we can start adding capacity to that. So those were the areas that I think we were more cautious on and feel better about all of those as we sit here kind of 90 days later. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bruce McClelland for any closing remarks. Bruce McClelland: Well, great. Thanks for everyone joining us today. Just to reiterate, I guess, the key messages here. We -- as we just summarize, I think we feel like we have good visibility going into the rest of the year, starting with improvements here in the second quarter and look forward to keeping everyone updated. We have a whole slate of investor conferences over the next couple of months and look forward to keeping you updated with our progress. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Good day, and welcome to Camden National Corporation's First Quarter 2026 Earnings Conference Call. My name is Lucas, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Renee Smyth, Executive Vice President, Chief Experience and Marketing Officer. Go ahead, Renee. Renée Smyth: Welcome to Camden National Corporation's First Quarter 2026 Conference Call. Joining us this afternoon are members of Camden National Corporation's executive team: Simon Griffiths, President and CEO; and Mike Archer, Executive Vice President and CFO. Please note that today's presentation contains forward-looking statements and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is included in our first quarter 2026 earnings release issued this morning and in other reports we file with the SEC. All of these materials and public filings are available on our Investor Relations website at camdennational.bank. Camden National Corporation trades on NASDAQ under the symbol CAC. In addition, today's presentations include a discussion of non-GAAP financial measures. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release, which is also available on our Investor Relations website. I am pleased to introduce our host, President and Chief Executive Officer, Simon Griffiths. Simon Griffiths: Good afternoon, everyone, and thank you, Renee. Earlier this morning, we reported strong first quarter results with net income of $21.9 million and earnings per share of $1.29. Excluding noncore acquisition-related items from last year, adjusted net income and adjusted diluted EPS increased 39% year-over-year in the first quarter of 2026. We are pleased that these results were near our record earnings reported last quarter, reflecting the continued value generated by the Northway Financial acquisition and ongoing organic financial improvements across the franchise, despite macroeconomic headwinds and the seasonal softening we typically experience in the first quarter. These results demonstrate continued progress against our strategic priorities of growing the franchise, operating with discipline, and adapting our capabilities to better serve our customers and communities. Our balance sheet remains a source of strength, supported by strong and building capital levels, reserves that we believe are appropriately aligned with loan quality and solid liquidity. We continue to maintain regulatory capital well in excess of required levels and internal targets, with our tangible common equity ratio increasing to 7.64% at quarter's end. Our disciplined credit approach continues to deliver strong asset quality with past-due loans and nonperforming assets remaining at very low levels in the first quarter. Although loan growth was tempered this quarter, due primarily to typical seasonality within our markets, we saw continued growth in our home equity loan portfolio, which increased $10.6 million during the quarter. We're encouraged by the continued strengthening of our commercial team with recent key hires already making meaningful contributions. Our production pipeline reflects healthy customer demand across our markets, even as quarterly balances are impacted by payoffs and seasonality. As we head into the spring and summer months, loan pipelines continue to build, reinforced by the talent added to our commercial and retail teams. As we build commercial capacity, we are deepening engagement with small and middle market businesses and positioning Camden National as a primary banking partner for a full suite of lending and treasury management solutions. Our deposit base reached $5.6 billion at March 31, representing a 1% increase from the prior quarter. Given the cyclical nature of our deposit flows, we are pleased with this level of growth in the first quarter as it reflects our continued success with our high-yield savings accounts and recent wins by our commercial and treasury management teams. We are focused on relationship deposits, attracting deposits through service, convenience and disciplined pricing. Our goal is to build long-term customer relationships, not simply pursue rate-driven volume. At the same time, we remain disciplined stewards of our capital. And with strong capital levels, we are focused on balancing reinvestment in the franchise with returning capital to shareholders, including through our recently announced share repurchase program and regular cash dividend. We continue to advance our digital strategy by equipping our bankers with practical, time-saving tools. Our internally developed AI platform, Camden IQ, anchors our AI initiatives, which operate within an established governance framework designed to drive productivity while remaining aligned with our moderate risk profile and value-driven, people-centered culture. Recently, we launched Prep IQ, which delivers a real-time integrated view of customer information across platforms, enabling more informed and productive conversations. Loan IQ, another internally developed tool, further enhances efficiency by streamlining access to loan policy and supporting faster, more consistent decision-making. We're encouraged by the rapid adoption and early benefits of these tools. Expanded use of automation continues to improve efficiency and redeploy capacity toward higher-value customer interactions, supporting our disciplined approach to expense management. Overall, our first quarter performance reflects the effectiveness of our strategy: maintaining a resilient balance sheet, driving high-quality growth and staying relentlessly focused on delivering value for our customers, communities and shareholders. We believe we are well positioned for the remainder of 2026. With that, I'll hand over to Mike to provide additional financial details for the quarter. Michael Archer: Good afternoon. As Simon noted, we had a strong start to the year, delivering solid earnings for the first quarter. And importantly, our financial operating metrics continue to trend favorably, including a reported return on average assets of 1.28%, a return on average tangible equity of 18.17%, and a non-GAAP efficiency ratio of 53.21%. We continue to be focused on growing the franchise and delivering shareholder value. For the first quarter, we reported a net interest margin of 3.24%, which was up 20 basis points year-over-year and down 5 basis points from the previous quarter. The decrease on a linked-quarter basis was driven by lower fair value mark accretion income of $956,000. Our underlying core net interest margin remained stable at 2.92% between periods. As we move into the second quarter, we anticipate net interest margin expansion of 2 to 5 basis points on a core basis. Our current interest rate outlook calls for a slower and more gradual net interest margin expansion throughout 2026 as the likelihood of further Fed rate cuts has decreased. Noninterest income fell on a linked-quarter basis, largely due to normal seasonality across many of our fee income categories, including debit card, mortgage banking and swap fee income. Despite market volatility, assets under administration across our wealth and brokerage business remained essentially flat during the first quarter and were $2.4 billion at March 31. We continue to be focused on growing our wealth channels, and we are pleased to see AUA grow 11% year-over-year and quarterly revenues continuing to grow. As we move into the second quarter, we anticipate noninterest income to rebound to approximately $13 million. On the expense front, noninterest expenses totaled $35.7 million in the first quarter, down 3% from the previous quarter. For the second quarter, we anticipate our expense base to normalize as we benefited from the true-up of our incentive accrual bon payout in the first quarter. And as in prior years, our annual merit cycle and other seasonal costs will be recognized in the second quarter. We are currently estimating a noninterest expense of approximately $37.5 million for the second quarter. Our credit quality across our loan portfolio continued to be very strong at March 31. Nonperforming loans were just 22 basis points of total loans and past-due loans were just 6 basis points of total loans. Net charge-offs for the quarter totaled $506,000 or 4 basis points of average loans annualized, and was the driver of our first quarter provision expense of $553,000. Our allowance for credit losses on March 31 was 92 basis points, compared to 91 basis points at year-end. Given the strength of our loan portfolio and our overall loan mix, we continue to believe we are appropriately reserved at this level as evidenced by a 4.2x coverage ratio of nonperforming loans at quarter-end. Lastly, I wanted to note that our capital continues to rebuild following our acquisition of Northway Financial last year, supporting both balance sheet strength and ongoing capital returns to shareholders. During the first quarter of 2026, our tangible book value per share grew 3% to $30.58 at March 31, which included the repurchase of just over 33,000 shares during the quarter. Through regular cash dividends and share repurchases, the company returned $8.6 million in capital to its shareholders. This concludes our comments. We'll now open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Damon DelMonte from KBW. Damon Del Monte: I hope everybody is doing well today. First question, Mike, just wanted to talk a little bit about the margin. Got your comments there about 2 to 5 basis points of core expansion. Could you just talk about some of the dynamics behind that? Is that more on the liability side or is that kind of going to be driven by the expected rebound in loan growth as we progress through the year? Michael Archer: Damon, yes, good question. Yes, primarily on the liability side, as we get into some of the seasonal months, we anticipate some continued benefit there just from normal deposit flows, if you will. We also, as CDs continue to reprice, there'll be some benefits there as that continues to roll. And then I would just say on the derivative front as well, as we get into the back half, we'll start to see some benefit there. Some of our derivatives start to roll off. We do on the asset side, I'd say albeit at a slower pace, new loan volume, certainly, there's an opportunity for us to continue to squeak out some basis points, if you will, just on the earning asset yield. And I would just lastly add there too, Damon, that I think, strategically, one of the things that we're focused on is just redeploying our investment cash flow where we can: one, to optimize certainly funding; but ideally, two, to fund loan growth on a go-forward basis. So lots of pieces there, but I think that kind of summarizes it. Damon Del Monte: Got it. Okay. That's helpful. And then from the fair value accretion standpoint, I think it was like $4.5 million or so this quarter. Is that right? And if so, kind of what's your outlook going forward? Michael Archer: Yes. No, good question. So overall, I think we're about $4.3 million for the quarter. I would still say $4.5 million, maybe a little bit north of that is still a pretty good run rate estimate for us for now. Damon Del Monte: Okay. Great. And then with regards to the loan growth and the outlook there, Simon, heard the call-out on the home equity line doing quite well. Can you just talk about some of the other expectations on the commercial side, CRE and C&I, and kind of what are some of the key factors behind that, driving that outlook? Simon Griffiths: Yes, Damon. I think overall, we see -- continue to see strength across our business. Obviously, there's a lot of macroeconomic uncertainty out there, but I think the underlying continues to be positive. We certainly see on the commercial side, we see some nice momentum, and certainly see businesses wanting to get out and invest. And obviously, as we start to get into the spring/summer months, that obviously kind of comes into focus as they're getting investments, making investments ready for the summer. We see nice momentum around the resi business as well. We talked about home equity, which I think is strong, and continue to see nice momentum on that business as well. So I think overall, it's a positive outlook. And we talked a little bit about in our script around some of the additions we're making, some of the strengthening of the team that we've made in the New Hampshire market. That also is strong. I was out with them a couple of weeks ago, and really excited by the opportunities we're starting to see in the Southern New Hampshire market and the strength of the team there. And I think all these pieces together definitely lead to a positive outlook. Damon Del Monte: So would you kind of expect to get sort of like low to mid-single digit on a full year basis? Is that a reasonable assumption? Simon Griffiths: Yes. That feels reasonable. Obviously, this year, lots going on. But I think where we sit right now, I think low sort of single-digit, low mid-single-digit seems a good range. Operator: Your next question comes from Steve Moss from Raymond James. Stephen Moss: Maybe just starting here on -- or Simon, following up on the new hires in New Hampshire. Just kind of curious the type of talent you're seeing and the opportunity you guys are seeing to hire, and any thoughts on maybe the potential expenses beyond the second quarter, if there's maybe more incremental adds? Simon Griffiths: Steve, yes, we continue to be extremely disciplined, as we've talked about in previous calls with you. Yes, our focus is really on self-funding, reinvesting, providing -- finding efficiencies across our business. So we don't see a material impact to the expense side. Some of those hires are certainly replacing existing positions. We see opportunities, obviously, with some of the southern end markets, there's been a lot of disruption, some M&A, and so we're picking up some great hires from some of those pieces. And I think honestly, they're very attractive to the Camden story. I think they see the opportunity here. We've got a lot of ambition to continue to grow. We've obviously got the Northway acquisition, which I think has provided a great platform. And we're continuing to invest. So we're seeing that opportunity and I think continued at a steady, measured pace, continue to make those investments throughout this year and into next. Stephen Moss: Okay. I appreciate that color. And then just maybe in terms of -- I hear your comments on the home equity and resi stuff. Kind of curious on the commercial loan pipeline, where are you guys seeing pricing these days and what you are expecting there? Michael Archer: Steve, it's Mike. Yes, I mean, I would say, overall what we're seeing is, I would say, on average, deals kind of in that 6% to low sixes on average. I mean certainly, there's certainly a premium, if you will, for credit quality these days, and certainly aggressive in just the market. But we, as we think about loan growth, we certainly want to maintain our discipline there. And that's kind of who we are and who we've been and continue to be. But overall, I would say just on a weighted basis, it's probably closer to 6% at this point, or a little bit higher. Stephen Moss: Okay. Appreciate the color there. And maybe just one last one on M&A here. You've integrated the Northway deal, Simon, and done a good job with it. Maybe just updated thoughts on talks and what you're thinking on the deal front here these days? Simon Griffiths: Yes, I think on the -- you just broke up a little bit there, Steve. But I think you said costs, update on the costs. Is that correct? Stephen Moss: No. On M&A activity and just the thoughts around deal activity post -- now that you've integrated Northway, you're doing -- you've been doing well here with the transaction. Just kind of curious where M&A discussions are and just updated thoughts there. Simon Griffiths: Overall M&A. Yes, we -- I mean, just to continue to recap. I mean, I think Northway obviously went very, very well. We're very proud of the work there. I was out in New Hampshire last week or so, and just seeing just a lot of energy from our clients, from our customers. Just really proud of the New Hampshire teams and the way we're really sort of getting some traction in the markets and excited to be part of the Camden franchise. I think on a look-forward, Steve, we continue to look, we've said publicly, we're certainly interested in opportunities, but it has to be the right opportunities for Camden. We feel like we've got tremendous opportunities on the organic growth front. We're seeing great capital rebuild. We're seeing this has been highly accretive from an income perspective and lots of opportunities there. So we don't feel pressure to make a deal, but we're certainly looking. We've talked about contiguous markets as sticking to our DNA as an organization. And really organizations with a similar sort of footprint and feel and look to Camden National Bank, and a culture that really would assimilate well. So we're certainly open to those opportunities, but not getting pressured and certainly not going to overreach at the same time. So it's a balanced approach, a thoughtful approach and one where we're going to continue to obviously really focus on the core business and driving the performance and continuing that path with top-quartile returns. Operator: Your next question comes from the line of Matthew Breese from Stephens. Matthew Breese: Mike, I wanted to drill into your comment on margin expansion being driven by the liability side. Could you just provide a little bit more color on the areas where you see the most potential for improvement? One thing I was just focusing on was the cost of CDs, the 3.17%, seems like a pretty low starting point to begin with. Where else do you see the opportunities? Michael Archer: Yes. I mean, I think, Matt, as you know, certainly, as we think about second quarter and beyond, I mean part of the opportunity for us is just the remix of our deposit base as we get into the spring/summer season. Generally speaking, I would say, call it, late May, into June, we start to really see some of the seasonal deposits come in. So we fully anticipate that to be the case again this year. No reason to believe that wouldn't be the case. So we certainly see opportunity there. And we also have, as I mentioned, we have some derivatives, I don't know the number off the top of my head here, that are rolling off. But some of those have served us really well over the last few years just given the Fed position today are a little bit underwater. So as we think about opportunity there, there continues to be some opportunity. I think overall, as you think about the funding base, we do think that there's probably that 2 to 5 basis points, is where we can see some margin expansion here in the second quarter. And I think we're -- we feel pretty good that as we continue even with the Fed holding as they are, that as we get to the back half of the year, there could be an opportunity where we start approaching 3% on a margin -- core margin basis. So we do see core margin expansion here over the next few quarters. Matthew Breese: Great. And then for loan growth this quarter, how much of what we saw -- or a bit of the sluggishness on the loan growth front, how much of that was seasonality? How much of that do you think was competition? We've heard a lot about prepays and prepayment. And what gives you the confidence, maybe some color on the pipeline, that will get back into that low to mid-single-digit range for the remainder of the year? Michael Archer: Yes. No, I think -- I mean, we're seeing pipelines build, Matt. I mean, I think that gives us confidence, I think, just on a year-over-year basis, we're seeing it. I think as Simon had mentioned in his comments, we really added some strong talent just across the New Hampshire franchise and really being -- really just activate that this year. It's an incredible opportunity for the organization. At the same time, we've made some nice adds just to our main franchise, in some of our markets that we've been in for quite some time, and we see some upside there. Certainly, on the retail franchise, we've had a nice strategy that we're executing on. We continue to add bankers in that space as well, that are out selling residential mortgages, home equity has been really strong for us, and small business. So I think as we think about our opportunity for low to mid-single-digit growth here on the loan front, I think the reality is, yes, the first quarter is normally sluggish for us. I think we're starting to see the pipelines build. And generally speaking, the back half of the year is kind of where we start to see it typically play out, if you will. But again, all signs point to that at this point. So we still feel like that's a pretty good-range estimate. Matthew Breese: Got it. Okay. And then 2 others for me. One, just focusing on the resi loan category. What's the current breakdown between loans being sold into the secondary market versus held for balance sheet at this point? And when do we start to see that portfolio -- is that a growth category for you or more one that we should think about as stable? Michael Archer: Yes. I would say overall, Matt, we're generally plus or minus 50-50, in that neighborhood. Certainly, quarter-to-quarter, it will -- can move a little bit. But generally speaking, that's kind of how we're thinking about it. I think overall for the resi portfolio, I would say we're definitely thinking about probably slower growth and more relationship-based growth, is what I would say, less just transactional, just in thinking about how we want to position our loan portfolio and balance sheet over time. Certainly, I wouldn't say our expectation is it's flat. But certainly, I don't think it's also growing at the mid-single-digit level that's in the expectation. Matthew Breese: Okay. And then last one for me is just, historically, I don't know if I remember Camden being much of a prolific repurchaser of your own stock. You talked a little bit about that in your opening comments. To what extent might that fit in on a go-forward basis? How much in the way of share repurchase should we be thinking about? Michael Archer: Yes, it's a good question. I would say that we're kind of -- I mean, we kind of talk internally about one of our challenges kind of jokingly, is we generate lots of capital and we have to put it to work, Matt. So I think just in terms of organic growth that we're focused on, positioning our capital level so we can be opportunistic as that occurs, as well as deploying in terms of share repurchase and dividend, I think that's going to play into the mix. I would say on the share repurchase front, again, I wouldn't -- I don't think I could sit here and quote a number of what we're targeting, but we'll continue to be opportunistic. The shares that we did buy over this past quarter, let's say, we saw a dip in our share price. And for us, given the valuation of that, that made sense. So I would envision that we continue to play that out a little bit over the coming quarters. But again, I think it will depend in large part on our share price. Operator: Your next question comes from the line of Daniel Cardenas from Brean Capital. Daniel Cardenas: Maybe if you could give me a little bit of color on competitive factors, both on the loan side and the deposit side, whether they've become more intense or less intense and if competition is rational. Simon Griffiths: Yes. Daniel, appreciate the question. Yes, I would say, overall, we definitely felt a pickup in competition over the last 3, 6 months. Having said all that, I think there's still plenty of room out there when we can demonstrate the tremendous value we can bring around our products, around the value of our people, conversations, advice, treasury and other capabilities. So I think it's -- the opportunities are to be had, but there's definitely a feeling that there's been a pickup in pressure and focus on assets over the last, let's say, 6 months or so. And that certainly showed up in a little bit of the pricing pressure that we've talked about. Having said all that, as I say, I do see lots of positives for the, particularly, New Hampshire and the main markets. You're seeing customers wanting to get out and invest, see great opportunities. And we're having lots of active conversations and seeing that kind of sharpen our pipelines, which is certainly in a good position, I think, heading into the second quarter. So overall, we feel well positioned. I think we're -- the talent we're bringing in as well gives us an added kind of a little bit of a tailwind there and I think gives us momentum. So looking forward to the second quarter and the rest of the year. Daniel Cardenas: Okay. And then I mean, what are your customers telling you in terms of the current economic environment? Are they becoming perhaps a little bit more cautious? Or is it more business as usual? Simon Griffiths: I would say it's a mixed picture. I would say, definitely, consumer spend remains steady. Have a stable outlook in terms of the consumer, which obviously impacts a lot of our businesses. I'd say business investment is certainly measured, but at a positive pace. I was at a business in the Midcoast recently, and they're looking to expand, not slowing expansion and certainly on the front foot. I think we're seeing that across clients. I think there's certainly some pockets of particular strength, Daniel. Certainly, areas like [indiscernible], a couple of other areas just given demographics and other kind of pieces, that we see certainly some momentum there. We don't see AI spend showing up with our customers. It's really on core capabilities, core infrastructure, capital spend that really is where the focus is. And it's a tight labor market, so that's certainly still a factor that plays in the main market, New Hampshire market. So I think overall, it's a mixed picture. Certainly, when we talk to some of our tourism-related, hotel-related kind of areas, they see a certainly decent start, good start to the year in terms of bookings and their outlook for the summer months. How that plays out, obviously, with fuel costs and other factors, is going to be an interesting play. But certainly, Maine does well. It's steady. When there's these macroeconomic pressures or other factors, Maine is always steady, down the middle of the fairway. We don't see the highs of the highs and we don't see the lows of the lows. So we see that sort of solid kind of middle ground and stability. And I think that's going to show up well this year, particularly given obviously, some of those macroeconomic concerns that are out there right now. So overall, a bit of a mixed picture, but generally, I think quite favorable, and I think looks -- sets us up for a good year. Daniel Cardenas: Excellent. All right. And then, what are line utilization rates looking like right now on your commercial portfolio? And then how does that compare to, say, 6 months or so ago? Michael Archer: Sorry, Daniel. So did you say the commercial utilization? Daniel Cardenas: Yes. Michael Archer: Yes. So we're kind of in that 35%, 40% neighborhood. And generally speaking, I know you didn't ask, but the same on the home equity front as well. Daniel Cardenas: Okay. Last question for me, just as I think about fee income growth in 2026, I know Q1 can be a little seasonally soft. But is a mid-single-digit type of growth on a year-over-year basis an achievable objective on the fee income side? Michael Archer: Yes. Yes, I think that's fair, Daniel. Simon Griffiths: I was just going to add that we have a, I think, strong wealth strategy. Obviously, there's a lot of moving parts in the fee income, and there's -- obviously, the consumer fee income is a key part of that. But just generally, we're investing in that business, both in the CFC business and the wealth business. We added a couple of key hires last year, and that's certainly building out some important markets for us. And we're seeing some nice growth. We see, particularly on the CFC side, our brokerage business, we saw some very nice growth last year. And that momentum, I think, will continue this year. And then the wealth business as well, seeing some high single-digit growth there, certainly in the first quarter, and some good momentum. So I think overall, it's a business that is going to add, of course, we have the resi business as well, which is a real core strength of Camden. So those pieces. And then we see some nice fees coming out of the commercial business as well on the swap front. So I think overall, it was a little bit of a soft start to the year. But certainly as we get into the second, third, fourth quarter, I think we can see some momentum from there moving forward. Operator: As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Simon Griffiths for any closing remarks. Simon Griffiths: Thank you for your time today and your continued interest in Camden National Corporation. We truly appreciate your support. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Alexandria Real Estate Equities' First Quarter 2026 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to our first quarter earnings call. With me today are Marc, Peter and Jenna. First of all, as I always do, I want to say a thank you to our remarkable family team for their awesome efforts during a tough first quarter operating environment. And as they know well, we are motivated each and every day by our solemn mission to enable this precious life science industry, one of the most treasured and innovative industries on the face of the planet to discover and bring to patients life-saving and life-changing therapies. And how many of us, friends, loved ones still suffer from the likes of Parkinson's, ALS, pancreatic, colon, breast, et cetera, cancers, dementia to name a few. 2026, we celebrate the 50th anniversary of the DNA and biotech revolution, and we still have addressed less than 10% of human disease. The life science industry is a highly regulated industry dependent upon proper functioning of the 4 key pillars. As we've said before, strong and basic translational research is critical. There remains strong bipartisan support in Washington to fully fund the NIH. There was a great victory this quarter in the defeat of the 15% limitation on reimbursement of institutional indirect costs, which I think will be very, very well both received and implemented over the coming quarters and years. Unfortunately, August 24 (sic) [ April 24 ], the entire NSF, National Science Foundation Advisory Board was fired. Their role is science and engineering advice, kind of a shock. Leadership challenges remain at the NIH and HHS and FDA. Number two, strong innovation, coupled with open and vibrant capital markets. Obviously, we're in one of the -- maybe the greatest innovation time in the history of humankind. On the capital markets, they've been very selective. Private funding has been very solid, but deliberate and discriminating. On the public side, the markets have been open for good data and key milestones, but for most public biotechs in preclinical or in the clinic, which don't have data or milestones to finance off of, it's been a very tough slog. Number three, reliable and efficient regulatory framework, continuing effort to need to reduce time and cost into and through the clinic. The FDA progress has been sluggish. Leadership and staffing pressures have been abundant, and China continues to pressure the industry here at home. Number four, health payment and reimbursement environment for innovative medicines. CMS is actually operating quite well under the leadership of Dr. Oz, but both sides of the aisle are focused on drug pricing. And it's hard to imagine that they haven't figured out an approach to cut out the middleman, which takes 40% to 60% of medicine pricing, which would ease the burden both on the recipients of care and on the innovative drug discoverers. We get often asked about AI in all realms of all industries. And I think it's fair to say that most of you know by now, we've got 37 trillion cells in each of our bodies and AI can support but not replace physical experimentation. Biology is just way too complex at this stage. R&D cannot go fully in silico given the massive complexity of biology. And giving an example, Novartis' CEO, who just joined the Board of Anthropic said, we only understand less than 5% of human -- the functioning of the human body today. And as you know, drug development is very complex from target discovery to hit generation to lead identification to optimization to clinical trials and on to commercialization. And it's pretty clear that the authorities in this area believe AI cannot replace physical experimentation. Most current usage is still document-centric, not biology breaking. Push button drug discovery is overhyped and even native AI companies in this sector haven't proven dominance whatsoever. It's pretty clear that AI is not fully autonomous discovery, but is aimed at compressing time lines and increasing throughput and recovering lost institutional knowledge, and that is all really good. I think most experts believe that AI will have a small impact on real estate requirements and could even see the need for additional dry and wet space as they run experiments designed by AI. Moving to the first quarter, as all of you know, it was a very tough operating environment, but we made very solid progress on our path forward laid out in detail at our Investor Day. Number one was to maintain a strong and flexible balance sheet, and Marc will talk more about that. Number two is to reduce capital spend and funding needs going forward. And I think we're well on our way to refining -- or refining and reducing CapEx in our pipeline. And we've also been fortunate to sign quite a number of LOIs leading to leases, which will reduce the CapEx into the lease statistics as we go forward. Something that is a cornerstone to this year in this reset is to substantially complete a large-scale core, noncore and sales of partial interest disposition plan. We are on track even though the first quarter was relatively quiet, but we fully intend like last year to meet our goal. And I think it's fair to say, and Peter can expound on this when -- during Q&A, the transaction market for life science assets is even better this year than it was last year, and we have a high level of confidence. Four, we want to steadily improve occupancy and increase NOI focused on leasing. The pinch point in leasing has been -- this is one of our lower quarters, but we look to bounce back nicely next quarter. This is maybe the first quarter in the history of the company that I can remember where we didn't sign a single public biotech lease. So that gives you a sense of what the environment is out there. I think it's fair to say in our pre-read, we highlighted the sale, which closed during the fourth quarter, but it's emblematic of the quality and value of the underlying life science assets that we continue to hold, especially on the mega campus. Our disposition of 409/499 Illinois Street in Mission Bay received a record pricing of $1,645 per square foot, the highest ever achieved for lab asset in San Francisco. And by the way, it was 40% occupied. Fair to say that this year, what is critical for us is to continue our path forward. The mega campuses will continue to differentiate us. Our balance sheet will remain strong and flexible. We've worked on continuing to lower G&A. The quality of our assets continues to be outstanding as recognized by our tenants as well as our operational excellence and clearly a best-in-class team throughout. I think finally, fair to say that if you look at our top 20 tenants, 80% of the top 20 tenants are investment grade and -- or large-cap companies, and that's very reassuring. 55% of our total ARR comes from that. And of the top 20, we have almost a 10-year WALT, which is really great. And we have one -- I think, the longest of WALT of -- not WALT, but duration of our debt, and Marc will talk about that. And then finally, 78% of our ARR comes from our mega campus platform, which we've been working hard on. So with that kind of intro to the quarter, let me turn it over to Marc for his detailed comments. Marc Binda: Thank you, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon, everybody. First, congratulations to the entire Alexandria team for the outstanding operational execution of the steps of our path forward set forth at our December Investor Day despite a very challenging industry backdrop, including, first, outperformance on capturing leasing demand in our largest markets relative to our market share. I'll get to that later. Second, positive development and redevelopment leasing momentum with the execution of development and redevelopment leases and letters of intent aggregating 394,000 square feet. Third, focus on improving occupancy with cumulative leasing of vacant space of 1.1 million square feet that we will deliver in September on average. Fourth, continued general and administrative expense savings of $7.4 million compared to the 2024 quarterly average. Fifth, a $366 million gain associated with our unsecured bond tender, which reduced our overall debt; and sixth, significant fundraising efforts with $2.2 billion of dispositions and sales partial interest pending or identified and in process. FFO per share diluted as adjusted was $1.73 for 1Q '26, and we reaffirm the midpoint of our guidance for FFO per share diluted as adjusted for 2026 at $6.40 while tightening the range. Leasing volume for the quarter was 647,000 square feet. The decline in total lease volume was driven by the following: first, as expected, lower renewals and re-leasing space given the 657,000 square feet of key known lease expirations that we anticipated would become vacant during the quarter; and second, limited demand from public biotech with 0 leasing volume in the first quarter a segment of our tenant base, which accounts for 24% of our annual rental revenue. A bright spot for the quarter includes the positive momentum on development leasing with 118,000 square feet executed and another 276,000 square feet of signed letters of intent for existing development and redevelopment space. Looking ahead to the second quarter, we do expect an uptick in total leasing volume of around 900,000 square feet, given the early activity to date. Free rent and rental rate changes on renewed and re-leased space were under pressure in 1Q '26, which reflects the market realities and includes a 48,000 square foot lease at 40 Arsenal Watertown for a 12-year term, which was a significant contributor to the rental rate reduction of about 15% and 15.8% on a cash basis for the quarter. Alexandria continues to dominate in our largest markets. This is a really important takeaway. In our largest 3 markets during 1Q '26, we captured on average around twice the leasing volume compared with our market share of life science real estate. For Greater Boston, we captured approximately 20% of the total leases in the market, which is 153% of our market share. For San Francisco Bay, we captured 30% of the total leases in the market, which is 253% of our market share. And for San Diego, we captured approximately 67% of the total leases in the market, which is 208% of our market share. These stats highlight Alexandria's dominant brand, sponsorship, mega campus quality location and the best team in the business. Occupancy at the end of 1Q '26 was 87.7%, down 320 basis points from the prior quarter, primarily driven by the 657,000 square feet of key known lease expirations, which went vacant during the quarter. We have an additional 747,000 square feet of key lease expirations expected to go vacant in 2026 with approximately 45% of that expected to expire in the second quarter, which should put pressure on occupancy for 2Q '26. For the second half of '26, we expect occupancy to benefit from the 1.1 million square feet of vacant space that has been leased and is expected to deliver in September on a weighted average basis. We updated the midpoint of our guidance range for year-end 2026 occupancy from 88.5% to 87% or a reduction of 1.5%, which was primarily due to a reduction in the anticipated benefit from a range of several potential disposition properties, which have vacant space. Our initial guidance assumed a 2% benefit, and we now assume around a 1% benefit as we no longer expect to sell as many assets with significant vacant space. It's important to highlight that we've had good leasing interest on some of these types of properties with vacant space. Tenants continue to prioritize asset quality, location, best-in-class operations, sponsorship and brand trust, which distinguishes Alexandria as well as our mega campuses, which represent 78% of our total annual rental revenue at 1Q '26. Importantly, this has led to significant occupancy outperformance by Alexandria in the mid to high 80% range across our largest 3 markets compared to market occupancy in the mid to high 70% range for these same markets at the end of 1Q '26. Same-property net operating income was down 11.9% and 11.7% on a cash basis for 1Q '26, which was primarily driven by a reduction in occupancy. Consistent with my commentary on our last earnings call, we expect stronger performance in the second half of 2026, primarily driven by improved occupancy compared with the corresponding prior year period. It's important to also highlight that our anticipated same-property pool also had lower occupancy in the second half of 2025 compared with the first half of 2025, which all things being equal, should help same-property performance in the second half of 2026. We updated the midpoint of our guidance range for same-property net operating income from down 8.5% to down 9.5% or a 1% reduction due to a decrease in the anticipated benefit from a range of several disposition properties, which have vacant space similar to the dynamics I described for the change in occupancy guidance. Despite the current challenges in the life science real estate market, we continue to benefit from a very high-quality tenant base with 55% of our annual rental revenue coming from investment-grade or publicly traded large-cap tenants, long remaining lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases and strong adjusted EBITDA margins of 66% for 1Q '26. We continue to focus on one of the pillars of our path forward, which includes the continuing successful reduction in management of general and administrative expenses. We remain on track with our guidance range of $134 million to $154 million for 2026, which represents around a 14% savings at the midpoint compared to our 2024 benchmark or about $24 million in annual savings. On a combined basis for 2025 and 2026, we expect G&A expense savings of around $76 million in aggregate relative to 2024. And our trailing 12-month G&A as a percentage of net operating income through 1Q '26 of 6% is less than half the average of all S&P 500 REITs over the last 3 years at around 14.3%. For 1Q '26, realized gains included in FFO per share diluted as adjusted from our venture investments were $18 million, and we reiterated our guidance range for realized investment gains of $60 million to $90 million for 2026. Capitalized interest for 1Q '26 was $70 million, which was down around $12 million from the prior quarter. The decline was primarily driven by a pause on construction and preconstruction activities on assets that were sold or designated for sale in 4Q '25. We expect capitalized interest to decline in the second half of 2026 due to a combination of factors, including, first, the completion and delivery of some of our current development and redevelopment projects under construction; and second, the potential for pauses or ultimate dispositions related to land, including some portion of the land with real estate basis averaging $1.2 billion with preconstruction milestones in August of 2026 on a weighted average basis. We reduced our guidance for capitalized interest by $5 million at the midpoint of our range with a corresponding increase to interest expense due to anticipated earlier completion of certain construction and preconstruction milestones and pauses related to several projects in the second half of 2026. We enhanced our disclosures for capitalized interest to highlight construction and preconstruction milestones broken down by year, including the following: first, land with $567 million of real estate basis with preconstruction milestones in April 2027 on a weighted average basis; and second, development and redevelopment projects under evaluation for business and financial strategy of $1.3 billion spread across 5 projects with construction milestones in March of 2027 on a weighted average basis. We continue to evaluate each project individually. If in the future, we decide not to move forward with these projects beyond these construction milestones, capitalization of interest for these projects would cease along with other related project costs, including payroll, which are highlighted on Page 42 of our supplemental package. We have 1.9 million square feet of projects under construction and expect it to stabilize through 2028, which are 77% leased, including around 600,000, which is expected to stabilize in 2026, which is 93% leased. We also have 1.6 million square feet spread across 5 different projects for which we are evaluating the business and financial strategy. I'll walk through the 4 largest. First, 421 Park Drive is located in our Fenway mega campus. This is a ground-up development intended for laboratory use. We expect this project to be attractive to the many nearby institutions. And the outcome for this project will depend on tenant interest, and we expect to have critical construction milestones in early 2027, which we are evaluating. Second, 40 Sylvan Road is located in our Waltham mega campus. We believe this project could be attractive to advanced technology tenants that may find certain elements of the building attractive and may not require a full conversion to lab. This project has critical construction milestones in the second half of 2026, which we are also carefully evaluating. Third, 311 Arsenal Street is located on and is highly integrated into our Arsenal In the Charles mega campus located in Watertown in Greater Boston. We are seeing good activity for this project from advanced technology users, and we recently executed approximately 82,000 square feet of letters of intent with 4 tenants for this kind of use, which increased the lease negotiating percentage for this project up to 28%. And fourth, 3000 Minuteman Road is located in our mega campus along Route 495 north of Boston. We believe this site will be attractive to advanced technology tenants as evidenced by the 160,000 square foot letter of intent we recently signed for a portion of the project. For both 311 Arsenal Street and 3000 Minuteman Road, if we complete these advanced technology leases, we may place all or some portion of these spaces into the operating pool, which may reduce operating occupancy in the near term, but more importantly, will reduce our capital needs and generate near-term revenue upon delivery. We continue to focus on our disciplined strategy to recycle capital from dispositions and partial interest sales to support our funding needs with a focus on the substantial completion of our large-scale noncore asset program in 2026. We expect land to comprise 10% to 25% of the $2.9 billion midpoint of our guidance for 2026 dispositions and sales of partial interest with core, noncore and sales of partial interest to comprise the balance of 75% to 90%. Our guidance assumes a weighted average completion date of August 2026, which is about a month later than our initial guidance provided at our Investor Day. We believe there is strong institutional interest for our core assets at a reasonable cost of capital. And accordingly, we believe that joint ventures for some of our core assets could be a significant component of our capital plan, and we expect to have more details over the next quarter on the mix of dispositions as well as the timing as this continues to evolve. Our team is making good progress with about 80% of the $2.9 billion midpoint for dispositions and sales of partial interest pending or identified and in process. We expect to make decisions on the remaining 20% over the next several months. In early December, our Board authorized a reload and extension of the common stock repurchase program of up to $500 million. Our guidance does not assume any common stock repurchases in 2026 based upon current market conditions, and we're currently prioritizing our fundraising efforts to go towards our existing capital needs before we consider future common stock repurchases. We continue to have a strong and flexible balance sheet. Our corporate credit ratings continue to rank in the top 15% of all publicly traded U.S. REITs. We have tremendous liquidity of $4.2 billion and the longest average remaining debt maturity among all S&P 500 REITs of 10 years. We have reiterated our guidance range for 4Q '26 net debt to annualized adjusted EBITDA of 5.6 to 6.2x. As expected, our first quarter 2026 leverage increased to 6.8x on a quarterly annualized basis, and we expect leverage to come down in the second half of 2026 as we make progress on our dispositions and sales of partial interest. We tightened the range of our guidance for 2026 FFO per share diluted as adjusted with no change to the midpoint of $6.40. We made a number of changes to the underlying assumptions for guidance, which were primarily driven by 2 items. First, we reduced rental rate changes and rental rate changes on a cash basis by 7% and 3%, respectively, primarily for 2 transactions, which include a 48,000 square foot long-term lease completed during 1Q '26 in Watertown to an entertainment studio user and an 81,000 square foot lease completed in April with an exciting growth stage life science company to backfill a struggling tenant located in Torrey Pines, and we continue to focus on capturing demand and meeting the market for the right tenants. Second, our initial guidance assumptions for occupancy and same-property performance included a 2% and a 3% benefit, respectively, for a range of assets that could be considered for sale during 2026. Due to changes in the mix of assets considered for sale this year since our initial guidance, we now have a smaller assumption for sales of assets with significant vacancy. Accordingly, we reduced our outlook for occupancy and same-property performance by 1.5% and 1%, respectively, to reflect an updated assumption that we hold on to more assets with vacancy in part due to good tenant interest on these types of assets. At our Investor Day in December, we provided a guidance range for 4Q '26 FFO per share diluted as adjusted of $1.40 to $1.60 with a midpoint of $1.50. We refined this range to $1.40 to $1.50, which implies a $0.05 decline at the midpoint of the range of $1.45 which is primarily related to a reduction in capitalized interest, as I discussed earlier. It's important to note that while our guidance for the fourth quarter of 2026 implies a $0.05 reduction in the midpoint to the $1.45, the midpoint for the full year 2026 FFO per share diluted as adjusted was unchanged at $6.40 and benefited from later timing on the projected timing of dispositions and sales of partial interest, which was moved back by about a month. In addition, we also provided several key current considerations on Page 6 of our supplemental package that highlight several factors that could have an impact on our results in and beyond 2026, including 1.5 million square feet of lease expirations for 2027 with approximately $97 million in annual rental revenue that are expected to have downtime and which we are closely monitoring. We remain keenly focused on executing the steps for our path forward that we established at our Investor Day, including maintaining a strong and flexible balance sheet, reducing funding needs, substantially completing our large-scale noncore disposition plan, focusing on improving occupancy and NOI and successfully managing G&A, among others. With 10,000 known diseases and limited cures and treatments, the industry has a lot to accomplish, and we continue to believe that life science companies will continue to recognize Alexandria as the market leader with the best assets in the best locations and the best on-the-ground teams to operate these mission-critical research facilities. Now I'll turn it back to Joel. Joel Marcus: Operator, let's go to questions, please. Operator: [Operator Instructions] Today's first question comes from Farrell Granath with BofA. Farrell Granath: I first wanted to address the change in occupancy guidance that you made a commentary about the consideration of those assets no longer being considered for disposition, but the disposition guidance did maintain at the $2.9 billion. So I was just wondering if you could bridge that change what other assets were maybe being considered? Is it more assets that don't have as much vacancy? Or is it land? I'm just trying to understand that mix. Joel Marcus: Yes, Marc? Marc Binda: Yes. So it was a change in the mix. As you said, the midpoint was unchanged. There were a handful of assets that we had been considering for sale that had vacancy that we've seen, in some cases, some good leasing interest from tenants. And so we ended up changing some of the assumptions to other assets that have more kind of stabilized occupancy. The ultimate mix, we gave a broader range this time around of 75% to 90% for both core, noncore as well as joint ventures. So that's really where the change in the mix will come in that component. And we should be able to have more color on what that looks like over the -- I would say, over -- hopefully, over the next quarter or 2. Farrell Granath: And my second question is about the leasing into the entertainment studio for the arsenal lease. Just curious about that type of exit opportunity of reaching the demand that's in the market and maybe being an alternative use. How much of the near-term or line of sight leasing is potentially for this alternate use versus life science? Joel Marcus: Well, yes, Farrell, this is Joel. The entertainment tenant was an existing tenant, and it was a renewal given the fact that rental rates for that type of space have come down in the area. So it seemed prudent to renew a tenant in hand rather than empty out the space and reposition it or whatever. So it wasn't a new use. It was already there. And that's an asset that we've owned for probably 20 years. But I think you see through a number, 311 Arsenal, we've had very good activity with a range of advanced technology companies where we can utilize the space at a less CapEx investment. Rental rates are not as buoyant as lab, but those represent good opportunities. So it really depends on the location, the type of space. It's hard to generalize. Operator: And our next question today comes from Seth Bergey at Citi. Nicholas Joseph: It's Nick Joseph here with Seth. Just given the FDA leadership uncertainty and NIH budget pressures, have you seen any behavioral changes on the private biotech tenant side around expansion decisions or sublease activity or requests for lease modifications? Joel Marcus: Well, on the private side, I think we've said that ventures continue to raise money and deploy that money. They've done it in a much more judicious fashion than during, obviously, the bull market run of the last decade and then kind of a rocket ship of COVID, just given market conditions and the fact that you can't -- some companies can execute an IPO, but it's pretty difficult. But overall, I think that the FDA impact to the private side is really more impactful on the public markets, but they do obviously impact the private markets in the sense of confidence in raising the money. But I don't know, Jenna, any comments you want to make? Jenna Foger: I think that's right. I think overall, FDA uncertainty as far as policy is concerned, changes. I mean, obviously, there are some things that the FDA has tried to do and announce in trying to expedite regulatory review processes and the like, which is hopefully net positive for the industry, but that's not really playing out, as Joel mentioned on the private side just yet. Public are kind of contending with that a bit more. Nicholas Joseph: That's helpful. And then just curious, any changes to the current tenant watch list relative to kind of the past few quarters? Joel Marcus: Yes, Marc, you could comment on that. Marc Binda: Yes. Look, we continue to evaluate tenants really on a kind of one by one, tenant-by-tenant basis. I will say at the beginning of the year or really at our Investor Day, I think we had identified something around $23 million. That number has crept up in terms of a reserve for wind downs or tenant failure. That number today is somewhere in that $25 million to $30 million range. And it's through a variety of -- it's a variety of tenants, both private and public biotech as well as the kind of the ancillary type tenants, the revenue kind of producing tenants that also service those types of tenants as well. Joel Marcus: Yes. I think, Seth (sic) [ Nick ], if you look at the -- just one comment on that. If you look at the current environment over the last, say, year or 2 as distinguished from historical biotech, this is the first time that companies have really more -- or owners have more aggressively, not at the public level, but at the private level, tried to combine companies or wind down companies that they feel that the opportunities for the marketplace just aren't there. And so that's just part of capital discipline and the judiciousness with which people are watching dollars, again, given tight public capital markets. So that's the big change, I think, that we've seen compared to historical. Operator: And our next question today comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: I was looking through some of the disclosure on the 2027 expirations, which were really helpful in terms of -- I think there were some added expirations coming in 2027 versus prior. I guess my question is, as we're sort of putting it all in the blender and you're thinking on a same-store basis, it seems likely that 2027 could be down similar magnitudes as 2026, given it's a pretty similar setup with the expiration level. Is that a fair way to think about it? Or just what breadcrumbs would you provide for that? Joel Marcus: Yes. So I'll ask Marc to comment, but maybe just from a topside view, I think we're not -- it's so early in the year and so much can change. Just look at what changed last year from inauguration through the year was kind I couldn't believe the impact to the industry. It's pretty clear that, number one, we can't give '27 guidance at the moment. And number two, I think we're hopeful, as you see from some of the -- if you call them breadcrumbs, but the movement in leasing, whether it be for life science or alternative advanced technology to be gaining some good foothold there. And I think that gives us hope that we can address some of these. As I said, one of our key elements to the path forward is increase occupancy and hence, NOI. So -- but Marc, any comments you want to make? Marc Binda: Yes. Just that, as Joel said, we're not ready to give guidance for '27. But certainly, you're right that there's some expirations that we expect to have downtime. But a lot of -- the ultimate answer to your question is how quickly can we lease up vacant space, lease up the developments, et cetera, to blend into an occupancy number that makes sense. And a lot will really just depend on where the industry goes and a lot of these kind of macro factors. But we'll continue to lease and I hope continue to outperform in terms of capturing the amount of demand. Joel Marcus: Yes. And a couple of examples that Marc mentioned, 311 Arsenal and 3000 Minuteman are really good examples of that where we were having chronic vacancy and figuring out the strategy that we wanted to go forward, whether it is hold and lease, whether it's reposition, whether it's disposition, et cetera. And I think just those incremental achievements this quarter have been positive. So that just gives you a little bit of the change we're seeing. Ronald Kamdem: Great. My second question was just on the dispositions. It sounds like there's a little bit of a pivot away from some of the more vacant assets. I think you said you're considering JVs now. I guess my question is, is there also a change in sort of pricing expectations? And is there any sort of market concentrations where you're seeing more or less traction? Joel Marcus: Yes. So I'll ask Peter to comment, but let me say, in general, I think any mix, and Marc has kind of given you the mixing bowl and there's a slide in the pre-supp read. It's very dependent upon traction of leasing and where we see leasing progress, especially if we can lease for lower CapEx and get quicker NOI realization, we're going to pivot on that particular asset in a positive way. That doesn't mean that someday we would hold the asset indefinitely, we might choose to sell it. But I think that's been the key driver. But Peter, just a comment or 2 on the transaction market. Peter M. Moglia: Yes. We have just found that there's a good amount of core type capital in the market that's looking for high-quality assets. So we wanted to leverage that. We have found a way to do it through JVs. But I wanted to say that it doesn't mean that our noncore asset sales would suffer through because of that. There's still a lot of people out there looking at those types of acquisitions as well. And everything that we have been marketing has been well received and does have multiple people looking at it. So we got a lot of confidence that we're going to hit our numbers despite the fact that we didn't do much this quarter, although we let people know that early. But anyway, yes, the amount of money from the core side that's coming into the market has really just allowed us to lower our cost of capital overall by doing some of these JVs. Operator: And our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: Joel, you mentioned the FDA and judicious capital markets as being some factors out there in the environment. But just what do you -- are there any other items that you think right now are impacting the demand for space? Has there been any change in sort of like the type of space folks want? Or this is just going to take a while to play out? Joel Marcus: Well, I think the pinch points are a couple of pinch points. One is the turmoil at NIH, which caused a lot of -- certainly impacted us directly in a number of markets. And now that's easing up with the limitation on the indirect cost reimbursement that the NIH was doing and then kind of the NIH going to the hill wanting a reduction in their budget, which I've never actually heard of anybody who would want to do that when the Senator or when Congress on both sides of the aisle are in favor of more or less fully funding the NIH. So that's early-stage stuff. And hopefully, that gets worked out over time. I think there's some good positives there, but leadership is a problem. I think the FDA is a huge problem. Almost every day -- there was just a release today that it looks like they may try to pull an approved drug off the market because the FDA claims that maybe there was some manipulation in data. So almost every day, you're getting a shock effect from the FDA, both at the leadership and at the core level. And I think that's very real because as people think about funding, whether it's preclinical or into the clinic, you've got to be mindful of time, cost and approvability. I think that another pinch point clearly is the capital markets. As I said, public biotech, whether they're preclinical or clinical, can't really finance unless they've got data or a milestone, and that's kind of a killer situation. Zero public biotech leases this quarter to the leading franchise is unheard of. And then I think finally, there is the China effect, which a lot of capital is flowing to China for perceived ease of time frames and cost. I think that ultimately is going to backfire like a lot of offshoring that has taken place because Chinese data is not going to be allowed without going through a pretty rigorous FDA approvability and oversight. But I think there -- a lot of people are trying to get drugs into the clinic in China and then bring them over. And so that certainly impacted, I think, space. So I think all those factors together have made it a much more challenging operating environment. But Todd Young, who's Senator from Indiana has got a bill and an effort to try to curtail some of this craziness with China. It's a little bit about how we offshore autos and steel over the last many decades and then realize that, boy, you can't do that or rare earth minerals, you can't leave them in the hands of a potential adversary. So I think there will be congressional action. It probably will come after the midterms, unfortunately, just because there's so much controversy, but I think it will happen because this is a critical industry, and we continue to lead the world, but the fact is China is a powerhouse and their government has poured immeasurable resources into this while we're kind of in disarray at the moment, which is unfortunate. But I think we'll get our act together here. Anthony Paolone: Okay. That's real helpful. And then just second one on 421 Park Drive. I just -- I didn't quite get what the considerations or what the options were as you evaluate that. So I think there's a little bit of leasing there, but I couldn't tell if there was a change of use or I just was hoping to understand that a bit better. Joel Marcus: Yes. So 421 is a state-of-the-art lab. It is -- we've sold several floors of that on a condo basis to a major institution in Boston and the rest remains for lease or for sale in the sense of a condominium kind of situation. But the NIH 15% kind of brought a halt to almost all demand, certainly in the Boston area and to some extent across the country. Now that, that has been overturned in the circuit courts and the administration has not chosen to fight it. I think the path forward there likely will be institutional leasing or sale of condominium interest. So we're waiting for that to kind of evolve. I don't think we would pivot to another use there likely. I mean it could be office from Longwood Medical Center or the Fenway. There is a huge amount of medical-related office demand there. And so that's a possibility, but we feel pretty good about the future there now that the 15% issue has kind of gone by the wayside. It will just take a little bit of time. Operator: And our next question today comes from Jim Kammert with Evercore. James Kammert: Joel and team, pardon my ignorance, what do you define as advanced technology tenants? And I'm just trying to get a sense of maybe not your tenants, but what would those industries or tenants representatively be? And what would sort of be the tenants of that sort in the market across your 3 primary Boston, San Diego, San Francisco markets? Joel Marcus: Well, a lot of that is secret sauce. So -- but let me say, I think an example, and you guys were just there at Campus Point when you did the tour with us, that campus holds -- primarily, we're delivering the Bristol-Myers West Coast Research headquarters hub. We're working -- we just broke ground on Novartis, and there's a lot of early-stage biotech there. But the campus in addition to being heavily big pharma is heavily advanced technology, 2 tenants really make up maybe 25% of the rent roll there. One is a Amazon. This is not a fulfillment or a distribution. This is part of -- I really can't say what part of Amazon, but it is a very sophisticated and research-oriented part of Amazon, and they've been there for quite a long time. And then we did a build-to-suit on that property. I think we showed you the buildings or the building, several stories of brand-new office for Leidos who does the -- they manufacture the advanced screening technology at airports, et cetera. And then we've built several floors of skiff space below that. So we consider both the Amazon use and the Leidos use as advanced technology uses. So advanced technology is pretty broad. We've been involved in it since -- I mean, we did Google, although Google is not necessarily an office -- or a lab-type tenant, although we've leased to some of their subsidiaries laboratory would be -- advanced technology is a pretty broad definition. But I don't necessarily on a public call, get into how we view this and how we're trying to position some of our spaces because obviously, it's a highly competitive marketplace. But the demand there is large and the funding there is large. James Kammert: Very helpful. And then for second question. As regards to the 4Q $1.40 to $1.50 run rate, does that contemplate at the lower end even $3.7 billion potentially capital recycling or more closer to the midpoint of $2.9 billion? Just trying to square some of our modeling assumptions. Joel Marcus: Yes, Marc? Marc Binda: Yes. Yes, sure. Yes. No, we did bring down that range, Jim, I think at Investor Day, we gave a range of $4 billion to $5.5 billion, so $4.75 billion as the average amount of basis being capitalized for 4Q '26. We brought that range down by about $200 million. So that's kind of where we expect things to fall out. Obviously, things can change, but that's our best guess for now. James Kammert: Okay, appreciate that. Operator: And our next question -- sorry. Joel Marcus: Yes, let me just say one other thing. So Jim, one thing that we've mentioned over and over is for a variety of technologies, we call them advanced, but it's a broad range of technologies. There are needs for highly secure spaces, heavy floor loading capacity, very enhanced HVAC systems, et cetera. There's a bunch of -- I think, even Hallie at quarter or 2 kind of highlighted some of that. So we're particularly interested in that kind of an advanced technology tenant, not just a, say, an office AI kind of tenant, we wouldn't really consider that in the same category. So if that's helpful, sorry. Operator: And our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess just I wanted to go back to that $1.40 to $1.50 run rate. I know you said that was sort of our best guess. But you revised the guide now a couple of times. And I guess I'm trying to figure out like at this point, is that truly the $1.40 bottom? What's maybe the biggest variable in your mind that could push that $1.40 lower? And just to clarify, is that $1.40 sort of the initial run rate going into '27? Joel Marcus: Yes. So I'll let Marc answer that, but I think you have to remember, we give you our best judgment based on facts and circumstances as we know it at the quarter end point in time. And obviously, things change a lot. I mean, imagine what happened first quarter of '26 when the leadership and nature of health and human services changed dramatically with the appointment there last year. So -- and then tariffs came shortly thereafter. So you can only make a best judgment based on this time and space. So we'll update quarterly. But Marc, you can answer the question. Marc Binda: Yes, Vikram, so yes, cap interest is one of those drivers. That's the one that drove the number down by around $0.05 from kind of the last time we updated that number at Investor Day. I mean in terms of areas that we're focused on or risk factors, I mean, the couple that come to mind is we've got to execute on the disposition plan. As Peter said, we're very focused on that and I think are feeling incrementally more confident on our ability to execute there. And then tenant wind downs can sometimes be unpredictable. That number, as I think I mentioned earlier on the call, had grown from kind of a reserve number of $23 million to something closer to $25 million to $30 million, but we've continued to work through that. So those are a couple of things that we're watching closely, but the $1.45 midpoint is our best estimate at this point from what we know. Vikram Malhotra: Okay. Great. And I just want to touch on 2 -- get your thoughts on 2 topics. One more specific, the G&A, sort of given the dispositions that you've embarked on for a while and now perhaps next 2 years, is there simultaneously maybe a relook at G&A to cut that further over the next 2 years, both sort of core G&A, but also performance-based? And then second, do you mind just touching on the topic of AI and square footage needs? There's a lot of debate on is the lab-to-office ratio changing? Is the total square footage potentially changing? But any anecdotes from your tenant base on their use of AI and what that means for future space would be helpful. Joel Marcus: So maybe, Marc, do you want to take number one and then maybe Jenna and I will address two. Marc Binda: Sure. Yes. We've been -- in terms of G&A, we've obviously been focused on really managing G&A very carefully for many years. We had a big reduction last year that had $50-plus million of savings. And we've been highlighting for a while that some of that wouldn't necessarily continue into '26, but still a meaningful improvement. Part of that has been some restructure of the comp plans. There was certainly some forfeited comp for some of the executives last year. And so we -- look, we continue to do what's right for the organization and put people in the right positions to succeed. And so we continue to make sure we got the right people on the bus, and I think we have an outstanding team. I don't know if you want to add anything else there, Joel. Joel Marcus: No, I think it was good. So on AI and square footage, I think it's fair to say that I made remarks in my commentary, and I would add to that. We haven't seen any tenant, not to my knowledge, and I've got pretty good insight into tenants across the portfolio who've come to us and said, gee, we want to reduce because of AI. We just haven't seen that, and we don't have back office space that would be highly susceptible to that. On the other hand, we haven't seen people come to us and say, gee, we're expanding because of AI, and we're ready to do that, generally. I mean those -- it's just too early, and I kind of laid out the experts view of this area, not Joel or Alexandria, but I think what I said in my earlier commentary rings true. But Jenna, from the ground -- on the ground thoughts, comments of what you're seeing there? Jenna Foger: Happy to. Hello, everyone. So as Joel mentioned, we are really not seeing material changes from AI on the ground in terms of tenant demand and the specificity of which they need in terms of lab office ratios shifting at this point, we're just not seeing it. And part of the reason why is because as Joel mentioned, we are still in superbly early innings of AI's impact on drug discovery and development. And Joel mentioned 37 trillion cells in the human body. Biology is so massively complex. And certainly, disease pathophysiology, we just don't understand it enough to apply an AI layer to make it completely autonomous. We're very far from that. So AI certainly cannot replace physical experimentation or validation in a lab. But what we are seeing, and we hope because the opportunity set is so large with 10,000 diseases and only 10% addressed, many of them with not even adequate treatment is that we hope that AI will have value in compressing time lines, increasing efficiencies and reducing costs and really recovering lost institutional knowledge. So that is kind of where we're starting to see AI take place and some of our companies are fully starting to incorporate AI into lab workflows in this lab in a loop type fashion, where they'll generate in silico knowledge and then they will test it in biological systems within the lab. So again, as far as AI's impact -- and we cannot reiterate this enough, in terms of AI's impact on real estate demand and also kind of in the types of states right now, it really remains neutral. Certainly, if AI really does bear the promise of allowing one company to increase the number of targeted experiments that can run at one time, lab requirements may increase. You may have some issues where you have more distributed AI going on. We just don't know yet. But certainly, we're really not seeing a shift. So we really want to get that message across today. Operator: It looks like our next question today comes from Rich Anderson at Cantor Fitzgerald. Richard Anderson: I'll keep it to one question as we're getting long here. A while back, someone asked -- I think it was Ronald who asked about lease expiration activity in 2027. You rightfully said you do not given guidance at this point, but there is, call it, $0.55 of annual revenue related to that 1.5 million square feet. Is it prudent in your mind to -- for us to be assuming the entirety of that $97 million gets put into a delay bucket of some sort as you look to re-lease that space? Or is there progress going to be made now in front of next year such that it may not be that draconian of an event? Joel Marcus: Yes, Marc, I'll ask you to respond. Marc Binda: Yes. Rich, so yes, if you're just talking about those expirations in a vacuum, Rich, we do expect there to be downtime on those particular spaces. Look, we're making good progress. And I think we identified something like 35% or 36% of that, that we've got kind of early negotiations on. So obviously, we're going to try our best to beat the amount of downtime that we guided to there and to try to get revenue as soon as possible. But also, as I said, that also doesn't consider all the other things that we're focused on. Obviously, we're focused on filling vacant space today, in particular, kind of some of these developments with the alternative use as Joel mentioned, and trying to convert things to revenue as soon as possible elsewhere in the portfolio to make up for that, but TBD. Richard Anderson: Okay. Yes. And just real quick for you, Marc. The assets that you are no longer selling that are -- that have some vacancy to them, you're holding on them because you're seeing some leasing success. Is that a result of just the market coming towards you? Or is that a change of strategy for these assets, maybe bringing in tech type tenants? What has changed the narrative on those assets, whereby you're thinking about holding on to them now whereas before you were considering selling them? Marc Binda: Yes. Look, I can give you one example of a property that we had considered as a potential to be sold in San Diego. And Joel kind of alluded to this earlier, if there was ability to get near-term revenue and put in a reasonable amount of capital, we would certainly consider that. And the asset I'm thinking about was a big asset. It was 160,000 feet, and we've got somebody looking at that very closely right now. And it's a nice asset. So I mean, it's really a consideration on an asset-by-asset basis. We didn't -- it wasn't like we just kind of said, okay, well, let's just sell less noncore assets. That wasn't the case. It was really asset by asset, those assets that needed a lot of capital or were, in our minds, noncore kind of not really associated with the mega campuses were definitely assets we're continuing to look to sell if it makes sense. And in some cases, when we saw good activity, we decided to pivot on those. Richard Anderson: Okay. Fair enough. Joel Marcus: Yes, Rich, another good example would be -- and it's in the list or has been in the list over time of under business and financial review, the Minuteman assets north of Boston, we signed a pretty big LOI there. And so that inherently changes less CapEx and quicker time to delivery. That then changes your calculus on what you want to do with such an asset. So it's very driven by -- and in one case, there's life science use. In another case, it's advanced technology use. So it's not one use per se, it's -- really depends on the market. Operator: And our next question today comes from Wes Golladay of Baird. Wesley Golladay: We're now about 5 years past the COVID boom where tenants were funded on weaker science, and you did call out aggressive wind down. So just curious where are we at as far as winding down these COVID era tenants, are we in the late innings? Joel Marcus: That's a hard question to answer the way you framed it. I wouldn't call it COVID era tenants per se. I mean, I think -- and maybe you're just referring to companies that got formed on the prospects of a really super buoyant market or something. But so many of these are really probably too much money flowed to too many deals and -- both on the public and private side so some of those naturally get wound down along the lines that you talked about. But in today's market, the wind downs come from other things too, the recognition that, okay, we're going after a particular disease and it turns out somebody just hit a huge milestone. We feel we can't be first-in-class. We're going to be a follower and do we really want to put -- if I'm a venture person, put our money into that, that's not a frontline therapy. So that's a calculus that comes into a lot of this as well or particular issues with you're seeing side effects or you're seeing this or that. So it's complicated. There are a lot of different reasons, not just, gee, we went after a -- or we just took advantage of kind of silly money during COVID times, and now we're just unwinding it. So it's more complicated than that. Jenna Foger: So I would add I would just add one thing to that. I think Joel's exactly right, it's not that there's a flushing out of COVID companies per se. It's in a capital constrained -- a continuous capital constrained environment where the cost of capital is high, Boards and investors on both the public and private side are being that much more judicious about where they're spending their capital. And if companies don't have a strong line of sight on milestones or certainly they miss those milestones, investors have to make decisions about where to allocate their capital. And so in this environment, that is really what is creating the decision-making of we may wind down a company or we may contract in terms of capital allocation. It's not necessarily all these companies are built over COVID, and now they're being flushed out. Wesley Golladay: Okay, I appreciate that. Joel Marcus: That's a great point. Wesley Golladay: And then you did make the comment about no leases with public biotechs, but maybe you can talk about the pipeline? Are people touring that are public biotechs and are they just a little hesitant due to the macro environment? Joel Marcus: Yes. I think that's probably a 1 quarter blip because I suspect we'll be back there during the second quarter with positive leasing, but it just goes to show that we've never seen that before. And as I say, that's a combination of a lot of factors that I've mentioned. But I think it's a 1 quarter blip. But still, the -- if you look at overall ARR from public biotech compared to the demand, that sector -- and we've said this continually over the last couple of year -- quarters and years, that's the one sector that's most obviously lacking in demand. And the primary reason is they can't -- unless you have good data or a critical milestone, you can't just go to the market and do a secondary offering just to extend your cash runway, really hard to do, both private and public. Operator: And our next question comes from John Kim of BMO Capital Markets. John Kim: On your second quarter leasing guidance of 900,000 to 950,000 square feet, I was wondering how much visibility you have on that? And if you could provide some commentary on how much of that is new versus renewal versus new development? And lastly, how big your leasing pipeline is overall beyond the second quarter? Joel Marcus: Yes. Number one, it's not guidance. It's just an indication based on activity and transaction work, and I don't think we will give any other comments on that at the moment. John Kim: Okay. Joel Marcus: We wouldn't give an indication of general direction unless we felt pretty comfortable, I'll say that. John Kim: Sounds good. On capitalized... Joel Marcus: But until things are done, they're never done, as you know. John Kim: Right. Capitalized interest, your guidance implies $58 million run rate going forward. It looks like you are going to be capitalizing about 1/3 less assets by the fourth quarter. So simple math kind of suggests it would be about $46 million by the fourth quarter. Is that math right? Is that how we should be looking at cap interest as we head into 2027? Marc Binda: Yes. John, our... Joel Marcus: Yes, we're not giving guidance for '27, but Marc will give you some framework. Marc Binda: Yes. Yes, that's right. I mean if you look at the basis today, it's north of $6 billion of basis that we're capping today. And we've said, okay, we think the second half comes down because we've got some big deliveries. There's the one big delivery in San Diego, and then we've got some assets that have got some milestones that are probably going to either be put on pause or in some cases, sold. Some of that's land. And so we gave -- in our supplemental, we gave what we think that basis under capitalization is going to be in the fourth quarter, which was that kind of $4.5 billion or $4.6 billion of basis at the midpoint of that revised range for the fourth quarter. And then we tried to give folks a sense of what -- how much basis is out there that has milestones in 2027. Some of that is land, and we broke that out very carefully in our supplemental. Some of it's land and then some of it is these -- are these kind of 5 assets that we've been highlighting that we characterized it as evaluating business and financial strategy. There are some milestones related with those assets that's in the early part of 2027 that -- those are being capitalized today. The big one is 421 Park. So -- and that will -- we don't know what's going to happen there. It will -- a lot of it will just depend on the demand and how quickly we can lease up that project. But -- so that's about as best as I can frame it for you at this point. Operator: And our next question today comes from Michael Carroll at RBC Capital Markets. Michael Carroll: Marc, I wanted to circle back on those 5 projects that ARE is evaluating for a potential change in the business strategy. Like what are the exact options here? Is it you're going to build it for a different use like advanced technologies? And then if that doesn't work, then you're going to like keep it kind of as is waiting for a better market to pursue those projects. So it's lease it as a different use or hold off until a better market. Are those the 2 options that you're analyzing? Marc Binda: Yes, Michael. So I mean, I think for most of these assets, it is considering whether we pivot away from a traditional lab use to some type of advanced technology use or other interested parties that would find the kind of the nature of those buildings very interesting for other uses other than laboratory. So that's most of the assets. 311 Arsenal Street, we mentioned we've seen some activity there from those types of uses. I think we signed 80-plus thousand of LOIs for that. 40 Sylvan, similar bucket, 3000 Minuteman, we actually did sign a big LOI for a non-laboratory use there. So the pivot -- the potential pivot there is -- on most of those assets is for other types of uses. But as Joel mentioned, we could also consider these as potential sale candidates down the road. 421 was the one that was a little uniquely different than the others, where we could consider condo interest or that asset could go office, I suppose, but it is intended to be a lab building. But all these assets are -- have -- or we've got a little bit of time here, but we're running up on milestones where we would need to make decisions or capitalized interest would turn off. And those milestones are coming up on average kind of early part of next year. Michael Carroll: Great. And then if you do change the scope of those specific development projects, I mean, could that impact your construction budget in 2026? Or is that really the $500 million, I think, that it was highlighted in the supplemental, is that more of a '27 beyond impact just because the investments for these other types of uses would be smaller investments versus life science? Marc Binda: Yes. I think we have a good handle on this year's capital plan, Michael. It would really be more of an item that could impact spending for next year. Operator: And our next question today comes from Dylan Burzinski with Green Street. Dylan Burzinski: I appreciate the commentary so far on sort of the $97 million of vacates in 2027. I guess what we're trying to figure out is it looks like excluding that amount, there's, call it, another 1.536 million square feet of lease expirations. Do you guys sort of have a good handle on that? Is that -- are those likely to renew? I guess what we're trying to figure out is like the likelihood or probability of that $97.5 million moving higher as we get closer to '27. Marc Binda: Yes. Dylan, yes, it's just a little bit too early to tell on what happens with the rest of the expirations for 2027. What we do know now is that, that 1.5 million or the $97 million of rent you referenced that those may have -- or are likely to have some downtime. So it's really hard to predict at this point what the retention rate looks on the balance. I can tell you, at least for this year, we're -- I think at the beginning of the year, at least for 2026 expirations when we carved out the kind of the key lease expirations for '26, we thought we would be somewhere in the 60-plus percent retention rate. But I really don't think we're prepared to kind of comment on where '27 is. Dylan Burzinski: That's fair. And maybe just -- and I appreciate the color on sort of the potential amount of leasing activity that you guys think you'll get done in Q2. I guess as we sort of think about beyond that, is that sort of a good, call it, 3.5 million to 4 million square feet of annualized leasing volume a good amount to sort of use as a run rate? Or -- and obviously, leasing is going to ebb and flow, but just sort of curious how we should sort of think about the pipeline beyond the next quarter. Joel Marcus: I don't think you should assume that, that is a run rate. I think we're in a different time now. So I think the run rate will evolve over time, especially given a more life science/advanced technology mix given the assets. So I don't think you could use that immediately. But I mean, historically, give or take, some amount on either side, $1 million has been a common run rate over time. Whether we get back to that as a run rate, I think time will tell. Operator: And our final question today comes from Jamie Feldman with Wells Fargo. James Feldman: Congrats on getting to the end of the call. I just wanted to take your -- the latest temperature on opportunistic capital looking at the space from the real estate perspective. I think you had mentioned JV is looking a little more interesting. Has anything changed? Or can you give us the update on whether it's global capital, whether it's domestic capital, there's a lot shifting around there in terms of the capital needs across the globe. What's the latest state of affairs in terms of opportunistic buyers into life science? Joel Marcus: Yes, I don't think we want to comment really too much on that. But Peter, you can. Peter M. Moglia: Yes. I would say that it's a combination of both domestic and international capital that is looking at these assets. James Feldman: So would you say the appetite has changed? Or it's pretty much the same? Peter M. Moglia: What has changed is over the last 2 years up until this year, there was really no money looking at core. It was all opportunistic. And for the right reasons, right? I mean we were coming -- we were hopefully bottoming out in the real estate industry and everybody was raising money based on double-digit IRRs. And that's what those funds' targets were, and that's what they had to invest in. Now we have money, how it came about, I don't know, but we have folks that are saying, "Hey, I want good quality, safer assets." And I know I can get a real estate deal that will provide a spread over bonds that I like for the risk that I'm going to take. And so now that, that money is there, and as I said, it comes both domestically and internationally, we're leveraging that to get a better cost of capital overall for our program. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for any closing remarks. Joel Marcus: Yes. Thank you, operator, and thank you, everybody. We appreciate it. 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 afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Second Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] I will now turn the call over to Catherine Park, Vice President of Investor Relations. Ms. Park, you may now begin your conference. Catherine Park: Good afternoon, and thank you for joining us today to discuss Starbucks' Second Quarter Fiscal Year 2026 results. Today's discussion will be led by Brian Niccol, Chairman and Chief Executive Officer; and Cathy Smith, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and the risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. All metrics referenced on today's call are non-GAAP and measured in constant currency. Please refer to the earnings release on our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures and supplemental financial information. As a reminder, the financial results discussed on today's call reflect the consolidation of Starbucks China as our transaction closed after the second quarter. This conference call is being webcast, and an archive of the webcast will be available on our website through Friday, June 12, 2026, and for your calendar planning purposes, please note that our third quarter fiscal year 2026 earnings conference call is tentatively scheduled for Wednesday, July 29, 2026. I'll now turn the call over to Brian. Brian Niccol: Good afternoon, and thanks for joining. I want to start with the headline. Q2 marked a milestone for the business. We delivered growth on both the top and bottom line for the first time in more than 2 years. Consolidated second quarter company revenue was $9.5 billion, up 8% (sic) [ 9% ] year-over-year. Global comps were a strong 6% driven by terrific performance across the business, especially in the U.S., and our consolidated operating margin improved to 9.4%, up about 110 basis points. And as a result, earnings grew year-over-year. Positive comp trends have continued through April, and this gives us the confidence to take up our fiscal 2026 guidance for global comp growth to 5% or better and earnings per share to $2.25 to $2.45. We believe this quarter reflects the turn in our turnaround, but we know there is more work to be done. Our Back to Starbucks strategy is working because we're executing with rigor and focus and the outcomes are showing up in real and visible ways. Thanks to our partners and the craft, connection and sense of community they deliver for our customers. This is Starbucks. Green Apron Service is setting the standard for world-class customer service. We're winning the morning and building the afternoon with great craft and speed across every access point. Our Green Apron partners are creating more moments of connection with every cup served and our support teams are leaner and faster and built around a culture of listening, learning and acting with intention. Our menu innovation is exciting and moving at the speed of culture. The third place is alive and well in every coffeehouse. And soon, the design aesthetic of our cafes will match the feeling you get in them. Our Starbucks Rewards program is more rewarding and there is trust in our coffeehouse leaders to run their business and create community. And the best job in retail keeps getting better. Our brand is showing up in more places and the shine is back on Starbucks around the world. This is the Starbucks we're building. The Starbucks customers deserve; the Starbucks, our partners are proud to call theirs; and the Starbucks, we believe will deliver strong performance quarter after quarter. As shared, we grew both the top and bottom line in the second quarter. So let me break down how we achieved these results. North America led our comp performance with both North America and U.S. comps accelerating to more than 7%, driven by over 4 percentage points of transaction growth. We haven't seen this transaction strength in 3 years. Our U.S. company-operated business grew transactions across all dayparts, with mornings now roughly back to fiscal 2022 levels and we saw broad-based spend growth across all income levels and age demographics. Our delivery business also contributed to both comp ticket and transaction growth in the quarter. We expanded delivery access across our U.S. company-operated portfolio last fiscal year, and it's proven to be a largely incremental revenue stream, growing more than 30% year-to-date across our U.S. company-operated business. International revenues grew nearly 8% (sic) [ 10% ] year-over-year as momentum built globally. Comparable sales increased nearly 3%, and our top 10 international markets, including China, all posted positive comps for the first time in 9 quarters. This combination of sales growth, operating leverage and cost management translated into an EPS of $0.50, up approximately 22% year-over-year. We said we will grow the top line first and margin and earnings growth would follow. Q2 is proof our strategy is working. Starting in the coffeehouse, we focused on continued improvements to staffing, scheduling, technology and leadership to make Green Apron Service work more reliably every day. As a result, in the quarter, customer experience scores continue to rise. Customer service times remained on target even with the greater transaction volumes. And in May, we're rolling out a new feature in our app that lets customers schedule their order pickup time. We expect this enhancement will bring even more order and predictability to mobile order. Since launching the Grow program, which is our simplified coffeehouse reporting and ranking system back in October, the share of U.S. company-operated coffeehouses delivering 4 or more shots has increased over 30 percentage points. This progress reflects clear standards, strong performance and more consistent execution from our coffeehouse teams. The Grow report has become a great new tool to evaluate performance and target improvements and it's helped put us on our way to being the industry-defining customer service and experienced company. Partners felt the difference as well. Confidence on the floor improved with healthy rosters and growing leadership stability and our data shows that coffeehouse leader stability is highly correlated to store performance. In Q2, 80% of our 5-shot coffeehouses had a leader who had been enrolled for more than a year. We also announced new ways for partners to share in our success. During the quarter, we announced we would shift to weekly pay and introduced a new quarterly reward program for baristas and shift supervisors. This program recognizes coffeehouse teams for strong performance across sales, operations and customer service. Looking ahead, we'll continue to strengthen the supply chain behind Green Apron Service. Our focus is on improving costs, availability, flow and accuracy to meet our pace of innovation and support consistent execution as our business grows. Our goal is really simple. If it's on the menu, customers should be able to order it. We're also tackling technology, equipment and process improvements to enable even better craft, connection and speed. Second, our disciplined menu innovation, energized marketing and redesigned Starbucks Rewards program continue to drive demand. Our lean organizational structure is allowing us to innovate and execute quickly. This is already showing up in the pace of our menu innovation in the quarter, which included new bakery items and an elevated bake case, premium Matcha beverages and our 1971 dark roast coffee. It's innovation focused on what customers want, geared for both the morning and afternoon occasion and built for easy execution in our coffeehouses. In April, we launched new energy refreshers and our new mango flavor. Both have exceeded our expectations and strengthened proven $2 billion platform. Customers can now tailor the caffeine level of the refresher with the same ease and flexibility as flavors, creating more reasons for customers to visit later in the day. We'll continue to build on a refresher platform through the year, and even more flavors and blended versions as well. Our upcoming summer menu features innovative drinks and merchandise that build on our iconic platforms and mix is soon to be favorites with returning classics. It's designed around what customers want in both the morning and afternoon. A highlight includes the tropical butterfly refresher with a striking look and refreshing flavor and like other refreshers, it will be available with customizable energy. We believe it's a great way to kick off this summer. Marketing continues to amplify our brand as well. We're back in culture, whether it's major music moments like Coachella, global stages like the Winter Olympics or tech platforms like ChatGPT. We're engaging with customers in ways that feel authentic and distinctly Starbucks and is helping deepen brand loyalty and fuel fandom. U.S. 90-day active Starbucks Rewards membership reached a record 35.6 million with both rewards member and nonmember transactions growing year-over-year. Our new 60-star redemption option has become our most used reward, accounting for approximately 1/3 of all redemptions. And while still early, we've seen a growing number of customers visit 4 or more times a week since launching last month. We've made Starbucks Rewards a growth engine again, positioning it to drive new customer routines, deeper engagement and increased frequency. And that connection is showing up in the brand. Brand affinity continued to rise in the second quarter, reaching 5-year highs in consideration and purchase intent. Gains were led by Gen Z and millennials and more customers now believe their Starbucks purchase is worth it compared to a year ago. This shows what Starbucks continues to become, more visible, relevant and loved. Third, customers are responding to a great coffeehouse experience. Coffeehouse uplifts are driving positive customer feedback and transaction trends, reinforcing the role of the coffeehouse experience in our return to growth. We're investing in that experience at scale with more than 300 uplifts now complete on budget and with 0 closure days. We're accelerating this work over the next 2 quarters and expect to have more than 1,000 uplifts completed in our top 20 markets by fiscal year-end. Our return to growth has also sharpened how we manage our coffeehouse portfolio. The Grow report paired with improving company-wide comp trends is helping us more clearly identify outliers, focus resources and raise standards across the system. We're also applying the same level of discipline to coffeehouse development as we reset our portfolio and begin ramping unit growth. Finally, broad-based momentum across our international markets in Q2 highlighted the strength and resiliency of our global brand. Japan had an outstanding quarter, led by a record sales week over New Year's, robust tourism and strong additions to our menu. And in South Korea, our Aerocano launch in February drove incredible demand with more than 1 million cups sold in its first week. China delivered transaction-led comp growth for the fourth consecutive quarter as Starbucks remained the top away-from-home coffee choice for Chinese consumers. We also completed our transaction with Boyu after the close of our fiscal quarter, bringing together Starbucks globally trusted brand with Boyu's local market expertise to unlock attractive long-term opportunities in China. With a rebased portfolio, the Starbucks China team is eager to step back into growth, with plans to expand Starbucks footprint from over 1,000 county-level cities today to more than 1,500 in the next 3 years. As our International business moves towards a nearly 90% license model, we're simplifying our structure and strengthening how we support our business partners. This puts decisions closer to customers and local markets, and it lets us focus on setting standards and sharing best practices. It's a model built for speed, accountability and scale. Taken together, we're encouraged by the progress we've seen across key markets during the quarter, and we're confident in the role of our international portfolio as a durable growth engine over time. So to conclude, Q2 marked a significant step forward in our turnaround. We delivered growth on both the top and bottom line, reflecting strong execution of our Back to Starbucks plan. Operational discipline is working with labor, throughput and availability moving together and with brand momentum translating into comp growth. Our focus now is on sustaining our momentum and making our results repeatable and durable, all while delivering a healthy cost structure that supports profitable growth. It's how we turn progress into consistent results, and that's how we create long-term shareholder value. This is Starbucks. There is more work ahead and we're focused on it. Our priorities are clear, the organization is aligned, and we're confident in the opportunities ahead. We're building a company that learns as it executes, one that stays close to the coffeehouse, moves quickly to scale what's working and keeps getting better over time. We know the path forward will not be linear, but it is clear the changes we're making and the momentum we're building are starting to compound. I want to say thank you to our partners around the world for the leadership, discipline and care they bring to our coffeehouses every day. You delivered these results, and you should be proud. With that, I'll turn it over to Cathy to walk through the financials in more detail. Catherine Smith: Thank you, Brian, and thank you all for joining today. Our second quarter results demonstrate the progress we're making on both the top and bottom line to support lasting profitable growth in our business. I'm grateful to our partners across our coffeehouses, supply chain and support centers whose commitment and passion are delivering the best of Starbucks to our customers every day. I'll now share our Q2 results and then provide additional insight into the months ahead. Our Q2 consolidated revenue was $9.5 billion, up 8% (sic) [ 9% ] to the prior year. Global comparable store sales grew 6.2%, driven by continued strong performance across both our North America and International segments. As of March 29, we had 41,129-Starbucks in our global portfolio with 11 net new coffeehouses in the quarter. Our North America segment revenues grew 6% in the quarter to $6.9 billion with comparable store sales growing 7.1%. And in the U.S., our comparable store sales growth also accelerated to 7.1% led by transactions up more than 4%. Average ticket grew nearly 3%, driven by a combination of our growing delivery business, beverage mix, our artisanal bakery launch driving greater food attach and the continued popularity of modifications led by our Cold Foam platform. Cold Foam, our leading modifier, continues to grow in popularity, with platform sales up more than 40% in Q2 across our U.S. company-operated business. Innovation across new flavors and the introduction of protein have further strengthened the appeal of Cold Foam, especially among Gen Z. We also believe Free Mod Mondays as part of our new Starbucks Rewards program will continue to support its growth. Our comp performance reflects our strengthening business fundamentals, world-class customer service through Green Apron Service, menu innovation that shows up in a welcoming third place and a strong, relevant brand supported by our marketing and rewards program. This is the Starbucks that drives durable growth. Our 90-day active Starbucks Rewards program grew to 35.6 million members in Q2, up 4% year-over-year. We saw steady member growth from Q1 to Q2, which is a positive shift from prior year seasonal sequential declines. Members are adapting quickly to our new loyalty program. And while early, we're encouraged by the level of engagement we're driving across tiers. Also, since launch, both the rate and volume of U.S. card loads have grown steadily, exceeding our expectations. Overall, our North America store base grew by 25 net new coffeehouses to 18,385 at the end of the quarter. This included 44 net new openings across our company-operated business as well as 19 net closures in our licensed store portfolio. Our North America licensed revenues were roughly flat year-over-year, reflecting these net store closures in the quarter. Notably, U.S. licensed stores returned to positive system-wide comps for the first time since Q1 fiscal 2024. This was led by record airport volumes and growth in other discretionary segments, together with continued recovery in retail and grocery. Moving to International. The segment reported $2.1 billion of net revenues in the second quarter, growing nearly 8% (sic) [ 10% ] year-over-year. International comp sales grew 2.6%, once again led by transactions which were up over 2% in the quarter. As Brian mentioned, all 10 of our largest international markets, including China, Japan, South Korea and Mexico, delivered positive comps for the first time in 9 quarters. Of note, Starbucks China delivered another quarter of transaction-led growth with comps up 50 basis points on transaction growth of more than 2%. On a 2-year basis, comps were stable sequentially versus Q1, smoothing out the timing of the Lunar New Year. Our International store portfolio was 22,744 at the end of the second quarter, down 14 net coffeehouses from Q1. This includes the impact of 55 store closures as part of last September's portfolio decisions. We'll get to guidance shortly. But as we look to the rest of the fiscal year, we're well positioned together with our international licensee partners to return to net unit growth. In Channel Development, our Q2 net revenues grew 38% (sic) [ 39% ] year-over-year primarily due to higher revenues from the Global Coffee Alliance. Our new multi-serve refreshers concentrate which we introduced in North America last quarter is shaping up to be our largest CPG launch in over a decade with strong customer reception and repeat purchase behavior. At the end of Q2, we also launched coffee and protein ready-to-drink beverages, complementing our growing protein platform in our coffeehouses. Moving to margin. Our Q2 consolidated operating margin was 9.4%, improving 110 basis points from the prior year. This was our first quarter of consolidated margin expansion since Q1 fiscal 2024 led by the International segment. International operating margin grew by approximately 790 basis points to 20.3% as the segment continues its broader recovery. As expected, approximately half of our international margin expansion was driven by held-for-sale accounting related to Starbucks China, which temporarily reduced store operating expenses and D&A by approximately $118 million in the quarter. This dynamic concluded at the start of Q3 with the transactions closed. In North America, our Q2 operating margin contracted approximately 170 basis points to 10.2% as our progress on operating leverage and cost discipline continued to partially offset our annualizing investments in Green Apron Service. Our North America margins in the quarter were also impacted by roughly 190 basis points of product and distribution cost increases as a percentage of revenues and greater-than-anticipated legal accruals. About half of the product and distribution increase was driven by innovation-led product mix, and the remaining balance was inflation largely related to tariffs and elevated coffee prices. While market dynamics can change, we expect these tariff and coffee pressures to moderate in the back half of fiscal 2026, especially given recent trends in coffee prices. As a reminder, our results typically lag the market, both upward and downward due to our coffee purchasing and hedging practices. And finally, consolidated G&A in the quarter decreased 5.5% as our organizational streamlining efforts continue to actualize this fiscal year. Our Q2 effective tax rate rose to 27.1%, primarily due to taxes accrued in advance of the planned sale of Starbucks China's retail business. Higher pretax earnings and related permanent and discrete tax items also contributed to the increase. All in, Q2 earnings per share grew 22% year-over-year to $0.50, our first quarter of EPS growth in more than 2 years. Before we discuss our outlook, I'd like to spend a few moments on China. Our previously announced transaction with Boyu Capital closed shortly after quarter end. Beginning in Q3, the retail operations of Starbucks China will be deconsolidated from our financials and will be reported as part of our broader licensed portfolio. We will also cease our quarterly reporting on China stand-alone revenue and comps. In addition, we will make an informational 1-pager available shortly after this call on the quarterly results and supplemental data page of our Investor Relations website. The overall value to Starbucks is anticipated to be more than $13 billion, including the net present value of our licensing economics. As part of the transaction, Starbucks received approximately $3.1 billion in gross cash proceeds before taxes. Prior to closing, we repaid our $1 billion February maturities and expect to deploy the remaining proceeds toward additional debt reduction and ongoing balance sheet management. These actions further strengthen our financial position consistent with our BBB+ Baa1 rating. Our capital allocation philosophy reflects a disciplined approach across 3 priorities: strategically investing in the business, maintaining a competitive dividend and returning excess cash to shareholders, supported by our investment-grade profile. We believe this framework positions us well to invest opportunistically, navigate cycles and create durable value over the long term. Turning to our outlook for fiscal 2026. Our Q2 results highlight the progress we continue to make in our turnaround and momentum we've built around our strategy. From the outset, we've been clear that top line improvement would come first with earnings growth to follow. As our comp performance becomes more consistent each quarter, this growth, combined with our cost savings efforts are starting to show up in margins. Starting at the top of the P&L, we are raising our fiscal 2026 global comp guidance to 5% growth or better, led by 5% or better comps in the U.S. Customer demand trends in our business remain strong today. And while history demonstrates the resilience of our brand through periods of high gas prices, the current macro environment brings heightened uncertainty to our operating landscape and consumer behavior more broadly. Our comp guidance accounts for these considerations. In addition, our guidance now assumes a joint venture licensing structure in China, and in the back half of this fiscal year, we expect our China-related revenues to be less than 20% of what we would have previously reported with China as company operated. As such, we now expect our consolidated fiscal 2026 net revenues to be roughly flat year-over-year. We continue to expect slight year-over-year growth in our fiscal 2026 consolidated operating margins driven by the net effect of a number of factors. First, we expect sales leverage to build over the next 2 quarters as we execute with discipline and advance our cost savings initiatives. These serve as offsets to our investments in our Back to Starbucks priorities as well as other headwinds. Second, as I mentioned earlier, we expect coffee and tariff pressures to start easing as we move into the back half of the fiscal year. Third, our China JV structure is expected to be margin accretive with roughly half of its revenues flowing to operating income. We remain on track with our $2 billion cost savings plan. These are gross savings, which we expect to realize through fiscal 2028, and balanced across product and distribution costs, OpEx and G&A. This year, the impact of our efforts will be most visible in G&A as much of our realized savings across the P&L are being offset by our strategic investments in our Back to Starbucks plan. We continue to expect our consolidated G&A dollars to run below fiscal 2023 levels even after incorporating greater performance-based compensation related to better-than-expected financials. Putting this all together, we are raising our EPS guidance at both ends of the range to between $2.25 and $2.45. China's transition to a JV structure is now expected to be relatively EPS-neutral this fiscal year. While global macro factors can introduce variability in our results, our guidance reflects our current view and confidence in the underlying business. Finally, from a unit count perspective, we still expect to add approximately 600 to 650 net new coffeehouses this fiscal year. We expect International to accelerate its growth over the next 2 quarters to achieve 450 to 500 net new coffeehouses in fiscal 2026, of which China still comprises close to half. We also continue to assume 150 to 175 net new U.S. company-operated coffeehouses this year, and we will continue to assess our existing portfolio as we rebuild our development pipeline. In conclusion, our results this quarter deepen our conviction in the long-term trajectory of our business and our Back to Starbucks plan. Our improving execution, brand relevance and customer experience reflect who we are and the progress we're making. This is Starbucks. Our work isn't done, and we remain clear eyed about our path forward to deliver a stronger future. And with that, we are now ready to take your questions. Thank you. Operator? Operator: [Operator Instructions] Your first question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Yes. I'm curious if you could talk about sort of the -- just the service times. In the past, you've kind of updated us on where you're on average, if we sort of pulled your employees, do they feel like they're kind of hitting targets there? And how do you think that the algorithm changes you made have supported that. And when you add scheduled ordering, how will that further address some of the service time improvements that you've made? Brian Niccol: Yes. So thanks for the question. Obviously, our focus on what I think we've described in the past is 4/4/12. So 4 minutes in the cafe, 4 minutes in the drive-thru and better than 12 minutes for promised times in mobile order pickup is still very much a focus area. And as you mentioned, we're kind of continuing to make, what I would call smart queue smarter queue going forward based on learning with higher transaction levels. And so right now, we've got about 80% of our stores or better hitting the metrics. And we believe as we roll out the scheduled ordering, that's going to enable us to improve our performance, more specifically in the MOP arena because we'll hopefully be able to pull some things out so that we have more predictable orders in the queue. And the other thing that we're working on, too, is just continuing to figure out a lot of people order in mobile or in some cases, in the drive-thru via mobile when they're already on-premise. And so we're learning how to sequence those orders better. So that they get treated correctly, given where they are in proximity to actually the order taking place. So the team is doing a great job on this. We continue to make great progress. And as a result, I think, our customers are feeling -- seen in the cafe and more importantly, getting their orders on time in the right amount of time. And then in mobile order and drive-thru customers are seeing their orders show up on time and again, at the speed requirements that they would hope for. Operator: Your next question comes from Sara Senatore with Bank of America. Sara Senatore: A couple of questions, maybe a 2-part question about the margin, if I could. The -- I guess you mentioned, Cathy, the impact of innovation on part of the cost of goods. I was just wondering if maybe that is something that you anticipate to persist. It seems like the -- in like the increase in the EPS guide was maybe a little bit less than I might have anticipated for such a big comp beat and raise. And I'm just trying to understand kind of puts and takes and in particular, on the COGS line and relative to, I think, some of what you had portended about maybe cost savings to come in future quarters in the supply chain. Catherine Smith: So let me start with the big picture on the EPS raise to our guidance and the implied flow-through and then that will maybe dovetail into the COGS question you had. So we're really obviously very pleased with our continued progress starting on the top line, the success we're seeing both in execution at coffeehouse as well as through the menu and marketing efforts. And so very pleased there. We are seeing also sequentially each quarter the improvements showing up in U.S. company-owned in particular, in North America, as the teams continue to get better and better at scheduling. So we're getting better flow through there on top of our Green Apron Service investments every quarter. But in the macro, we're also cognizant of the macro environment, and we want to make sure we're prudent as we continue to think through the remainder of the year. Obviously, we still have half a year in front of us. So that would suggest a little bit of why you're seeing maybe not as bullish in EPS flow-through given the top line that we're expecting. With regards to the COGS element of that, though, we are seeing first half of this year continued coffee elevation, price elevation year-over-year. It's almost not quite, but I think it's almost $1 a pound year-over-year change. And then the implications of tariffs as they run through our inventory, obviously, both of those we expect to abate toward the back end of the year. So both the coffee prices, we expect to continue to come down and they have a little bit as we -- our coffee always lags coming through our financials. And then the tariff implications we expect to roll through the inventory very quickly. So the back half, we should see better on both of those. So all in, though, really pleased with both the performance on labor and the performance in the menu, and we'll continue to tighten that up, and it will show up in our -- obviously, our earnings flow through in time. Operator: Your next question comes from David Tarantino with Baird. David Tarantino: And congratulations on the progress here. Brian, my question is about the operations improvement that you've seen. It's been pretty dramatic over the past, I don't know, 3 or 4 quarters. And I was wondering if you could maybe opine on how much runway you think the operations improvements alone still have in terms of being able to drive comps? I know it's may be difficult to separate that from some of the other things you're doing. But just perhaps you can maybe opine on that and give us an update on how those original pilot stores of the Green Apron Service model are doing relative to the base, that would be great. Brian Niccol: Yes. Thanks, David. And I appreciate you pointing out that the operation has really improved. Hopefully, everybody is experiencing it. I know I'm experiencing it as I get to visit markets kind of all over the United States and around the world. And the way that we really are tracking this is through our Grow scorecard. So you heard me mention in my prepared remarks, we've got a huge move forward in the number of stores that are achieving 4 shots. And that is really an important piece of the puzzle. But what I would say is pointing to more opportunity to come. We still have close to 40% of our stores where they're not at 4 shots. And so we know what we need to work on. The thing that's great about the Grow scorecard is it gives you clarity on what's working and where we could be better. And so it gives a very simple tool to coach. And it also gives us a very simple tool to recognize for great results, which we're seeing a lot of those examples as well. And then when I look at also just the speed of service and the way we're deploying, you kind of heard Cathy mentioned this, I think we're just getting better at how we're deploying, allocating the labor based on the transaction growth that we're seeing in the business across all these different access points, right? The delivery channel is growing for us in a big way, cafe business is growing, as is our mobile order pickup business. So as we learn about those different experiences and how those transactions are coming back to the business, we have the ability to better deploy and even get better customer experience. And the other thing that I think is really important to point out is we only have done the uplift in about 300 stores. And if you've experienced a store with an uplift, the third place truly is alive, vibrant. Our partners, I think, are really proud of their coffeehouse, and they really take to heart the idea of being the community coffeehouse again. And that's going to ramp up to well over 1,000 stores by the end of this year. And then we've got ambitious goals to get that across 8,000-plus stores in very short order. So we're seeing upside after those uplifts occur, both in the morning and afternoon dayparts. So operationally, I believe there still is a lot of opportunity for us to get more and more performance out of our stores because our partners are going to be the right-sized roster deployed correctly. And then we're going to support them correctly with technology behind the scenes so that the supply chain has the product showing up at the right time for them. And then I think the other key piece of bringing the third place back to life is an opportunity that our customers embrace and ultimately, our partners truly embrace. So I'm really excited about where we are. I mean, we've made tremendous progress over the last 18 months. And if you think about it, it hasn't even been a year that we've rolled out the Green Apron Service model. It will be a year come August. And we're continuing to see those kind of lead stores still lead. And the thing that I love about that is we're learning from those lead stores. So I'm excited about where we are, but I am -- Mike was here with me, I think he'd be excited about telling you about all the things that are still to come in our operating model and what our partners can deliver in being the best customer experience company. Operator: And your next question comes from David Palmer with Evercore ISI. David Palmer: Just a quick model question and a big picture one. With regard to the cost of the Green Apron Service, investments in the quarter versus the year. Any changes in how those investments -- how you're thinking about those investments and maybe just a sense of how it staged through the year there versus the productivity that you're planning for this year? Any sense of that by quarter and how it's phasing through the year would be helpful. And then a big picture one. I know a lot of people are focused on the specialty beverage market. There's forces colliding. There's big traditional QSR players that are getting into the market. There are specialty coffee players that are expanding their beverages. And I'm wondering Brian, if you're looking at this big market as you're executing your initiatives, and obviously, those seem to be working if you have a thought about where this market overall is going. Brian Niccol: Yes, I'll take the last piece of that question, and then I can hand it over to Cathy. But what I think is -- we're seeing is just the reality that more and more customers are interested in drink experiences, whether that's morning rituals or afternoon experiences. And I think you're also seeing customers or consumers, frankly, at all different age cohorts wanting to have a third place experience. And so look, it's almost, I think, a complement to the fact that our refresher business is being imitated in so many places. And what my experience has been is when the category starts being talked about, the market leader benefits. And that's going to be us in this scenario. And I believe the innovation that we're bringing to refreshers, the innovation that we're bringing to coffee, the innovation that we're bringing to espresso is going to continue to position us really well in culture. And it's also going to position us well to lead on kind of the growth side of the category that we're going to continue to see. So I think it's a great sign. It's a telling sign that we're actually responding to what customers want. And I think others are trying to imitate and I think we're in a great place with our scale and with our innovation and the pipeline that we've got coming really across how people want to experience drinks. I hand it over to you, Cathy. Catherine Smith: Yes. And maybe only because it's become my own personal favorite, I'm going to expand on refresher really quickly. What we're seeing is great incrementality as well with our new refresher customizable energy platform. We built on a $2 billion platform. As Brian said, leading position there. We're seeing it show up elsewhere with competitors. But now that we added the customizable energy, we're seeing people take away the caffeine in the afternoon. We're seeing people that weren't energy drinkers in the morning become energy drinkers in the morning with our refresher platform because of the additional caffeine. And so that just showed us that a platform that was already a great and growing platform when we added the customizable energy, it became even bigger and that's become a household favorite at my house. To answer your question on modeling for the cost of Green Apron Service, as Brian said, we'll annualize Green Apron Service in August. We'll start -- it started rolling out, remember, in a couple of like 2-week waves in August. And so we're about the same level each quarter until then. And then obviously, it will come down quite a bit from there. And then on productivity, we watch throughput. Mike and the entire Coffeehouse and Barista team every day are working on that as well. And so we'll continue to get better and better at that, too. Operator: Your next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: Congrats on the quarter. I wanted to ask on the comp momentum, really impressive, especially in the context of the noisy consumer backdrop. Can you give any more color on the cadence of comps as you move through the quarter? And anything that you're seeing in April, given what's going on with gas prices. And then, Cathy, if I could just clarify on the EPS side. Now with the 5% plus comps, I understand you're being a bit more prudent. Can you just help us understand what you would need to see to get towards the top end of the range on the guide and perhaps versus the bottom. Brian Niccol: Yes. So I'll take the first part and then I can hand it back over to Cathy on the second part. The good news is we really saw strength all quarter long. And I kind of go back to what I was talking earlier about when I think David asked a question about operational performance. One of the things that was great that we saw month to month to month is just this improvement in our Grow scorecard performance. You heard me reference how many stores now are achieving 4 shots. I want to make sure everybody understands what I mean by that, which is we're tracking now customer comments. We're tracking throughput. We are tracking staffing correctly. Obviously, these are all things that ultimately you see show up in the scorecard. And if you perform on your sales, your throughput, your staffing, your customer performance and your food safety, the ability to get to 5 shots. And where we've seen kind of a real change in performance is once people get north of 3 shots, 3.5 shots. And so what we did see is operationally, we saw that improve every month. And as we enter or I guess, get ready to exit April, we've continued to see that strengthen our operating performance. And we've also continued to see the consumer stay in the business, consistent with what we saw in the Q2 for our company. So we haven't seen a lot of the macro effects trickle into consumer behavior as it relates to Starbucks. But I think we want to be cautious going forward because we're not sure how this will play out as the issues continue to happen, whether it shows up in gas prices or utilities in other ways or other input costs like fuel costs. So -- but we're excited very much about what we're seeing from an operational performance, how the customer then responds to that great operational performance and then the great work that I think the marketing and menu team are doing to bring relevant drinks, and you'll see us continue to push forward in food to go along with those great drinks. And so I'm really excited about where we are. And I'm optimistic that if we stay the course on executing Green Apron Service, executing the third place experience with all these uplifts and then continuing to support our partners with the right rosters, the right deployment and then the right menu and marketing innovation, we should continue to be rewarded with customers' business in any environment. I'll let you cover the second part. Catherine Smith: On the EPS guide. So what would you have to believe, as you said, we're trying to be prudent given that we still have the macro backdrop that we do. But what would you have to believe? Well, first of all, we start with top line. So we said 5% plus, it would need to lean on the plus. That will obviously help the EPS in the guidance range between the $2.25 and $2.45 toward the top end. Additional things that are contemplated in the back half of the year, we need to see coffee prices abate. Obviously, we continue to take a prudent position there, but we'd like to see those continue to abate. We'll want to make sure we're watching fuel and the implications of fuel, obviously, on our business as we get surcharges, but also on the consumer. And then lastly, we'll continue to tighten up our innovation performance on COGS in particular. And as we do all of those things, that would put us at the top end or who knows what. And so we'll start with top line first. Operator: Your next question comes from Chris O'Cull with Stifel. Christopher O'Cull: Congratulations again. Brian, it was interesting that the U.S. is growing transactions across all income cohorts, including, I guess, lower income, which is a segment that has given most fast food or QSR concepts a challenge even with significant discounting. Why do you think the company has been successful in engaging that cohort. Brian Niccol: Yes. Thanks for the question. Look, this is one of those things I believe what we see with folks is when you give them an experience that they feel is unique, differentiated, special, a little touch of luxury, it goes a long way. And we're seeing that play out with every income cohort. So if you're somebody that's viewing this as your splurge, they're perceiving this as, yes, that was worth it for a little splurge. And then for others, where they're seeing it as they're ritual, we're getting great feedback that we're now performing with the speed and the consistency that they're looking for. When we're seeing the occasions where people want this to be a community connection point, we're being able to show for them on that occasion. So I think this is what we talked about a while ago when I first said, hey, we need to get back to being Starbucks, which is we have to demonstrate for people that it's worth it. And if it's on the low income side where it is seen as a bit of a splurge and it's a little bit of indulgence. And by all means, we need to have those drinks that they want. And then we need to give them the experience where they feel like, you know what, for their hard-hard earned dollars it was well worth the spend. And that's the feedback we're getting. And also, I got to tell you, too, I think, Cathy mentioned this, most recently, with our refreshers work, we're also seeing this play out in a really effective way too with all income cohorts. Where earlier in the morning, you're seeing more of the low-income consumer really adapt to the idea of a higher caffeine refresher. And later in the day, you're seeing some of the higher income people take the caffeine down a little lower, and giving themselves the customization that they want later in the afternoon as it relates to a refresher experience. So we're focused on being a great experience regardless of what income cohort you're in. And I'm really proud of our partners because they are the ones that are executing that coffeehouse experience that resonates with folks where they walk away saying, you know what, that experience was worth it. Operator: Your next question comes from Peter Saleh with BTIG. Peter Saleh: Congrats on a great quarter. I just wanted to ask about the rewards program. I know the changes rolled out in March, so really not that much of a benefit to the second fiscal quarter, yet you did see some growth in the Rewards membership. So hope you could give us a little bit more color on what you're seeing in April? How has that accelerated? And on the flip side, sometimes when you change Rewards programs, there's a little bit of a disruption. Are you seeing a disruption? Or are you seeing an acceleration? Any sort of details around that would be very helpful in April. Brian Niccol: Yes. Thank you. And look, I got to give a lot of credit to our Rewards team. They spend a fair amount of time making sure that this program was executed with excellence. And look, I'm delighted to say our rewards, the amount of people in our rewards program went up. We fully expected there will be some disruption, and we'd have to work our way back through it a little bit. But instead, it was just the opposite. And I got to tell you, I happen to be a reserve member. And even on Saturday, I got my new Black Reserve card. And if some of you are at that reserve level, I encourage you going to the app and order your reserve card, it's pretty cool to get. My wife might have had some envy when mine showed up. But the thing that I think is really powerful in this Rewards Program is we are seeing frequency increase, granted, this is early days. We're also seeing people really take advantage of the new lower kind of stars redemption opportunity, where with 60 stars, you can get $2 off. And the team is doing a great job. And I think it demonstrates you don't have to make our rewards program, a coupon book, which is where I felt like we were when I first got here and we had to stop doing all that discounting. This needed to be about engagement. This needed to be about personalization, and this needed to be about recognition. And that's exactly what you're seeing with our 3 rewards tiers. Now the ability to participate in the Starbucks shop and based on where you are, whether you're black or -- I'm sorry, reserve or green or gold, you even get access to unique items in the merch shop. So I just think the team has hit the ball out of the park on this one. It's early days, but I love the fact that we've already seen more rewards customers jump into the program. And by the way, usually in this quarter is when we usually traditionally see a dip in rewards participation. So we kind of bucked the trend. And then we also rolled out a new program that I feel just has tremendous momentum and a tremendous pathway in front of it for more growth and more engagement. Operator: Your next question comes from John Ivankoe with JPMorgan. John Ivankoe: One of the more difficult things to model is labor dollars per operating week, whether looking at versus '23 or versus '19, considering Green Apron, all the costs, obviously, the additional labor hours and additional people, additional training you put into the store. So really, the question is how -- maybe just kind of directionally how labor dollars per operating week may settle out in the next couple of years, especially given some of the initiatives and programs that your COO, I know, is planning to put in, in the relatively near term. How much efficiency, in other words, could we get out of existing labor hours to potentially use to drive additional transactions? Brian Niccol: Well, let me just on the first piece in regard to like efficiency. I think the way we're going to be more productive is through the ability of driving more throughput with the new rosters and the deployment that we have. We don't see our way forward with cutting. We see our way forward with being creating technology or creating equipment or creating processes to support the labor hours we have in the store to be more productive, meaning more transactions, more throughput. And I think the team is laser-focused on this. We know we have a real opportunity to continue to be better at how we use the Smart Queue system. And we know we have an opportunity to be even better with the deployment. And we also know we've got an opportunity on how we set up the flow, whether it's the cold bar, our food system. And then obviously, I'm really excited about the new Mastrena that we've got coming down the pike where all of a sudden, you're going to be able to get 4 shots done in less than 30 seconds. So I think you're going to see us be able to meet the demand and do it in a way where we're able to drive more throughput, both in peak and in kind of these 15-minute, 30-minute increments that we're tracking. Your other question, we don't actually think about it the way I think you described it, but maybe we can... Catherine Smith: Yes. Let me -- maybe I can add a little bit more color there. So as Brian said, we want to make sure we're supporting our Green Apron partners every time they're engaging with a customer to make that the best and most rich experience. So we're going to continue to invest there. If you're thinking through like hours and rates is the way I think about it, every hour that's a customer supporting -- I mean a Green Apron partner supporting a customer, we want to support that. What we would want to do though is help them to be able to deal with more throughput like Brian described or those non-covered hours, those hours where they're not supporting a customer. If there are things we can do to help our Green Apron partners, eliminate those kinds of tasks, then we would love to do that, and we can do that through technology and other ways, which we're doing. So longer term, total hours, I wouldn't expect to necessarily go down, especially as we continue to drive more and more demand. Rate, it will continue to be the area that we'll want to focus on, some jurisdictions require a rate already, and so we'll be thoughtful there. But I would think about it as kind of focusing on throughput in the covered hours or those hours where our Green Apron partners support our customers and then trying to be as effective and efficient as we can on the hours where they're not supporting a customer. Operator: Your next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: My question is on the kind of EPS growth algorithm. I think at your Investor Day, the long-term algo you put out there through fiscal '28 pretty much assumed 25%-plus type EPS growth in fiscal '27 and in fiscal '28 to hit your former I guess, what is upwards of $4 target and with revenue being only 5% of that, clearly, the majority of the growth is coming from operating margin expansion. So with that as a backdrop, one, I was just hoping you can talk about the primary buckets of that. I think it's the $2 billion savings and how you kind of see that by year. And then just as you raise, like you just raised your fiscal '26 EPS guidance, should we be flowing that upside through to the former kind of absolute EPS guide approaching again $4, or do you think of that more of just an EPS pull forward of growth and therefore, we should still have that fiscal '28 number kind of as is. Catherine Smith: So Jeff, maybe I'll start and then, obviously, Brian can add anything on. So we're really pleased with the performance we're seeing already and to be able to come in and increase our guidance so quickly even after just giving it at Investor Day. Obviously, it's a testament to our strategy that's working. So we'll stick with that. On your point about op margin expansion, absolutely, that is -- the key to the EPS targets we gave for 2028. And it is -- a lot of it's top line. Remember, about half of it is in top line and the other half is in that cost savings program. The cost savings program is a multiyear program, the $2 billion. You're seeing it probably not as obviously this year because we've got a fair amount of savings, but it's helping to offset some of those investments we're making with Green Apron Service. We're also obviously seeing it come through in some of the near-term G&A work we've done. But you should expect it to come through in '27 and into '28 as well. Some of those things we're working on take a couple of -- a little bit of time to get -- pull it through the P&L, which we're doing. So we've got a robust pipeline. What I can tell you is the number of initiatives have grown since we last spoke. So that's great, and we feel very confident we're on track for the $2 billion program. And then lastly, you asked about flowing it through. I would say we're really not changing our FY '28 targets at this time. It's really early. We have another quarter behind us, let's just keep putting them down. And then at the right time, we'll come back with some different guidance. Operator: And the last question comes from Sharon Zackfia with William Blair. Sharon Zackfia: So I think everyone is really impressed by the operational improvement. And I guess I wanted to drill down a little bit on how you keep the momentum going forward. You touched on this a bit. But are the scorecards fluid, meaning what -- how do you keep those original cohorts improving? Or is it just a matter of muscle memory over time? And then secondarily, I'm sure you studied 2023 from the outside, it looked like everything was good until abruptly it wasn't. So how do you -- and what safeguards have you kind of put in place so that you can diagnose any shortfalls to start to happen operationally to address them really quickly. Brian Niccol: Yes. Look, this is why having, I think, clear standards and using a clear tool like the Grow scorecard is so important. And obviously, one of the things I will tell you is, as we get more and more people close or more and more coffeehouses close to the performance standard, we raise the standard. And I think that is just the reality of wanting to always be world-class. And the thing that I think is really exciting about the Grow scorecard is it's correlating to performance. And then also, it's giving us clarity of what's working and what's not working. And so that's going to be our best tool to understand what's happening in the coffeehouse. So I also think, too, just as an organization, we are much closer and in sync and in tune with our coffeehouse and the customer that's coming into the coffeehouse. So you got to stay close to what's happening from an operating standpoint. You got to have signals like a Grow scorecard, but you also got to be in the coffeehouses, talking to our partners that see what's happening on a day-to-day basis. And I think our team is doing just that. And we will continue to make sure that, that is the case. I was actually just kind of looking at my past 3 or 4 months. And it's great to see how many coffeehouses I was able to visit over the past 3 or 4 months. And there's just -- it's invaluable to be able to be in a store with your partners, with your coffeehouse leader to hear what's working and what's not working. Because we don't have it all figured out. But the feedback I get from our teams is we're moving in the right direction. They love the Grow report, and they love getting the feedback that's simple, actionable and very clear. And so that's probably our best tool to make sure that we don't take our eye off of being a great operating company that's focused on great customer service. But the other key piece for us is whether the consumer is in a tough situation or in a healthy situation. My experience has been if you execute with excellence and you frankly give the customer the best possible experience for their hard-earned dollar, you'll be rewarded with their business. And that's what we're going to stay focused on the things that we can control. Operator: And that was our last question, so I will now turn the call over to Brian Niccol for closing remarks. Brian Niccol: All right. Well, look, thank you, everybody. And thanks for all the questions. Look, I just want to wrap up here, and I want to reiterate what we've accomplished, right? So over the past 1.5 years, we set a plan, right? We built, I think, determined teams to really start working with speed and rigor. And thanks to the dedication of our partners, I think, some smart investments, operational discipline. And clearly, we now have some brand momentum. It's great to see that the company is back to growth. So clearly, we have more work to do. But I do believe you've seen a turn in our turnaround, and I'm really confident in the opportunity ahead of us. Because of what I see just changing across our company. And I want to just share a little fun story. I had the opportunity to visit a coffeehouse in Nashville last week. And so I'm going to be specific here. So the team knows I'm talking about them. I was at Charlotte Pike and 22nd Avenue in Nashville. And I got to tell you, the store was transformed from my first visit about a year ago. When I walked in, all our partners' eyes were up, high energy, couldn't be more excited about providing great customer service. There was a true sense of community in the cafe. I had customers that were sitting on couches grabbing me saying, "Hey, I love the new furniture. I love the new third place experience." And I'd tell you, it was showing up in their performance as well. And I'm happy to say this was a 4.5 shot Grow score, so not just 4 shots, but 4.5 shots. And I'm sure they're on their way to 5 shots. But it was amazing to just see the transformation in 1 year and really the effort that our partners were making to provide world-class customer service. The other thing I want to share, too, is I really do see in our support center that our partners are embracing the accelerated pace of change. And they are really driving forward a lot of work that's making a real difference in the experience that we deliver in our coffeehouses. And I believe our support center is much more focused on the customer. And I believe speed is becoming an advantage as we will start operating with more confidence going forward. So look, together, we really are building a winning culture that makes our Q2 results, I think, repeatable and durable and truly represents what Starbucks is. It's one that's going to get better as we execute, one that's going to stay close to the coffeehouse, one that as we scale things we will scale the things that work and we'll learn from the things that don't, and one that keeps raising the bar for both ourselves and our customers. And I really do believe, Back to Starbucks is demonstrating that we're strengthening our execution. And our execution is now showing up in our results. So our focus will be now on consistency so that today's progress really does become ongoing performance. So again, thank you to our partners really around the world for the care and discipline that they are bringing to our coffeehouses. I want to thank our support centers for the focus that they put on getting the right work done at the right speed. And obviously, I want to thank our customers and our shareholders for your continued trust in the Starbucks business. And I'm sure we'll be talking here in the next couple of months. So have a great day. Thanks, everybody. Operator: Thank you. This concludes Starbucks Second Quarter Fiscal Year 2026 Conference Call. You may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell First Quarter 2026 Financial Results Call. [Operator Instructions] It is now my pleasure to turn the call over to Baird Radford, Executive Vice President and Chief Financial Officer. You may begin. Unknown Executive: Good morning, and welcome to the Omnicell First Quarter 2026 Financial Results Conference Call. On the call for Omnicell today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; Nnamdi Njoku, Executive Vice President and Chief Operating Officer; and myself, Baird Radford, Executive Vice President and Chief Financial Officer. This call will contain forward-looking statements, including statements related to financial projections or performance and market or company outlook based on current expectations. These forward-looking statements speak only as of today or the date specified on the call. Actual results and other events may differ from those contemplated due to numerous factors that involve substantial risks and uncertainties. For more information, please refer to our press release issued today, Omnicell's annual report on Form 10-K filed with the SEC on February 26, 2026, and in other more recent reports filed with the SEC. Except as required by law, we do not assume any obligation to update any forward-looking statements. During today's call, we will discuss some non-GAAP financial measures. Full reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are included in each of our fourth quarter 2025 and first quarter 2026 financial results press releases. Our results were released this morning and our financial results press releases, including these reconciliations, are posted on our Investor Relations section of our website at ir.omnicell.com. For our call this morning, Randall will begin with an overview of our first quarter 2026 performance and strategic priorities. I will then review our quarterly financial results and our updated outlook for 2026. We will then open the call for questions. With that, I turn the call over to Randall. Randall? Randall Lipps: Thank you. Good morning, everyone. We started 2026 with solid execution in the first quarter, delivering results at the high end or above our previously issued Q1 2026 guidance ranges across all key metrics, which we believe reinforces the durability of our business model. Total revenue for the quarter was $310 million. Non-GAAP EBITDA was $45 million and non-GAAP earnings per share was $0.55. We believe these results reflect the continued momentum across our core businesses, disciplined cost management and our ability to execute as we continue to advance toward our goal of achieving the vision of autonomous medication management. We continue to see constructive demand environment, including meaningful competitive conversion opportunities. Health Systems appear to be increasingly reassessing incumbent solutions that may have struggled to deliver consistent reliability, scalable service and enterprise-wide interoperability. As customers prioritize these key factors, along with efficiencies from moving medication workflows, particularly in environments facing ongoing staffing and cost pressures, we believe Omnicell is well positioned to serve as a long-term platform partner. As a reminder, our strategy is anchored in driving autonomous medication management as we seek to deliver improved outcomes across the patient care journey. We are operationalizing our strategy through the 3 tightly connected priorities. First, expanding our market presence across inpatient and outpatient pharmacies and patient care settings. Second, scaling predictable reoccurring revenue and advancing OmniSphere, our cloud-native medication management platform. These 3 core priorities reinforce one another. Expanding our footprint and increasing interoperability across care settings is anticipated to increase the scale and breadth of the medication workflows we support, which should provide a broader foundation for enterprise-wide automation and standardization. Increasing reoccurring revenue will give us the visibility and confidence to invest intentionally improving products and accelerating innovation with AI. Execution on this priority is evident through our growing Specialty and Consumables business. Finally, OmniSphere is the unifying layer that is meant to bring our enterprise offerings together, connecting devices, data and workflows on a single secure platform. The OmniSphere platform is designed to shift medication management from reactive manual process toward guided and increasingly autonomous workflows. We believe OmniSphere will enable our customers to unlock clinical capacity, enhance safety and compliance and drive more predictable operational and financial outcomes. We're seeing this play out in recent customer decisions as large and complex health care organizations increasingly select Omnicell to support medication management holistically. For example, health care providers within the U.S. Department of Veterans Affairs, continue to expand their use of Omnicell solutions as they seek to support more standardized streamline medication workflows across their organizations. These deployments span central pharmacy and point-of-care solutions, IV workflow and inventory optimization services, reflecting what we believe is a system-level focus on reliability, efficiency and enterprise visibility across the patient care journey. Similarly, a major academic medical center in New York recently chose to expand its Omnicell footprint across multiple facilities, extending our central pharmacy and our point of care solutions as they strive to enhance safety, improve operational consistency and support enterprise-wide standardization. A Rhode Island-based health system selected our pharmacy dispensing services as a thought to support safety and efficiency in pharmacy operations as part of our broader effort to modernize and standardize medication management across the system. As these enterprise relationships deepen and broaden, we're seeing a national expansion of reoccurring revenue streams tied to the installed base, which should improve our financial visibility and support continued investment in engineering and advanced analytics to deliver the value-added products and solutions that address customer pain points. We're also seeing strong engagement across outpatient and specialty pharmacy settings. A health system in Southern Missouri recently partnered with Omnicell Specialty Pharmacy Services as it worked to enhance clinical outcomes and improve the patient experience, while supporting the growth of the specialty pharmacy program. We find this engagement reflects the same enterprise mindset, customers leverage Omnicell not for technology but for the services and expertise that they're intended to extend medication management beyond the acute care settings and create more predictable recurring value over time. We're grateful for the trust our customers are placing in us to solve their critical medication management challenges. For those new to the Omnicell story are taking a renewed interest in our product offerings, we formally introduce Omnicell Titan XT, our next-generation automated dispensing system at ASHP late last year. Titan XT is designed to combine proven and reliable option with enterprise-level data and workflows and is built on our HITRUST certified cloud platform, OmniSphere. Together, this offering is intended to deliver enterprise-wide visibility, guided workflows and a modern infrastructure developed to support large complex health systems. Importantly, Titan XT represents a meaningful step as we advance toward autonomous medication management and is one step on the journey to connect every patient care area and pharmacy location with OmniSphere. Since introducing Omnicell Titan XT, we've been encouraged by customer engagement and feedback. Customers are responding positively to potential opportunities for meaningful workflow efficiency improvements including reductions in manual card filling activity, improved visibility into inventory expirations and time savings across nursing and pharmacy operations. Additionally, customers are embracing the backward and forward compatibility planned to be offered by Titan XT and OmniSphere as it enables them to plan and execute a migration to our next-generation platform at a pace that works for them. As we've noted previously, Health Systems capital approval cycles remain multi-quarter to multiyear activities, announcing Titan XT in late 2025 was intentional, giving customers time to incorporate the new platform into their long-term planning. Our expectations around installed base refresh facing are unchanged. We anticipate modest incremental Titan XT revenue in 2026. With initial hardwareship is planned to begin in the second half of the year, followed by a phased rollout of OmniSphere functionality in the first half of 2027. More broadly, customers are moving towards platform partners who can help them transform medication management end-to-end. The focus is on integrated standardized workloads across the full medication cycle to improve safety, efficiency and cost. We believe this shift plays directly to our strengths and supports deeper, long-term partnerships. In summary, we began 2026 with solid execution, disciplined financial performance and a clearly defined platform road map. While we remain mindful of evolving macro environment uncertainty and capital spending dynamics, we are confident in the durability of our business model, and the long-term opportunity ahead to modernize medication management. Well, with that, I'll turn it over to Baird to walk through our first quarter financial results and outlook. Baird? Unknown Executive: Thank you, Randall. We started 2026 with focused execution in the first quarter, delivering at the high end or above our first quarter guidance, reinforcing our confidence in our business model as we have kicked off the transition from XT to Titan XT in OmniSphere. We believe performance in the quarter reflects solid execution across our portfolio, coupled with strong cost management and some spend shifting into the second and third quarters. Total revenue for the first quarter was $310 million, representing 15% year-over-year growth and finishing at the upper end of our previously provided guidance range. This year-over-year growth was primarily driven by steady execution within our points of care connected devices revenues as well as continued growth in our recurring revenue streams. As a reminder, we are expecting revenue to be more linear in absolute dollars rather than year-over-year percentage growth rates as we progress through this year. Product revenue was $175 million, up 20% year-over-year. This growth is driven by the strength in our Connected Devices portfolio in both North America and international markets. Service revenue was $135 million, increasing 8% year-over-year with growth driven again by strong performance from our Specialty Pharmacy Services. From a profitability standpoint, for the first quarter of 2026, GAAP earnings per share was $0.25 compared to a loss of $0.15 per share in the first quarter of 2025. Non-GAAP earnings per share in the first quarter of 2026 was $0.55 compared to $0.26 in the prior year period. Non-GAAP EBITDA for the first quarter 2026 totaled $45 million compared with $24 million a year ago. Our strong profitability performance in the first quarter reflects disciplined cost management and improved operating leverage. For the first quarter of 2026, non-GAAP gross margin was approximately 46% compared to 42% in the first quarter of 2025 and 44% for fiscal year 2025, driven primarily by favorable mix and execution improvements across both product and services. As a reminder, we performed the software upgrade at customer sites that provided a headwind to the first quarter of 2025 and full year 2025 gross margins. Turning to the balance sheet. Cash and cash equivalents totaled $239 million as of March 31, 2026 compared to $387 million a year ago. The year-over-year change primarily reflects the repayment of $175 million of principal amount of debt that matured in September 2025 as well as the repurchase of approximately $78 million of common stock during 2025. Free cash flow was $39 million in the first quarter of 2026 compared with $10 million in the prior period and $18 million in the fourth quarter of 2025. Before turning to guidance, I'd like to briefly connect our first quarter performance to the broader operating context for 2026. We exited 2025 with a healthy backlog and improved revenue linearity driven by enhanced customer scheduling and coordination. These same dynamics supported our first quarter 2026 results and are anticipated to continue to provide greater predictability as we move through 2026. We also exited 2025 with strong competitive pipeline activity and we remain positive about our competitive positioning exiting the first quarter. The introduction of Omnicell Titan XT and the OmniSphere platform has increasingly shifted customer conversations towards enterprise-wide standardization and longer-term platform planning. While we think this reinforces the long-term opportunity ahead, it also reflects multiquarter to multiyear nature of health system capital approval cycles, which is an important consideration as investors think about pacing in '26. Since the introduction of Omnicell Titan XT, we've had constructive conversations with many customers around Titan XT and OmniSphere. Early feedback from customers have experienced demonstrations of our new Titan XT and OmniSphere software and workflows has been very positive. Customers are highlighting the DynamicRestock capabilities with guided workflows that are designed to simplify pharmacy technician tasks and reduce time spent on cabinet restocking. Customers are also noting that streamlined medication retrieval workflows for nurses will likely reduce the time the nurse spend looking for patient mezz that should free up more time for care at the bed side. During the first quarter of 2026, we booked our initial Titan XT orders, consistent with our expectations. Turning now to our outlook for the second quarter of 2026 and fiscal year 2026. For the second quarter of 2026, we expect total revenue to be in the range of $307 million to $313 million. Within that total, product revenue is expected to be between $174 million and $177 million and service revenue is expected to be between $133 million and $136 million. We expect second quarter 2026 non-GAAP EBITDA to be between $37 million and $42 million, and non-GAAP earnings per share to be in the range of $0.40 to $0.48. This outlook reflects continued evolution across the business, typical seasonal patterns within services and our expectation that the increased revenue linearity we saw in late 2025 continues through 2026. For the full year 2026, we are maintaining our previously provided guidance for product bookings, ARR and total revenue, while increasing our guidance ranges for non-GAAP EBITDA and non-GAAP earnings per share. For full year 2026, we anticipate product bookings in the range of $510 million to $560 million. Given the timing of our Titan XT announcement and our customers' multi-quarter to multiyear capital approval cycles, we continue to anticipate that the full year 2026 product bookings will be weighted toward the back half of this year. Total revenues are expected to be $1.215 billion to $1.255 billion with product revenue between $690 million and $710 million and service revenue between $525 million and $545 million. Year-end 2026 annual recurring revenue, or ARR, is expected to be between $680 million to $700 million. Non-GAAP EBITDA is now expected to be between $153 million and $168 million compared to previous guidance of $145 million to $165 million. Non-GAAP earnings per share are now expected to be between $1.80 and $2 compared to $1.65 to $1.85 previously. This guidance includes our updated estimate of approximately $12 million of tariff-related costs impacting the P&L in 2026. As a reminder, tariffs remain fluid and we continue to closely monitor. Our guidance also assumes an estimated non-GAAP effective tax rate of approximately 15%. Before concluding, I'd like to provide additional context around several assumptions underlying our full year 2026 outlook. As Randall outlined, our 2026 product bookings outlook reflects where we are in the XT life cycle. As we discussed at the time of the Omnicell Titan XT and OmniSphere announcement last December, 2026 marks the 10th year of use of earliest XT cabinets, which were first shipped in 2017. While we believe the potential benefits of Titan XT provide a significant long-term replacement opportunity, health system capital budget approval cycles typically span multiple quarters to multiple years. Launching Titan XT in late 2025 was intentional, allowing customers sufficient time to incorporate our new offering into their planning cycles. We continue to estimate the total replacement cycle opportunity to be in excess of $2.5 billion. That said, it is important to remind investors that the XT installed base today is younger than XT series installed base was at the time of the XT launch, which may create near-term pacing considerations. This dynamic may be offset in part or whole by the expanding value of the nursing and pharmacy technician workflows, supply chain management and data analytic capabilities we are building into OmniSphere. These collective factors are reflected in our 2026 product bookings guidance. As shared previously, we also expect revenue linearity to remain in place throughout 2026, which is anticipated to result in a quarterly revenue profile that is more muted in terms of quarter-over-quarter dollar movement and experienced in historical patterns from prior years. From a cost structure perspective, our full year 2026 guidance reflects a continued focus on balancing long-term value creation with probability. At the midpoint of our full year 2026 guidance ranges, non-GAAP EBITDA is expected to expand by more than twice the rate of revenue growth, while continuing to fund innovation, development and customer experience initiatives. In closing, we are pleased with our start to 2026. With disciplined execution and a clearly defined platform road map anchored by Titan XT and OmniSphere, we believe Omnicell is well positioned to drive sustainable, profitable growth in 2026 and beyond. With that, we'll now open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Stan Berenshteyn from Wells Fargo. Stanislav Berenshteyn: I wanted to get an update on the retail segment. I was wondering if you can offer some color as to EnlivenHealth, how's that progressing? Do you continue to see headwinds related to the footprint within the Retail Pharmacy segment. . Nnamdi Njoku: Stan, this is Nnamdi here. Thanks for the question. So just to give you a sense of what's happening there. Our team just returned from one of the major conferences NACDS, and -- what I will say is the mood in the room there was really with the major players. Looking forward, there's been a lot of challenging that have happened in that space in the last couple of years, but it seemed like there was some sense of stability and looking forward. Now it doesn't mean those challenges are getting muted. But what they are reporting back is that those key players are looking forward and the volumes there continue to increase, and it seemed like the tone in the room was really about how to deliver on those growing demand at the lowest cost. And that's where we see our Enliven solutions really playing a role there. Omnichannel communication, patient engagement solutions. So we're really just focused on engaging our customers in a way that is delivering value for them to meet that growing demand, but also continue to drive cost down with regards to how they serve their customers. So what I will say in summary is it's been a challenging time in the retail segment. I think that challenging sort of dynamic continues to play out. But there's been some sense of kind of looking forward with regards to just trying to figure out how to meet the growing demand that's out there. And we're just focused on just partnering with them to be able to deliver on that. Operator: Next question comes from the line of Jessica Tassan with Piper Sandler. Jessica Tassan: Congrats on the great results. Do you guys just mind kind of articulating the sources of gross margin upside on the product side in 1Q and on the services side and the extent to which you expect those sources of gross margin upside or the gross margin upside to be durable versus kind of transitory? . Randall Lipps: Thanks for the question, Jess. In terms of gross margins, we did see 46% total non-GAAP gross margin in the first quarter. It compares to 42% a year ago in the first quarter and 44% for last year. A couple of things contributed to that. First, on the product side, we saw favorability in the product and customer mix in our connected devices. And on the service side, we lap the investments that we were making during the course of 2025 in field-based software upgrades at our customer. So those 2 vectors are contributing to that performance. What I would say is that margins will continue to fluctuate from period to period. And last quarter, in the fourth quarter, maybe we're a little bit at a lower end. This feels like we're maybe a little bit at the upper end in the near-term cycle. So I don't want to call this the new ceiling or new floor. But I think we'll continue to see small fluctuations from period to period based on that mix. Operator: Your next question comes from the line of David Larsen with BTIG. David Larsen: Can you also talk about the key care impact that it did go for good on public hospital team volumes on active pursuits. Unknown Executive: Awesome. Thanks, David. You were a little faint on that, but it sounded like the tightened environment and the market conditions around the acute care environment. Nnamdi Njoku: David. So what I would say right out is it's a great time to be in medication management. As you know, the 2 main players there have rolled out new offerings and customers are reassessing the incumbent solutions. As we also look out there, technology is advancing and really giving us the chance to deliver on consistent reliability, scalable service, enterprise visibility. So it's pretty favorable out there in terms of being in this space today. So following our December announcement, we've been out there engaging customers, it's been very favorable. We continue to build our pipeline. I'll point to a couple of things that we're hearing from our customers as we have those conversations. The things that are really landing well have to do with looking at sort of system-wide visibility. So when you think about these complex health systems, the ability to centrally manage user management and devices across the health system in a standardized way is resonating as we have those conversations. The other thing that we're also seeing out there is the ability to sort of have a migration flexibility is also giving us a chance to really engage health systems as they expand, particularly those health systems that have a newer fleet. So the ability to have a mixed fleet environment and manage that migration is going really well. And then we've also talked about the workflow benefits with guided workflows and some of the things that we're really trying to address around operational variability. And in an environment with labor constraints as well, that's really landing well with those guided workflow conversations. So in a nutshell, it's a positive response we're feeling out there. We're investing in our commercial go-to-market approach, making sure we have the demo equipment out there to give customers a chance to really experience the solution that we're rolling out. So we're very encouraged by the discussions that we're having. We just continue to engage customers in that dialogue and to build the pipeline. Operator: Next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: Randy, a follow-up on the product bookings. The guidance there was unchanged, but I wanted to look a little bit underneath the hood. And I think you said the installed base refresh assumptions are unchanged. As you think about your customers and your prospects as they think about going for XTExtend versus Titan XT, are you seeing any increase in cancellations for XTExtend and maybe more customers looking toward Titan XT. Would love to get a sense of anything within there is different than your expectations a quarter ago. And then as it relates to the product bookings guide or conversations with customers, really has anything changed over the past 3 months? Randall Lipps: That's absolutely a great question because it has changed because now there's more optionality for customers and customers who may have been just leaning into an XTExtend extent to upgrade their current systems are now saying, well, maybe I should use Titan XT. And how do I feather that in. With it coming out, the hardware coming out at the second half of this year and the software coming out, the next part -- first part of next year. And so the conversations have people reevaluating their configurations and their strategies to acquire the equipment. And I think you're right, probably less people are less interested in the XTExtend package and more interested in how to deploy and when to deploy the Titan XT. So it's definitely making the conversations and the size of the deals, upsizing the size and how that, of course, involves some people have to go back to capital committees and get one and rejuggle that a little bit. But it's all really positive. It is -- and people know that when you deploy technology, you want to deploy it once for a long time. So particularly, these health care systems would rather wait and get the best result than do it twice in 5 years or something like that. So we kind of knew that would happen. Operator: Our next question comes from the line of Bill Sutherland with StoneX. William Sutherland: I was curious as -- particularly as these deals that you're in discussion about get larger. What -- Baird, you've talked about the likelihood that you'd start to look into leasing and -- or some kind of financing opportunities with -- in certain situations. So I'm wondering how that's progressing for you guys. . Unknown Executive: Yes. We continue to find that it's an important offering for us to provide to customers. There are customers that are trying to line up their cash flows in line with our operating revenues, and there's others that are looking at it through a capital purchase lens. And so continuing to offer both has been helpful and constructive in conversations. And I think it's leading to what we believe is a really nice pipeline of activity, both existing customers and competitive opportunities. And so having that in our portfolio has been quite useful. Operator: Your next question comes from the line of Scott Schoenhaus with KeyBanc. Scott Schoenhaus: I guess a follow-up there. You just mentioned the pipeline in your prepared remarks, the strength of your pipeline, but you mentioned the competitive conversions here. You talked about the workflow enhancements in the technology. I think that's better than your competitor out there. Your competitor also has a Class II FDA recall in the market. Maybe just talk about what's embedded in your bookings guidance on the competitive conversion side and where you see this going over the next 12 months? Because there seems a clear opportunity here in the marketplace that you haven't had in the last replacement cycle that could be significant. . Randall Lipps: Yes. Thanks for the question, Scott. Yes, we definitely are -- are excited about the moment that's present, having a new product in the market space is one thing, but also knowing that there's a large group of opportunities out there where customers, ours and our competitors' customers, will have to make decisions about their path forward. As we think about the assumptions that were based into the bookings, it's important to remember that we've been taking share over an extended period of time. And what that may do is vary a little bit from year-to-year. But over time, we've consistently been able to increase our market share. So we've built that assumption into our guidance. And what you see is a modest increase year-over-year and competitive wins assumed in our guidance. Operator: Our next question comes from the line of Matt Hewitt with Craig-Hallum. Matthew Hewitt: Congratulations on the strong start to the year. I guess sticking along the competitive conversion commentary. Obviously, market share, you guys are growing it there. But I'm just curious, are you seeing an increase in demand from these new customers to sole meaning we would expect over the course of this year into next year, the number of sole-sourced hospitals or systems has increased because of some of these competitive dynamics? . Nnamdi Njoku: Matt, thanks for the question. I would say, just reflecting on the engagement that we're seeing out there, I don't know that we're seeing a material shift in the volume of sole-source agreements. If you recall, most of the ways that we engage with our customers here, we tend to get into those types of arrangements with them. particularly these large customers. So I don't know that there's a material shift on that front. But we are pretty encouraged with just the volume of activity we're seeing out there. And as we start to progress some of these to the contracting stage, we'll see something out there. But at this point in time, I'm not sure that there's a signal there I can point to that's a material change. Randall Lipps: Yes. Matt, the only thing I'd add on to that is that for our customers, the importance to them of having a reliable cabinet is something that they really enjoy about working with Omnicell. And when we think about the innovation culture at the company. That does play into the continued dialogue with customers about how we are helping meet their evolving challenges in the pharmacy. So as a thought partner and as an innovation partner, those are 2 things that really end up in these conversations pretty heavily. And although not changing, but worth mentioning. Unknown Executive: Yes, let me add one comment to that. I do think there's a bigger portion of our bookings coming from competitive conversions as we move into the future. And some of those deals may be sole sourced, usually a big provider does look at doing sole source. But it's just where we are in the dynamic of some of these very large whales, how long it takes to get those contracts in place, I think it's what I will comment. But I think for sure, we're in a fantastic market with a lot of competitive activity. I mean we just the other day, had to double or maybe even more triple the amount of demo equipment out there just because there's so much demand for people to see the product. Operator: And our final question comes from the line of Gene Mannheimer with Freedom Capital Markets. . Eugene Mannheimer: Congrats on the good quarter and outlook. Your initial fiscal '26 EBITDA guidance provided back in February was a little bit muted. As I think about that, and I think you cited some planned investments, it appears that some of those shifted out of the quarter. Baird, and maybe you can elaborate a little bit on what those are and when they -- when we might expect to see it land? Unknown Executive: Thanks for your question, Gene. Yes. I -- as a follow-up to Jess's question about gross margins, we did land at 46% in the quarter. It's a little higher than we've seen over the course of the last several quarters. So maybe a little bit higher than normal. In terms of shifting out of costs, we had some places where we had the flexibility to keep the operating activities on track, not put us behind. But to shift a little bit of money out into Q2 and Q3. So I would expect to see some operating expense increases as we move into those periods. But I think the most important part is that we've really focused internally on the spend discipline and trying to reach the right balance between the long-term growth needed and profitability in the business. And in the first quarter, we did see early signs of those initiatives starting to take traction. And what you see is us gathering and putting some of that additional belief into the remainder of the year. So overall, I think it's a positive quarter, and it's a positive outlook as we move forward. And that's what we reflected in the guidance update. Operator: With no questions in queue. I will now hand the call back over to Randall Lipps for his closing remarks. Randall Lipps: Well, thanks for joining us today. We're really excited about where we are and just this point in the history of medication management, just a wide availability in the market to make some serious changes. And we're excited about the innovations we're bringing on our platform that's empowered by AI or enterprise agents and new robotics and world models, all these things are helping to drive us toward in the autonomous pharmacy in an accelerated fashion, which is as you all know, has been at the tip of our tongue for quite a while. So we're starting to see that come into the view, it's exciting customers and it's even exciting, of course, to our employees who are the best automation team in health care. So we appreciate you guys. So thanks for joining us today, and we'll see you soon. Cheers. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Christopher Jakubik: Good morning, everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and thank you for joining us. I'd like to remind everyone that during our comments today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures during these remarks. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.Kimberly-clark.com. With that, I will turn it over to Mike for a few opening comments. Michael Hsu: Okay. Thank you, Chris, and thanks to everyone for joining us this morning. Our first quarter results underscore the strong progress we're making towards creating a company unlike any other in our industry today. Our Powering Care growth engine is enabling Kimberly-Clark to continue building industry-leading base business momentum. We are delivering differentiated science-backed innovation in all rungs of the Good, Better, Best ladder. In the first quarter, innovation helped fuel our delivery of solid organic sales growth with volume plus mix growth increasing to 3%. This builds on 2 consecutive years of broad-based volume plus mix growth. We're building market share across our key focus areas of Baby Care, Women's Health and active aging and with a second quarter launch late that's 1 of our most active ever across the categories and markets where we compete. Our supply chain team continues advancing our commitment to deliver the best product at the lowest cost. We generated another quarter of industry-leading productivity, enabling us to continue investing for impact. Our fast lean operating model is making us more agile, navigating external turbulence. It's also helping us continue to bring the best of Kimberly-Clark to the world with speed and efficiency. We're still in the early innings of our potential, and we're well positioned and continue accelerating our virtuous cycle of value creation. We look forward to seamlessly plugging Kenvue?brands and businesses into our proven durable operating model. We're ready to raise the standard of care for billions of people around the world and deliver generational value for shareholders. I'm very proud of our teams for their passion and dedication as we work to make our bold ambition a reality. And with that, I'd like to open the line for questions, operator. Operator: [Operator Instructions]Our first question is coming from Dara Mohsenian of Morgan Stanley. Dara Mohsenian: First, maybe just a clarification on the full year guidance, obviously, we're seeing commodity pressure today, oil stays with now above $100 a barrel, that's not officially in guidance nor is the mitigating actions. But Nelson I was just hoping you can walk us through the range of potential actions you would take to help offset any pressure on full year earnings if oil stays up here, maybe rank order how you think about pricing versus productivity versus flex on ad spend? And just conceptually, do you think it's realistic, you can offset most of that if oil stays up here, understanding it's very volatile. And then Mike, if we can drill down a bit I did want to delve more into the pricing side in North America. We've obviously seen a pretty promotional industry environment the last couple of quarters. At the same time, you're generating very healthy volume growth on your portfolio within that environment and now we have this unexpected cost ramp up externally. So just a lot of moving pieces, and I was hoping you could help us understand strategically how you plan to manage pricing in North America given all those factors. Michael Hsu: Okay. Thanks for the question, Dara's a lot to unpack that. Let me kind of give you kind of the overall framework of how we think about it, and then I'll ask maybe Nelson can give you some of the details about how we'll process it and also -- and maybe ask [ Russ ] to click in on some of your questions about pricing. But I'd say, overall, that I feel like we're making great progress creating a new kind of health and wellness leader. And we're really encouraged by the strong base business momentum we're seeing. 3% volume mix in the quarter builds on I think sorry, ninth or tenth quarter of solid volume mix growth. And so we feel great about that. And the important thing, I think, as you kind of embedded in your question is that, that volume mix growth is being driven by innovation, right? And we're not renting that through promotion. The promotion is supporting the innovation. And so that's kind of the big deal for us. On top of that, we feel like our supply chain is in full swing and generating industry-leading productivity, which we feel great about. And that enables us to reinvest back in the quality and the marketing of our brands. So I think we're feeling good about our underlying base business momentum. I'd say the environment promises to remain turbulent, but we're going to remain agile and disciplined. We've been through a number of these things over the last -- well, in my tenure in this role, right, if you go through COVID and a few other wars, unfortunately, and other commodity or input cost situations. So we've had a lot of experience navigating a lot of different disruptions, including this quarter. And I'd say, overall, our process is to remain very disciplined. And 1 concept that we've felt very important is PNOC or pricing not a commodity input cost discipline. And we expect that to be at least neutral over time, and we're going to leverage all the tools that we have to make sure that we continue to do that. And so I think the key thing for us is we have a lot of levers to pull in terms of how we're managing our cost profile, which Nelson is going to talk more about right now. But I also say having that discipline on pricing net of cost is an important concept for us. Nelson Urdaneta: Yes. Picking up where Mike left Dara, a few things. As we look at the overall input cost inflation for the year and what we have factored into the outlook, and I think it's important to bring up the last 2 years. So for 2024, 2025, we faced right around $200 million of input cost inflation. As we got into this year in January, that was really flattish all in. So we were staring at about a flat input cost inflation outlook. And with the latest data and information that we've got, let me unpack what's in the outlook and what we've yet to build into the outlook, including the mitigation actions, as you stated. So for the second quarter, a couple of things. As we stated in the prepared remarks, we're going to be facing around a $20 million top line impact from the California DC fire, which for North America would be in the 70 to 80 basis points of headwind in the quarter. Then in the bottom line, we expect to have in the second quarter around $50 million, stemming from the inflationary impacts that we're seeing as a result of the Middle East war. And some of the impacts related to the LA DC fire, which as you stated, we expect to recover that in the second half of the year. If we look into the back half of the year, and we assume that oil prices remain at around $100 per barrel on average, we will be facing potentially gross incremental input costs of around $150 million to $170 million. We've not built this into the outlook because there's a lot of moving pieces as we speak, but we have also not built in any potential mitigations, which our teams are currently working through as we roll through the different scenarios. It's important to highlight that we, as Mike said, have instituted this philosophy of pricing net of costs, over time, neutral. And this is really embedded in our integrated margin management process, which ensures that over time, we expand margins, and keep on track with our plan stated our Powering Care plan rollout back in March of 2024. As such, we have several levers in there. First one, revenue growth management. Second one, a very strong pipeline of productivity initiatives. We've delivered 2 years of 6% gross productivity back to back. And this first quarter of the year, we're already at 6%, and our plans are to deliver for the full year 6%. The pipeline is very rich. We're making significant investments in the North America supply chain with the $2 billion announced a few quarters back, and that's progressing as planned. And then lastly is the whole strategic relationships with our suppliers in terms of pricing contracts as well as hedging programmatic elements that we've put in place. I'd also remind everyone that we've got a solid track record over the last 4 years of recovering any input cost inflation and actually expanding margins. If you look at 2023 through 2025, we expanded both gross margins and operating profit margins beyond the levels prepandemic. So we're confident in our ability to cover all these input costs over time. And again, we will be back with more news in our next earnings call. Michael Hsu: Sorry, I'm keeping track for you. So sorry, if our answers are a little full, but I'm going to ask Russ to comment on the promotional environment. Russell Torres: Yes, sure. Thanks. Dara. So I would say, just underscoring what Mike said that growing volume and mix profitably while maintaining PNOC discipline really is the key focus for us. And innovation is really the key to that. And specifically within North America, if I were to just double-click on that, you were asking about the promo environment. I would say that our overall pricing was in line in the first quarter, as you saw. And in fact, our overall weighted average promo intensity in North America is down versus pre-Covid versus category levels. And that's because we're focused on driving innovation. You will see innovation tick up when -- sorry, promotion tick up when we have an innovation agenda that's really strong because we're trying to drive trial, and that's exactly what you're seeing in diapers right now. We are using more promotion to drive trial. And we talked about that in the fourth quarter. We promoted Snug & Dry. We have a great innovation there that drives softness in our new absorbent core and we're pleased with the results there. We've seen household penetration and velocities up on that post promotion. And we've also shifted some investments across channels with surgical programming to ensure -- our loyal huggies buyers can find us after the recent distribution change, as we talked about in the last call in the club channel. But I'd expect that to normalize as we go through '26. And the bottom line is in North America diapers, our '25 promo was below category for the year, and it's below 2019 levels. So just to give you some context. Operator: Our next question is coming from Peter Grom of UBS. Peter Grom: Great. Thank you, operator, and good morning, everyone. So you updated your outlook for category growth to 2.5% versus 2% previously. Can you maybe just unpack that a bit more what regions or categories are you seeing a stronger performance, and then I think in the prepared remarks, you noted stronger category growth in North America, call it, I think it was 3.3% though, do you think that's a realistic run rate moving forward? Or do you think we could see a bit of a step back just given more uncertain operating backdrop. Michael Hsu: Okay. Peter, I'll start, and I'll ask Russ to weigh in here. I would say we're very encouraged by the resilience of our categories and the impact of our commercial programming. I'd say, notably, North America categories rebounded strongly in Q1. That was driven by some shifts in timing of competitive promotion activity, particularly and I think in the paper categories, but also -- you may recall in Q4, I think the categories had slowed down to just under 1 point. And that was really related to, I think, some things that happened in the year ago, port strikes and all this other stuff that happened. And so we're cycling that. But as we got into the end of the year, we're still a little unclear whether the slowdown was going to be endemic to the category or it's a one-off? And it turns out -- it looks like having cleared the quarter with a strong kind of increase in the category and in our organic, I think we feel like that was a one-off. And so I think our outlook for the year on a rolling 12 months, it's like 2.5% across our categories globally is what we have, and that's kind of the way we're looking at it. And so we feel good about the progress. Russell Torres: Yes. And I'd just add, I think Mike, you said it well. I'd just add, we aren't really seeing any large-scale shifts in consumer buying behavior. And we are still seeing consumers under pressure, but that's not a new dynamic. And so we're -- I think our trailing 12-month weighted average category growth is around 2.5%, and we don't see a reason for that that to evolve too much. And there are some puts and takes, as Mike mentioned, with respect to specific dynamics, but hopefully, that helps. Operator: Our next question is coming from Javier Escalante of Evercore. Javier Escalante Manzo: Thank you, operator. My question is on the merged entity. Mike, you laid out a new organizational structure. If you can help us understand it better. So how will it help restore growth Kenvue?while preserving the competitiveness of the core stand-alone Kimberly-Clark. What are the biggest changes that you made? And if you can explain how you see those working. And also finally, on the combination, if you can give us updates on the completion of the joint venture with [indiscernible], you may have some of it in the prepared remarks, as you can expand on that? And also, what is the status of the approval for the merger. Michael Hsu: Okay. All right. There's a lot to unpack there. I'll try. You can remind me, [ Ravi ] if I'm missing something -- let me start with -- after working on this since November, I would tell you for me and our team, and I think the team on both sides, the Kenvue?view side and the KC side, I would say, for all of us, even more conviction in the growth potential of the company that we're about to create. Kenvue?is going to report their first quarter results in early May, and that's consistent with their typical timing. So I'm not going to -- I'm not going to have your prejump that. But I will say, we've been working through kind of in our preparation for integration planning, some category reviews, Nelson, Russ and I with the Kenvue?teams. And I would say our view is that the recent challenges, although widely reported have been largely executional, and we don't see them as being structural. And in fact, there are pockets or more than pockets of strong profitable growth throughout the company. I would say a lot of that's been overshadowed by a few notable large challenges. I would say, primarily North America skincare, North America Oral Care has been a challenge and some of their business in China. So I think those are notable. But I would say, if you look at kind of how we've structured the management team, I think the management team and the combination of both KC and Kenvue?players reflects, I would say, the strong performance that I observed in the businesses on both sides. The other thing I'll say is Kirk and that management team at Kenvue? have taken some strong positive steps. And we're confident that Kenvue?will improve this year. And 1 of the moves they did make was adopt their operating model, and they announced that change back in February. And I would say it's very consistent with our kind of market-centric balanced matrix approach to operating. So I think we're very encouraged with kind of the progress on their side and also in the integration planning. And then as you kind of raised, I'm very pleased with that we've been able to assemble what I would view as a world-class team to create the preeminent health and wellness leader. And I think roughly, the bench from both sides is about 50-50. So the leadership team composition reflects strong talent that reflect -- that exist within both organizations. I think there's a great blend of market experiences, functional capability and technical expertise. And we felt like it was important to retain kind of the knowledge and leadership of what's working and also retain the strong institutional knowledge that exists in both companies. And like I said, I think if you look at the composition of the leadership team, it also reflects the strong performance in some of the Kenvue international markets. And so I'm pretty bullish on kind of what this team is going to do together. I will tell you, the operating model is going to be very market-centric but also leverage global scale. The culture, I think, will be ownership, speed and competitiveness. And I think that dovetails well, as I mentioned earlier, with what Kenvue has been doing. So maybe I'll -- I know I said a lot there. And Javier, I think Russ has got some comments as well. Russell Torres: Yes, I was just going to pick up on what Mike was talking about around execution. I think that really has been something we've been building and strengthening at KC for many years as those who followed us know both in terms of how to drive growth, but how to drive productivity and SG&A efficiency. And by the way, doing all those at the same time. So we've been basically taking that approach and applying it to the synergy process. We now have over 40 integration teams that are working on planning the combined company post close to build the future of the company to drive the synergies and ensure we can operate effectively together. And that process, I would say, is going very well. I've been very impressed with the actions that Kenvue?has been taking recently, Mike talked about in their base business and what they're bringing to the table for how we're looking at the future together. And we are seeing very good line of sight to synergies in all areas, COGS, I'll just give 1 quick example, their product is pretty small and dense. And so therefore, they tend to weigh out their trucks and ours is bulky and light, and we tend to cube out trucks. And so we're shipping to the same places, let's put them on the same truck. And there's actually quite a lot of value there. And SG&A, lots of examples we could highlight beyond just duplication we're really looking at it as an opportunity to leverage the combined scale to work differently, and that's simplification of the systems environment, SAP in, application rationalization consolidating processes, accelerating global business services using AI, lots of things there. And on the revenue side, we're really excited. I think there's tons of opportunities in distribution and leveraging commercial capabilities like e-com, all of which require getting the execution fundamentals in place, and that's really what we're emphasizing. And we're not waiting for the close. We are working on those things, as Mike mentioned, I know Kenvue?is working on them in their base business hard, and so is KC. So we feel like we're pretty well positioned to hit the ground running. Javier Escalante Manzo: Go ahead, Mike, just like a high-level thought. Do you think that part of these execution issues on the Kenvue?side had to do with the fact that the demerger from J&J at a time of a great deal of retail changes both in the U.S. and China? Do you think that, that's what led to underperformance. Michael Hsu: I don't think I can -- I know enough to comment on that, Javier, right? But all I'll say is running these kinds of businesses is hard. There's a lot of things that add up to being, what feels like small decisions end up having big impacts. And so that's why as I met with some large investors, and that's the question I asked, which is why does quality of management matter so much? It's because these are arcane businesses that have a lot of operating and running rules and they can be very difficult and things that feel small, like small inconsequential decisions end up having at times a big impact. And Nelson, and Chris and I saw plenty of those are craft back when we were at that company back in those days. And so -- so I wasn't there for that, and so I won't comment however here, but I would just say doing this is hard and making sure that you're kind of lined up correctly across all fronts of operating a business is really, really important. Operator: Our next question is coming from Lauren Lieberman of Barclays. . Lauren Lieberman: I was hoping you could just talk a little bit about the shipment timing that you mentioned in the prepared remarks on North America because it's category growth has accelerated. I don't recall if you guys use Nielsen or Sarcoma, but the Nielsen trends, including Costco, your business grew 5% and you reported in sub-Q. So just if you could discuss kind of in what categories, in particular, you're seeing those headwinds. Is it an inventory kind of correction? Or is it something that is timing related and kind of picks up in 2Q? Nelson Urdaneta: Yes. Sure, Lauren. So a few things. As you say, scanner data consumption data very strong. And as we've seen in many years, many quarters, there's always going to be some noise within the quarter between shipments and consumption. The key is really consumption. And looking into North America consumer specifically, as you point out, consumption was ahead of shipments by around 200 basis points, and trying to piece through the entire noise, I'd say, trade stocks inventory is not really the big thing there. It's more having to do with the fact that we had very strong activation programming in the first quarter, which started in January. So we had some shipments that came through in December, and that kind of anticipated what we went through. And that had to do a little bit with what you're seeing there and the difference. I think it's also important to highlight that as we think of the second quarter, we do expect organic sales growth to be slightly below Q1. And 2 things to keep in mind on that end. The first 1 we're going to have the strongest comp versus 2025, in which for total enterprise last year, we grew about 4%, and in North America, volume was actually 5%. And again, that goes back to the quarter-on-quarter can be a little noisy. And in last year's situation had to do with the fact that we had a series of product launches, particularly in baby and child care, which drove strong shipments in the second quarter. And then the other bid for the second quarter is we're going to be having a little bit of a headwind from the distribution center fire in California, as Russ had mentioned in his prepared remarks, that will be around $20 million or 70 to 80 basis points for the North America segment. But as we go into the second half, we expect that organic growth to actually accelerate because some of these noise elements we don't project. Lauren Lieberman: Okay. Is my line still open? Nelson Urdaneta: Yes, yes. Lauren Lieberman: Oh, cool. Okay. Awesome. So for her asking myself a question. Okay. So the operating profit headwind that you talked about for 2Q, which largely reflects the incremental inflation and also some of the pressure from the DC fire. So you've included that, let's call it, roughly $50 million for 2Q, you've held the guidance for the year. So what are the mitigating impact for the inflation you'll feel in Q2 specifically? And then if you're handling it that way for 2Q, why not, let's just call it, like complete the plan for the full year to talk about whether or not how you're going to be offsetting because the 6% productivity rate, while super impressive, you're already at that level. So I don't feel like -- it doesn't strike me as an easy task to up that rate of productivity to deal with this incremental $150 million to $170 million of potential pressure in the back half. Michael Hsu: Laura, maybe I'll just say 1 thing. Nelson is ready to pounce. But the 1 thing I will say is that the underlying assumption we're making is that we know what the cost impact is going to be. And we don't really feel like we know that yet. It's early. It's -- we know what it is today. We don't know what it's going to be tomorrow or through the balance of the year. And so that's kind of why we're kind of keeping the cards a little close to the best. Nelson Urdaneta: But building on that, Lauren, I mean, 2 things. As you say, the $50 million for the second quarter, we feel pretty confident we can maneuver through that. So that's not something that, again, we're bringing up as a major, major situation because it's not. As a reminder, we're about 80% covered in the entire cost basket between contractual arrangements, programmatic hedging and other items we're doing. . We've got the full set of toolkits within our integrated margin management approach. And it starts with the philosophy of pricing net of costs. And if you think about that toolkit, it includes revenue growth management. It includes the productivity. And yes, 6%. We're already at that level, but we've had quarters that have been ahead of 6%. We have a very strong pipeline of initiatives and our team is not sitting still as we're going through this. The reason why we didn't get into what would the specific mitigating actions be for the second half is that the teams are actually working through them today. We are having sit-downs with all of our suppliers, where force majeure or surcharges are being enacted. We're sitting down and renegotiating and opening up contracts as need be. We're looking at price pack architecture. And we're looking at all other elements of the toolkit. As I said, in the last 2 years, we faced about $200 million of incremental costs. And if you add up what we sort of estimate right now, and it's a point in time, plus the 50, you're right around that level. So again, as Mike said, we want to take the time to do this right. We want to see where things kind of settle because it's moving by the day. And we'll do what's right. We'll continue to invest behind the innovation and to do revenue growth management, it takes a little bit of time, but it's something that we know how to do. We've done it in the past, and it's going to be part of the toolkit. Operator: Our next question is coming from [ Anna Lizzul ] of Bank of America. Anna Lizzul: I was wondering if I could build on Lauren's question, Nelson, if you could comment, I guess, on the pacing of the top and bottom line as we move through the year, with both the impact from the distribution center fire in Q2? And then as you were mentioning, the other impacts down the line of oil and raising input costs. On the margin side, if you could talk about maybe the impact between Q3 and Q4, that would be really helpful. Nelson Urdaneta: Sure. A lot to unpack there, Anna. But let me kind of give you a little -- start with the top line. So as we mentioned, strong start to the year at the 2.5% organic growth as we go into the second half, we do -- the second quarter -- pardon me, -- we expect to be slightly below that for the reasons I explained in the prior question, largely with lapping the strongest quarter of last year at around 4% organic growth. North America volume 5% and obviously, the $20 million headwind that we'll face because of the distribution fire in California. But heading into the second half, we've got an acceleration in top line, and that's what's embedded in our outlook for the full year at this stage. As we look at the bottom line, a few things to unpack. First, we expect overall margins to actually pick up as the year progresses. We had in the first quarter, an expansion of gross margin sequentially versus Q4, and gross margin versus the prior year was slightly down 60 basis points, but that was largely expected because we are at the last full quarter of an impact from our exit of the private label contract in North America. Heading into the second quarter, third quarter, fourth quarter, we're largely going to lap that, plus -- and we expect gross margins to actually be expanding on a continuous basis for the balance of the year based on the outlook of what we have today. On operating profit margin, we expanded operating profit margins again this quarter by about 20 basis points, partly driven by the 90 basis point improvement year-on-year, from overheads, overhead of 13%, 90 basis points lower than the prior year. And we're getting good traction on delivering the full $200 million or exceeding it in savings as part of our Powering Care program. And we expect for the balance of the year to continue to see expansion in operating profit margins. For the full year, we expect gross margin, operating profit margin to expand both in the vicinity of 70 to 80 basis points. So that's largely a construct of what we see between the following quarters and the first quarter for both top line and margins. Operator: And our next question is coming from Robert Moskow of TD Cowen. Robert Moskow: I just wanted to test the overall theme of the call here that the business is truly resilient to all of these unexpected cost headwinds because when I look back to 2025, you had the tariffs was the big unexpected factor. And even though tariffs were mitigated for the full year, you still had to lower your profit guide for 2025. So when I'm looking at the 2026 number, the $150 million, $170 million is actually higher than what the tariff headwind ended up being. So I'm just trying to figure out how nervous to be about the ability to offset that much cost. Michael Hsu: Yes. I mean I think, Rob, I'll give you a little bit of historical background, and maybe I'll ask Nelson to comment. I would say, again, -- if you look at our recent history, back in 2022 and 2023, the business took on, I think, $1.6 billion of additional costs and $1.7 billion consecutive years. And so I'd say what we're looking at here is a fraction of that, right? And so I think what happens -- those were like all-time high I would say, inflation super cycle for us. And while the costs haven't receded, we've been able to manage through that cycle with discipline on this pricing that net of cost impact, right, or commodity impact. And so -- so I'd say at the level we're talking about, we feel like the business should be able to operate and manage through things, we'll let you know. And certainly, I think 1 of the reasons why we're hedging a little bit here is because we don't know what the costs are going to be. We know what they're going to be as of today or what the outlook is as of today, but it's still kind of a moving target. But I think our thing is I think since the 2022, 2023 period, I think we've developed much stronger cost management capability, which is why we're delivering industry-leading productivity. We've been really enhanced our RGM or revenue growth management, discipline. And so we feel good about our capability. And then the other thing I will tell you is we feel very bullish about the base business, right? Our organic growth being driven by a rebounding category, but also, hopefully, you saw in that presentation, the fact that we were up in 95% of sales weighted markets on share in North America and 84% in international. I think we feel great about that. And just to give you a comparison on the old metric that we use, which is just a pure count of cohorts, we're up in about 80% -- a little over 80% of cohorts, right? And so I think we feel good about the momentum of the business. Operator: Our next question is coming from Edward Lewis from Rothschild & Co Redburn. Edward Lewis: Just a couple of questions from me. Just be interested to hear how -- if we think about the good, better, best, how you're performing on those is good doing better than better or is better doing better than best? Just interesting to hear some commentary around that. And then I look at the international business, you called out good share gains in some of the markets. Just wanted to sort of get a sense check for how you're feeling about those markets given what's going on in the straight and the concerns people have about the impact and particularly in sort of the Southeast Asia region from the slowdown in shipping or in, I guess, in tankers coming out of the strait. Any update, any commentary there would be appreciated. Michael Hsu: I'll ask Russ to comment on the good, better, best. But I will say, unfortunate situation that we're operating in yet another region with another conflict. And so number one, Ed, I'll tell you thankfully, all of our people and employees have been safe and operating through this. And so -- and they been really kind of working overtime to make sure that we continue to kind of operate the business while keeping everybody safe. I will say business and performance has continued to be robust, especially in international markets. I think in multiple markets, strong double-digit growth. Interestingly, especially in Southeast Asia, our [indiscernible] business was strong double-digit growth, share up significantly. Russ, you may want to comment -- but the thing I'll also hit is in developed Asian markets like Korea, we're seeing a baby boom. So I think births were up 6.5% last year in 2025. And so the category was up 20% in Korea, where we have over a 60% share. So that's pretty meaningful for us, Ed. And so I think we're feeling very good internationally. And Russ you may want to comment a little further and then the good better best. Russell Torres: Yes, I agree. We've seen a lot of strength, especially in Southeast Asia, as Mike talked about, also India, Australia, kind of across the board. So we haven't yet seen a significant impact on the strait impacts yet. It's not to say that it wouldn't happen, but we're feeling pretty good right now. In terms of the Good, Better, Best question, I would say the premium side of the business remains healthy and it's continuing to grow, and it's the key to category growth. The consumers with higher incomes have remained resilient. And then on the good and the better, we're not seeing any specific patterns. I think what it comes down to is the strength of the value proposition to the tiers. And that really is what's winning. I think consumers are getting more choiceful for their money. I would note that, for example, in personal care, the penetration of private label continues to fall overall. And what's winning is the branded value propositions that are offering compelling value for money and those aren't necessarily in the lower price tiers. They're more of the mid-priced tiers. They're just providing a great proposition in consumers, especially in our categories are willing to pay. So that's our focus is to have the winning value propositions in all the tiers and let the consumer choose what's most appropriate for them. So we haven't seen very significant shifts into the good tier if that's kind of where you were going. It really depends on the specifics. Michael Hsu: Yes. I think Ed, interestingly, I think what's driven our growth over multiple years is the premiumization or kind of improving the product quality at the premium tiers and driving positive mix. And that's been consistent for the past, I would say, 7 years for us. I think what's changed is that it's not a pivot. It's just that we're applying the same approach to the value tiers. And so interestingly, we did in North America was bringing some of our best product technology from China and implemented it first in the value tier. And it will eventually go to all our products here in the U.S. But again, I think the fact that I think, as Russ says, we're bringing our best product at every run of the good, better, best ladder is kind of the real core strategy for us. Great. If we could take 1 more question? Operator: Our next question is coming from Chris Carey of Wells Fargo Securities. Christopher Carey: So I just kind of tend to wrap up a couple of key concepts explored on the call. Just number one, just -- I've gotten a decent amount of questions on the commodity outlook and mitigation as could be expected. But I thought I would just ask it this way, right? Like at the Investor Day, you had talked about changing your ability to confront different commodity cycles. Can you just give us a sense of how you feel differently right now, whether that's the time lag when commodities hit your P&L, that's the mix changes from portfolio adjustments. How are we different today versus, let's say, the last commodity cycle? And then secondly, just on the conversation around PNOC. I think embedded in some of your comments is the prospects of potentially looking at pricing? Or I think, Nelson, you said that RGM takes time. So maybe RGM is a potential lever here do you think that incremental pricing or incremental RGM could disrupt some of the volume improvement that you've been seeing, which is partly helped by some of the demand building activity that you're doing? Or do you think that you can continue to deliver volume if you were to kind of lean in a bit more on price or RGM, if you want to control PNOC if inflation stays higher, so appreciate those 2. Michael Hsu: Okay. Chris, let me start. Nelson is going to want to weigh in here on the commodity kind of management, but let me just start with the -- I would tell you, in my tenure, everything has changed about commodity management since we've been here. And I think I think in the past, I think we used to let things flow quite a bit. I think -- and I think I may have mentioned this, Chris, as we kind of looked at what was like holding the stock back, it was kind of the earnings volatility, and when you look at what's driving earnings volatility, it was input cost volatility, right? And so we -- with Nelson coming in, we made a very conscious effort to kind of reduce the volatility of input costs by using all available techniques to do that. And you can see that in terms of how we buy and how we contract, but also in some of the partnerships that we've developed over time. And so we feel very good about the progress we've made. And hopefully, I think the facts are that the beta on the input cost volatility has reduced significantly in the last 5 or 10 years. And so -- but Nelson, you may want to comment on. Nelson Urdaneta: Yes. And just building on that, Mike. And Mike mentioned it before, -- when I joined, we were going -- we were getting into the second year of the heightened inflation related to COVID. That's the second year in which we faced $1.7 billion of costs. And as I've said in some of the calls and in some of our investor meetings, we learned from that. We developed a lot of muscle around risk management over the last few years. We've instituted not just programmatic hedging but also strategic relationships with suppliers that allow us to have more visibility into costs and allow us to have flex to manage through the whole process. Before four years back, we would probably been talking about a different number today. But given what we've instituted on that end, this allows us to be able to manage any shocks much better. The other bid, and it's not the commodity itself, but it's how proactive are we on the rest of the toolkit. And that's why we refer to the pricing at a cost philosophy and the integrated margin management approach which is a philosophy that we've been embedding in the organization. It's very different. We're managing end-to-end. We're measuring the team's end-to-end, and that leads to different outcomes. And that's why our level of confidence in being able to manage through these cycles is much better at this stage, Chris. Michael Hsu: Yes. And then I'll mind you, we're not in previous cost shocks, but I think we're in much better position than we were, let's say, 5 or 10 years ago. . Great Okay. All right. Well, thanks, everybody, for joining us. For analysts that have further questions, Investor Relations will be around all day. So thanks very much, and have a great day. Operator: Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.
Operator: [Operator Instructions] At this time, I would like to turn the conference over to Bryan Goldberg, Head of Investor Relations. Please go ahead. Bryan Goldberg: Thanks, operator, and welcome to Spotify's First Quarter 2026 Earnings Conference Call. Joining us today will be our co-CEOs, Alex Norstrom and Gustav Soderstrom; and our CFO, Christian Luiga. We'll start with opening comments from the team and, afterwards, we'll be happy to answer your questions. We will be taking questions today via Slido. Questions can be submitted by going to slido.com, and using the code #SpotifyEarningsQ126. [Operator Instructions] Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed on today's call in our shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, I'll turn it over to Alex. Alex Norström: Thank you, Bryan. Hey, everyone, and thank you for joining us. 2026 is off to a strong start, with performance reflecting solid execution, healthy growth and the kind of engagement trends that give Gustav, myself and the team confidence in building Spotify for the future. In Q1, we saw results that were in line or better across the board. We surpassed 760 million MAU, delivered on the subscriber growth we aimed to achieve, and we saw healthy engagement from existing users, reactivations and new users alike. Since the global rollout of our more personalized free experience, users in key markets like the U.S. are now listening and watching more days per month. Now for a business as established as ours, did I mention, by the way, that we're celebrating 20 years this month, this is an exciting development. And I'll share more about why in just a moment. And we also netted our second highest gross margin ever. All that reinforces this confidence in sustained user and subscriber growth, low churn and then also continued progress on revenue and margin. Now for over 2 decades, we have worked hard to forge strong relationships with our industry partners and the artists and the creators that we support. You've watched these relationship evolved in the last 20 years. but we have never been in a better position to innovate and to grow, thanks to the progress we're making together. So the trust that we have built is rooted in our collective desire to deliver results and expand the overall opportunity. We will have some new things to share on that front soon. We just released our annual report on the health and growth of the industry. It's worth noting that Spotify remains the only platform offering this level of visibility into how the music industry actually works. Loud and clear show that in 2025, we paid out a record $11 billion plus to rights holders while continuing to outpace the growth of others. And year-over-year, we expect that outperformance to continue. Now on top of the streaming success, there's no doubt that artists, songwriters, musicians and fans are just always seeking stronger connections. Song DNA and About the Song were introduced this quarter to pull back the curtain on the remarkable talent behind our favorite tracks and offer more insights into a song. But we didn't stop there. Live experiences are one of the most impactful ways for artists and fans to Connect. So this winter, we took Spotify's most streamed global artist, Bad Bunny, to Tokyo to perform in Asia for the first time in front of some of his biggest super fans. And then we turned around and broadcast that iconic moment to the world. This went beyond the concept. It was a real opportunity to amplify culture. Now all of this drives retention. So let me take a minute to just explain how we think about retention. Importantly, it acts as a proxy for how users value their time on Spotify. And we look at many metrics, but the 3 that drive retention are more days in a month, more [ devices for context ] and more content types or verticals. I've already told you we've been growing today's users' spend with us each month. Engagement really is the lifeblood of Spotify. And I've been super excited to see this expand over the years and now too. Engaging with us then on more devices and also across our 3 content types just compounds this. This is how we grow the lifetime value of users. Users who engage in this way, they stay longer or perhaps never leave. These 3 levers are rooted in our personalization efforts and act to reinforce one another. And AI just takes this to a whole new level. Essentially, we are unlocking your Spotify, your way for 0.75 billion users around the world. Yesterday's announcement around fitness is a natural extension of this strategy. Spotify is already a trusted resource for wellness and fitness. Nearly 70% of premium users work out monthly and our users have created more than 150 million workout standard playlists, with many also turning to prompted playlists for support. So to meet this need more directly, we are launching a fitness hub on Spotify. And as we just announced, this hub features Peloton's premium subscriber content in an ad-free experience. And of course, this content will be a very strong complement to what has already been working, including content like Yoga with Cassandra, [ Jordan Jo ] and [ Chloe Ting ]. I know we continue to talk about our ads business as a work in progress, but the key point is that 1.5 years of rebuilding, the foundation is now in place. Brands have always valued Spotify for its high user engagement, its beloved brand and its high-quality content. But the market shifted with advertisers now favoring biddable buying. We had to evolve to capture that TAM. So we've rebuilt our stack end to end. Now while this creates some short-term pressure, it unlocks a much larger opportunity. And we are making solid progress. Today, Biddable represents more than 1/3 of ad revenue, and it's growing quickly. So with Biddable expanding and also our active advertisers growing, coupled with improvements in our measurement and performance, we can now innovate in the way in new ways the old stack never allowed. This finally lets us better capture the value of our audience. This is exactly how we wanted to start the year of raising ambition. We're now growing at scale, generating significant cash and reinvesting to capture the opportunities that matter the most. What you're now seeing is the beginning of a much larger next chapter, and we're excited to go deeper on that at our upcoming Investor Day with you all. With that, I'll hand over to Gustav. Gustav Söderström: Thanks, Alex. Now I'll pick up a little bit on what comes next, because that's where much of our focus is right now. So if you zoom out, the way we think about Spotify is pretty straightforward. With AI expanding our opportunities, we're building a system that understands our deeply engaged, passionate 0.75 billion users, one that adapts to them and improves the more they use it. It's also increasingly a platform that puts control directly in users' hands, with their ideas, logic and creativity, a platform that's deeply personal, increasingly interactive and evolving from a solo experience into something inherently multiplayer. As I shared last quarter, and more recently at South by Southwest, AI isn't new for us. Machine learning and personalization have long been core to Spotify, from discovery to recommendations. What's changing is what the technology is now allowing us to better understand, develop and deliver: creating differentiation and unlocking a very different experience and a new level of personalization. From our earliest days, Spotify has been a technology company, and we've always seen ourselves as the R&D department for the music industry. And that mindset has helped us embrace new technologies to accelerate product development and create unique value. Combined with our ads plus subscription model, deep expertise in personalization and scale operations, we think this positions us very strongly for the AI era. We're integrating AI across every part of Spotify, accelerating how we build and deliver at a pace we haven't seen before. We're shipping more, faster and with greater efficiency, lowering the cost per feature while increasing the impact. You can see some of the inference costs behind that acceleration in our OpEx. But we have tremendous confidence in what we're building, and I will share more about that soon. IDJ is now used by 94 million subscribers, closing in on 100 million, driving billions of hours of engagement. In this quarter, we've continued to push the boundaries of the user experience with new AI-powered features. As always, early adoption and deep usage is coming from our power users. But what's changed is how quickly we can learn from that behavior, refine the experience and scale it to a broader audience, delivering improvements faster and at a fraction of the historical cost. And all of this benefits LTV. We're particularly excited about [ Taste Profile ] now in beta. It gives users a clear view of how Spotify models they are listening across music, podcasts and audiobooks, and puts them in the driver's seat, allowing them to directly edit and refine their profile. So imagine telling Spotify to include more songs by those 2 artists my kids are obsessed with, or maybe the opposite, actually exclude those 2 artists, or add a classical tab to my home page. This level of nuanced control empowers users like never before. We've also significantly expanded prompted playlist, enabling users to act as their own algorithmic curators. You can write prompts to generate playlist-specific moods activities or cultural trends across music, but now also podcasts. So together, these features point to something bigger, a transition from a world where Spotify recommends things to you, to a world where you can actively shape, guide and interact with our platform, from passive to interactive, from static to adaptive, and from single player to multiplayer. And we think that's really important, not just for Spotify, but for how people experience media. We're already seeing this more interactive, multiplayer Spotify take off with features like Jam, where usage has doubled year-over-year and now exceeds 100 million monthly listening hours. And there is also Blend, Messaging, Mixing and, of course, Wrapped Party. So we're just getting started here. We're well positioned because of our large engaged user base, our deep create relationships and years of investment in personalization and infrastructure scale to arrive at this agentic moment. Together, these create a platform that can take advantage of this moment and unlock entirely new growth vectors that will enable us to climb to new mountains previously unimaginable. This connects to the broad opportunity ahead. We see significant room to grow across users, formats and engagement, and to really expand what Spotify is and come to come over time. We're at a pivotal moment building towards something even bigger. And on May 21, we'll show you why we're so excited about what comes next. So we'll hope that you'll join us there at our Investor Day. Now I'll turn it over to Christian to take you through the numbers. Christian Luiga: Thank you, Gustav, and thanks, everyone, for joining us today. Let me cover the quarter 1 results and then I will provide some perspective on our outlook. Unless otherwise noted, all referenced growth metrics are presented on a year-on-year constant currency basis. Additionally, this quarter, we have implemented a minor reclassification of non-advertising activities from our Ad-Supported segment to Premium. This is to better reflect the performance of our core advertising business. Just for reference, in quarter 1 last year, we [ shifted ] EUR 12 million in revenue, EUR 7 million in gross profit from our Ad-Supported segment to Premium. Any comments on the segment growth rates are on a like-for-like basis. So overall, we were very pleased with how the business performed in the quarter. MAU grew by 10 million to 761 million in total, surpassing our guidance by 2 million. Our growth rate accelerated 12% year-over-year, up from 11% in quarter 4. Outperformance was led by rest of the world and North America where we continued to benefit from our enhanced free tier rollout. We added 3 million net subscribers during the quarter, finishing at 293 million, in line with our guidance. We saw no surprises with respect to price increase related churn following our January U.S. price increase. Total revenue was EUR 4.5 billion, growing 14% year-over-year, which was an acceleration from 13% we delivered in quarter 4. Premium revenue rose approximately 15% year-over-year versus 14% last quarter. This was driven by subscriber growth and ARPU expansion of 5.7% year-over-year. Our Ad-Supported revenue grew approximately 3% year-over-year. Our new automated sales channel continued to grow fast and now represents over 30% of our Ad-Supported revenue in quarter 1. We also saw some continued choppiness in our legacy direct sales channel. While this dynamic will likely continue in the near term, we still expect improved growth in the second half of 2026 as our billable channels continue to scale. Gross margin came in at 33%, surpassing guidance by approximately 20 basis points, which year-over-year -- with a year-over-year expansion of approximately 133 basis points. Favorability versus guidance was driven by better other cost of revenue and revenue mix. Other operating income. The operating income of EUR 715 million was EUR 55 million above our guidance of EUR 660 million, delivering an operating margin of 15.8%. Our outperformance was driven primarily by social charges, which had a positive impact approximately of EUR 49 million relative to our forecast due to share price movements in the quarter. Excluding the non-forecasted associated charge favorability, we came in approximately EUR 6 million above guidance, driven by the gross margin outperformance. Finally, free cash flow was EUR 824 million in the quarter. Performance here was a bit stronger than our typical quarter 1 due to some timing factors, which will likely reverse in quarter 2. On capital allocation, we repurchased $361 million in shares during quarter 1, continuing our focus on opportunistically offsetting dilution from employee equity programs. We also settled our $1.5 billion in exchangeable note, and that was due in March, with cash on hand, rather than issuing new shares. As of the close of the quarter, we had EUR 8.8 billion in cash and cash equivalents and no debt other than lease liabilities. So then if we look ahead into quarter 2, we see continued momentum and healthy global funnel that is -- and are forecasting MAU of 778 million, an increase of 17 million from quarter 1. On subscribers, we are forecasting 299 million for quarter 2 or a net addition of 6 million. This is modestly below the significant outperformance we saw in the prior year quarter, which benefited from items such as favorable adjustment to our iOS app in the U.S. We reiterate our previous statement that we expect another full year of healthy subscriber growth, weighted more towards the back half of the year. We are also forecasting total revenue of approximately EUR 4.8 billion in quarter 2 or 15% growth. This reflects the ARPU increase of 7% to 7.5% year-on-year as we see additional benefit from the recently announced pricing action, partially offset by the lapping of pricing actions last year in the Benelux region. We anticipate the quarter 2 gross margin of 33.1%, approximately 160 basis points above the prior year. Our gross margin outlook incorporates continued strengthening in our core business alongside with the reinvestments into new products and initiatives that we believe set us up well for future monetization potential. Moving to the operating income. We are guiding to EUR 630 million in quarter 2. This reflects the above along with the timing of marketing of our latest features. This also reflects R&D related to strategic AI initiatives that we already drive -- that is already driving engagement. We expect operating expenses to remain at these levels for the next quarter or 2, and we are confident that it will enable healthy LTV returns. Although we do not provide full year guidance for gross margin and operating margin, we continue to expect both to improve in 2026 on a full year basis, with quarterly progression being variable and dependent on the timing of our investments. We also continue to expect meaningful year-over-year growth in free cash flow in 2026, reflecting our improved profitability and working capital profile, while we're also progressing towards a normalized tax rate in 2027. In conclusion, quarter 1 was a strong start to 2026. Revenue growth accelerated and profitability improved as we continue to reinvest our future growth potential. We remain really well positioned to continue compounding growth and profitability. With that, I hand it back to you, Bryan. Bryan Goldberg: Great. Thanks, Christian. And again, if you've got any questions, please go to slido.com, #SpotifyEarningsQ126. [Operator Instructions] And our first question today is going to come from Ben Black -- oops. I apologize, Ben, I just accidentally resolved it. We'll get that question back in the queue. One sec. We're going to go to Rich Greenfield. I apologize. Slight technical issue here. We're going to start with Jessica Reif Ehrlich's question on operating expenses. Q1 had higher marketing cloud and AI spend. Can you discuss the pace of investment for the balance of the year and how you would define a successful outcome for this investment spend? Gustav Söderström: Jessica, this is Gustav. Thanks for sneaking an AI question right at the top there. They usually take longer to get to. So I'm going to take the opportunity. So we did spend a little bit more on OpEx. And the way to think about it is we have not increased our headcount, actually we slightly decreased our headcount, but we are spending more compute per employee. And that is because we're seeing tremendous return in terms of productivity. We talked about accelerating our ability to ship products already during the late fall; that has only accelerated since then. So we're simply doing much more, and we're getting a very good return on that investment. But as we ship more features, in order to get the true return on that investment, we also need to tell our users about those features, which is why we're seeing some more sales and marketing spend as we market these features to users. But the way to think about it is we see tremendous opportunity here. I usually make the analogy to in 2009 when the iPhone came out and the App Store came up, and believe it or not, I was actually here back in 2009, so I lived through that. It was a time of tremendous opportunity. Some people sat around and waited. Spotify did not, we took the opportunity. And we drastically accelerated first our conversion to Premium and then our free user growth. We think this opportunity is as big or possibly bigger. So we're taking that opportunity. But we are very diligent and very disciplined about those investments. So we are seeing these returns. I talked in my prepared remarks about the DJ closing in on 100 million users. Also something we released only 4 weeks ago, Song DNA, is now up to 52 million users, in just 4 weeks. So we are seeing the kind of growth and return on these future investments that we want to see. Obviously, we think that usage is a good proxy for retention and retention is a good proxy for revenue long term. Bryan Goldberg: Okay. Our next question is going to come from Rich Greenfield on the state of the ads business. Growth is still slowing after the meaningful investments in ad tech in 2025 and absorbing the impact from changes to podcast advertising for Premium subs. Why is increased engagement not translating to accelerating ad revenue growth? Alex Norström: Rich, my friend. This is Alex. I hope you're doing well. I just wanted, before I expand on the question, I do want to just mention to Jessica. We do -- we -- you should check out Prompted Playlist, global campaign just came online yesterday. It's just a terrific campaign that explains how basically we give you back more control over your Spotify with us using AI. And this is a good point to sort of back up what Gustav just said, it's out there in a while right now and it's performing. So let's get back to the ad business. The ad business, Rich, has been seeing very steady progress more recently. But if you take it back 1.5 years or 2 years almost, we observed that there was a gap. What was the gap? Well, essentially, we saw us missing out on a TAM where people were putting a lot of money. And this time was programmatic, it was automated sales and it was biddable exchanges. And the decision we made back then was a pretty tough one because we had to essentially rebuild the entire stack. And we did that knowing that we would face a bunch of short-term pressure, but that it would unlock meaningfully a much bigger market for us in the long term. Now that transition is done. So now it's about execution. It's about patience. And really, what you have to believe for this is to work out for us are a couple of different things. But mainly, it's whenever we have seen increased time spent on Spotify, and quality time to boot, right, then -- and then there's a gap to monetization, typically, that gap will close. It's a question of time, whether it's like you're thinking about it as like advertising as a category, whether it's inside the company, the gap will close. It's just a matter of time. The other things you need to believe in is that really this rebuilt new stack that we have, it actually gives us more opportunity to do new things that we couldn't do before. And obviously, that our measurement and performance shows that Spotify delivers as a brand. What hasn't changed, I'll end with that, is that advertisers, they come to Spotify, marketers, they come to Spotify for 3 different reasons. Our beloved brand that they want to associate themselves with, our high user engagement and also, of course, our high-quality content. Bryan Goldberg: Okay. Our next question is going to come from Benjamin Black on gross margin. First quarter Premium gross margin was very strong despite only 1 month of U.S. pricing. Can you highlight some of the key drivers of the outperformance? And also dig a bit deeper into the 2Q gross margin guide. Could you talk about the investments you're making that may be weighing on gross margin upside? . Alex Norström: Benjamin, Alex here. I was looking forward to answering this question, but I don't know what Bryan did there when he sort of hit it. But it's now back up again, I was happy to see that. I mean it's cool that you called it out because both Gustav and Christian are very pleased with the gross margin progression, not just for this quarter but also consistently in the last 2 years. And really, the underlying reason for this is a very healthy core that actually spans both music and podcast and audio books. Now Christian [indiscernible] as far as going forward, I think the important thing is to understand how we think about gross margin. And like Gustav said, this is a time of tremendous opportunity for us. And the muscle that we've built during the past 3 years -- actually even 4 years, is that we think about reinvestments using cost of revenue, using gross margin in a very disciplined way. We do that. We try to strike a balance between that and margin progression. And again, I think we have a pretty good track record of striking a good balance between these 2 things. Christian Luiga: Should I just give you a little bit more flavor on the second quarter gross margin guide as you asked about that. I mean we do have a very strong growth [indiscernible] and we do invest in the same time on the base -- on the top of our core that is going really well. And that we do in quarter 2 in smaller, minor investments in different things. And some of them you will you will see today and some of them you will see when we get to Investor Day, and some of them you maybe will see later. But it's a good flow we have right now, and we are very disciplined and working very hard in our weekly bets board to actually update ourselves to see what we want to do. Bryan Goldberg: Okay. Our next question is going to come from Doug Anmuth on AI products. Can you update us on your progress towards new AI products that would empower users to create new content and enable derivatives of existing music? What are the hurdles to launching these products? And do you expect that they would impact your cost structure or margin trajectory in any meaningful way? Gustav Söderström: Doug, this is Gustav. I'll take this. I'll talk about this a little bit before. So for now, I'll mostly reiterate how we actually think about this opportunity. The way to think about it is that the generative market, for example, for music is really 2 things. It's net new music, which is happening at scale and quickly increasing the catalog. And that, we think, is good for a company that aggregates content, because it makes the recommendation prompt even more important. I think it's worth thinking about, I just mentioned, reveal my age here, saying that I joined Spotify in 2008. When I joined, I think the music catalog was about 2 million tracks, and now something like 250 million tracks. So the growth of the catalog is not new. We think it's going to keep increasing. And that means that the recommendation prompt gets more important for consumers. But what we think there is a unique opportunity is that, right now, existing creators are largely left out of the AI opportunity altogether. Many creators are using AI to make new music, but existing creators cannot join. That's because the copyright problem is much more complicated to [ solve well ] and the attribution problem of who should get paid what is much harder. But we love hard problems. So that's the problem we want to go after. We want to take this opportunity to existing creators as well, with derivatives of existing IP. So as I've said before, we have the capabilities and technologies we need. We are the right company to solve this problem. And we think that existing creators should participate in AI just as well as new creators. Bryan Goldberg: Okay. Our next question comes from Justin Patterson on productivity. We're seeing many companies wrestle with headcount investment versus rising AI costs. How is Spotify approaching this problem in gauging employee productivity? . Gustav Söderström: Yes. So this is Gustav again. Thank you, Justin. I kind of mentioned this, I snuck this point in before, but I'll reiterate that we are seeing tremendous productivity growth. You can translate that into different things. You could translate it straight into cost savings and cut headcount, which some companies out there are doing. The other thing you could do is to say we're going to be roughly the same amount of people. We're just going to do more. The third thing you could do, which you also see many companies doing is saying we should invest like crazy because there's so much opportunity. Right now, we're going for the middle approach. We're keeping our headcount roughly flat and just doing much more, shipping more value to consumers. And then on the question on how we measure this. You have many proxies on the way. So one proxy for this would be something very technical, like pull request, what amount of code is getting written, and maybe better proxies, how much we actually ship. We have something called DODs, definitions of done, for any feature that we build. So how many DODs are getting done? How many bets do we have on this bets board that I think Christian mentioned and I talked about before. And all of these keep increasing. And they're increasing several times. They're not increasing 10%. They're increasing -- they're doubling, that kind of increase. So we're seeing all of these metrics. Now we are starting to see these things ship. And as I mentioned, with things like Song DNA [indiscernible] starting to see them translate into usage. And usage, as Alex mentioned, is a really good predictor of retention, and retention is a predictor of revenue. And as Alex mentioned as well, we have 3 different modes of monetizing features. There is the free tier, where you can maximize the reach, we are one of the world's largest subscription where you can bundle things. And then as of recently, we've also shown that we can do top-ups like within audiobooks, which we are very excited about the progress on and the numbers that we are seeing. So we feel very good. What I'm trying to convey is that we are diligent and disciplined, but we are not sitting around waiting for this opportunity to go past us. We are taking the opportunity. So that's where we are right now. Alex Norström: And just to give a little bit of historical flavor on that, I just want to add and remind us that, some years ago, we did a resizing of the organization. And since then, as you've seen, we haven't increased our employees, and we have been very diligent in keeping the overall platform stable. And as of last quarter, we decreased with 65 people. So it's not like we are growing people and doing that, and we haven't done that -- we haven't done that for 3 years. It's been a very disciplined approach to this. Gustav Söderström: I think, yes, Alex here is probably too humble to state himself, so I'll say it for him, Alex is actually the one who set this plan about 3 years ago to get Spotify to be profitable, and we've been executing on this plan. So we are very diligent with our cost. Alex Norström: Thank you. That wasn't planned, giving me that much praise. It's both of us, of course. It's both of us. Bryan Goldberg: All right. Our next question is going to come from Deepak Mathivanan on our Ubiquity strategy. You have integrated Spotify and leading AI applications already, ChatGPT last year and Claude more recently. Can you talk about what type of traffic you're seeing and how consumers are using Spotify in AI applications at this time? And how are AI applications helping KPIs such as MAUs and time spent? Gustav Söderström: It's really all about AI today. That's great. So we are -- there are a few ways to think about this. As you know, Spotify has had a few core pillars, one being [ freemium ] and other being personalization and the third being ubiquity. So one way to think about this is [ just ubiquity ]. Spotify was always going to be everywhere, right? This has been a counter strategy to some of our competitors who favor their own ecosystems. So this goes for ChatGPT, Claude, et cetera as well. We just want to be wherever users are. And so that's a simple way to think about it. And I also mentioned that we track usage and engagement and costs very diligently, and we are seeing what we want to see. In terms of the type of traffic, it depends on the future, but what Alex mentioned upfront is we have, for the first time in the Spotify history, this ability for users to actually tell us in plain English or actually whatever language they want, what they want. We were always guessing. Old-school machine learning was a statistical activity based on clicks and streams. Now people are telling us in English that they're going for a run and they want this BPM and that cadence and so forth. So we're getting this treasure trove of data that we are capturing, training on it. And this builds a unique advantage for us. I talked last time about the large personalization model, which is a model that we're training from based on open source models. But it's trained on our proprietary data. This is not something that we rent from someone. This is something we're building in-house. And the casual name for the large personalization model is a taste model. Why is that important? It is because it turns out that taste is actually not a fact. It is an opinion, and it differs between people, between markets, between use cases and activities. So that is the kind of usage that we were hoping to see in Prompted Playlist in IDJ, and that's exactly what we are seeing, very advanced usage that is giving us a type of data we never had before. And now we're just heads-down serving those use cases better than anyone else. Alex Norström: Let me jump in on the action here a little bit, Gustav. So you -- I think it's important that you're hearing Gustav say this and I say sometimes about how we think. I think as a general approach, it's good for us to explain to you how we think about things so that you can understand how it applies to other things as well. I think when Gustav said earlier on -- in response to another question that when the music catalog grows and when our content platform grows in volume, it's always been good. It's good for users, it's good for the industries that we're in and so on. But then the second thing that happens is something we've also said for a long time, and Daniel broached this many times in these calls, that we optimize for the long term, and we talk about optimizing for lifetime value. So how do you bridge these 2 things, with an ever-increasing catalog of content and lifetime value? Well, it turns out that the #1 reason for why people actually engage more with Spotify is personalization. And how we track that is if AI increases engagement for us, it generally means that it increases personalization for us, right? And increased personalization engagement, to Gustav's points, are going to lead to -- well, they are going to be the best proxies for the increase in retention that we're going to see over time with these investments. And if that happens, then we know that that will eventually translate to a longer lifetime value, which in turn translates to more enterprise value. So that's how we think about the investments. Bryan Goldberg: Okay. Our next question is going to come from Eric Sheridan on operating expenses. Can you frame the key platform and product initiatives that are driving incremental operating expense trends? How should investors think about the trajectory of operating margins going forward? . Gustav Söderström: I'll start with them, and then Christian can talk about the trajectory. So I've kind of mentioned it already in terms of the OpEx spend, that it's a mix of increased compute, not increased headcount, and sales and marketing, to make sure that we capture the value of the features that we're now launching. To give you a bit more detail in what do we mean with compute, well, it's a few different things, actually. One is just using things like code, codecs, et cetera, to accelerate our development pace, and building some proprietary systems around that. I talked a little bit about [ Honk ] last time. I have many more exciting things to talk about if you guys want to go there, that we are doing. But that's just one type, accelerating our productivity of writing code. But then as I also mentioned briefly, we are training rather large models in-house, because we have lots and lots of unique data that no one else has. For example, the large personalization model, which is not something that you can rent or buy off the Internet. You literally need 700 million plus people every day using the platform to be able to say what is trending in a certain region in India right now. So a lot of it is training -- or some of it is training cost, and that's upfront. And we'll capture that value when those products roll out. And some of it is this direct productivity in terms of development costs. So think of part of it's strategic investment, part of it as a productivity investment. Alex Norström: Yes. And when we see product market fit with the features that we launch, it just leads to an opportunity for us to talk more about it, meaning we can start telling compelling marketing stories around it to scale it even further, on top of this healthy core that we have. It's all about awareness and [indiscernible] and part market fit. Christian Luiga: And what we highlighted, and I did in my script, was that the next 2 quarters will be a little bit elevated from this. And we do have a different pattern on our launches this year of products, and that's what Alex talked about. And the R&D, of course, is extremely important for building the tech stack that we are delivering to our customers. So I just want to say with that also that what we did say and we reiterate is that the operating margin will improve year-over-year. Bryan Goldberg: All right. Our next question comes from Justin Patterson on the new free tier. For Alex and Christian, how are you judging the higher cost of the free tier versus subscriber conversion and your LTV framework? How does this compare to your expectations when rolling this out last September? Alex Norström: All right. Justin, good question. I'll start and then Christian will fill in. So you heard me in the remarks saying that we, in particular, pay a lot of attention to the number of days in a month that users spend on Spotify. So I'd much rather someone spent many days in a month rather than many hours per day. Of course, you would want both, but if you have to prioritize, it's the many days in a month. And really, we -- internally, we talk about it as the lifeblood of our system. And if you look back on the development of the free tier, the new more enhanced free tier that we launched, I can't remember, is it a little bit more than a year ago now, we have seen consistently that the free tier users have increased in the active days in a month. Now what does that mean? Well, we've had this consistent increase for many years, basically from like '21, '22, '23 and so on. But when we launched new improved free tier globally, we saw this just step change, which essentially means that people are liking the free tier much more, right? It's satisfaction and more usage and more days in a month. So that is always going to downstream lead to more subscriber conversion and eventually lifetime value. I mean it's just blown up my expectations fully since we launched this last summer. Christian Luiga: So just chiming in. I guess you also have then read the numbers and maybe a little bit surprised that, in the quarter, was one of the few times we've had a negative development on the year-over-year gross margin on the ads business. But that is really coming back to the great engagement we have, and the engagement is driving more content cost right now than the income on top line. But the beauty in that and the healthy thing with that is that, of course, that means that we will be able to monetize that as we go into the future quarters and that will be then a positive push going forward. So that is really a short-term issue. Bryan Goldberg: Okay. Our next question is from Rich Greenfield on fitness. Fitness will undoubtedly drive increased video engagement on Spotify, particularly on TV screens. How does this impact your video ad business? And how should we think about the cost impact you will bear within the Premium business from adding this content? Alex Norström: I know you love your TV and Apple TV, Rich, so hopefully, we'll see you using Spotify pumping iron in front of the TV or maybe doing some stretching. You should think about this launch as a launch in fitness that basically is something that's happening organically already on Spotify. This is something we're doubling down on. And much like we did when we launched podcast at first and also audio books, we saw the behavior organically happening on the platform. And if you think about the TAM here, the demand here, in our research, we have this staggering number that says that 70% of our premium users actually train or work out or go to the gym or do yoga every month. And you can also see it in the numbers, hundreds of millions of playlists are being created to do yoga, to go to the gym and so on and so forth, right? So this is us doubling down on that trend. And little did we know when about 1.5 years ago when we launched [ SBP ], the ad-free video experience for Spotify Premium users, we saw a lot of fitness in structures and fitness creators just, unprompted, upload a lot of videos to Spotify. And if you think about it, this is really what we do, right? This is -- we use our platform to bridge the demand between creatives, like a fitness instructor, and users. We connect them using our trimodal economic engines like ads, subscriptions and top-ups. And we do that between creatives. And this is what we're seeing with fitness right now for us. So we do look forward to this expanding even more. And I'll just give you the highlight of how I'm using it. We're seeing some tennis content come online. I play tennis, not that I'm very good at all, but I still play a lot. So when I'm sort of gearing up for a bit of a tournament, then, it's an amateur tournament, then I'll see recommendations in the future coming up with podcast videos telling me how to stretch and relax before I go into that week. Maybe there's some instructional videos that tell me how to improve my [indiscernible] backhand. Maybe I'll get an audio book recommendation on how to think about tennis playing. So this is really something that we're happy to invest in. This is a demand trend that's happening right now in Spotify. Bryan Goldberg: All right. Our next question comes from Jessica Reif Ehrlich on ARPU. Have you seen anything unusual in subscriber reaction to your recent price increase? And could you talk about tools for further ARPU expansion from here? Alex Norström: You saw us increase price around the world at -- in the last quarter of last year. And then you saw us increase in the U.S. in this most recent quarter. No surprises at all for us. Christian Luiga: [indiscernible] tools, I mean how do we feel about increasing ARPU over time? I mean I think one of the things we have talked about is when you bring engagement and more verticals, you can actually monetize on that. But on top of that, I think we've proven with the model with audio books and top-ups, that that is a way to bring more monetization on our platform from our subscribers. And we continue to look at those kind of elements. Gustav Söderström: I'll just jump in here. Alex talked a little bit about us explaining how we think. And I think one useful model to think about, not just Spotify, actually all consumer products, is that people talk about averages, your average usage and so forth, but almost nothing is an average. It's almost always a [ power law ]. You have a long tail of users who use something a little and then you have a head of people who use it a lot. And so Spotify always had the business model to capture the long tail, which requires a free tier, and to capture a bunch of the averagely engaged users in premium. But until we launched audio books add-on, we didn't really have a tool to capture the head, the people who want to read for hundreds of hours a month. We had a clear theory that we could capture the entire [ power law ], but we haven't proven it to ourselves until recently. Now we have those 3 tools. So we feel very good about just getting more usage on the platform and use these 3 tools to monetize it. Bryan Goldberg: Okay. Next question from Steven Cahall on AI music. Does Spotify believe in an AI music creation tier? And if so, what are the sticking points with content partners and how might it be priced to Premium users? Gustav Söderström: Yes. So this is Gustav. I've touched on this a little bit. What we do believe in is that there is there is a lot of opportunity out there for creators who want to use AI tools, but there is an opportunity that no one is addressing right now for existing artists. And we really want to address that part. We don't think existing artists should be left out of AI. We think that may actually be the most interesting part of music. If you look at other industries, existing IP is actually the most valuable IP, not the least valuable. But because of our AI music works right now, that is not addressable. That's the problem we want to solve. We think there's a big opportunity for creators and for Spotify and for investors there. And so we think that there's a big opportunity to expand the music catalog, and that is obviously good for us, but we think there is also a big opportunity for existing artists that isn't addressed yet. Bryan Goldberg: Okay. Back to Benjamin Black with another question on fitness. Yesterday, you announced a partnership with Peloton. Could you highlight the strategic rationale? And also, could you talk about the cost structure or this deal? And how does this compare to audio books or the Spotify partner program spending? And is it reasonable to think that monetization will follow a similar strategy to audio books back in 2024/2025? Alex Norström: Benjamin, good question. I like our partnership with Peloton. Although we don't talk about the specific deals, you know that, I can let you know that this is content that's ad-free. It's high-quality content that normally resides within subscriptions, that retail at a much higher price. So we're putting that on Premium inside the fitness category. And so your question is like how does this compare to audio books? Well, in that sense, it actually is similar to audio books and [ SBP ]. Bryan Goldberg: Okay. A question from Maria Ripps on advertising. Higher engagement among ad-supported users is clearly a positive. What needs to happen for that engagement to start translating into gross margin tailwinds? Alex Norström: I think just to continue the work on the study progress that we've had so far with the new ad stack, getting not just more programmatic ad sales on top, which is growing very, very fast right now, but also sort of looking holistically at the whole system, including direct sales. Christian Luiga: I just want to reiterate that the quarter 1 gross margin that we had was a very small one in that was a short-term issue. And we reiterate which we have said now for 6 months that we see that the second half of 2026 is where we see the growth picking up. And I think -- I just want to say that again, and again, as it was some kind of a lot of questions around it today that we have said that quite for a long time now that is the second half where you see the progress coming through. Bryan Goldberg: Okay. We've got another question from Doug Anmuth on tiering. You've recently shifted tiers to feature and product sets in a handful of markets, essentially enabling good, better and best versions of Spotify. What have been the early learnings with this move? And how could they apply to more mature or established markets? Gustav Söderström: I love that you paid attention to this, Doug. This is one of my personal favorites. It's, like you said, it's very, very early and I can't say much about it. But the early indications is that when we deploy these types of value proposition frameworks, we do see a structural increase in ARPU. But it may be too early to sort of talk about specifics just now. Alex Norström: We're positive about it. Bryan Goldberg: Okay. Our next question comes from Sean Diffley on conversion. How should we think about the conversion of free-to-paid sub in 2026 relative to prior years given the enhancements to the mobile free tier? And how much of the increase in marketing spend is related to this versus other features that are on the [ app ] now or coming later this year? Alex Norström: Maybe Gustav can comment on other features on the app and so on, but I'll start by responding to your first question there. I've said it many times before, engagement and really the free tier is the best leading indicator to how our system spins. And by that, I mean, if you have more engagement and if you have a free tier that's thriving, that's growing fast, then that will eventually translate to more retention, to someone converting over to subscriptions, and thereby also generating lifetime value for the company. Gustav Söderström: And in terms of the spend, it's spread among many features. We are trying to market the features that are differentiated. A lot of them are focused on the Premium tier, maybe more so than on the free tier. The free tier is sort of selling itself because it's free. Bryan Goldberg: All right. And our last question today is going to come from William Packer on AI. Investor concerns over AI disruption have increased. Could you outline the key moats for Spotify that limit the risk from, one, stand-alone low-cost, free AI music alternatives; two, large platform peers that offer free AI music services; and three, competition from AI-first alternatives, which integrate label content? Gustav Söderström: Yes. This is Gustav. Thanks, William. So there's a bunch of questions in here. I don't really like the word moats. I think there are fair advantages possibly that you've earned because you worked really hard. So some of our fair advantages are that we have about almost 20 years of listening history. And so I touched on this before, some of the things in the world are facts that can be easily commoditized by LLMs, such as the capital of Texas or something. Other things are not so easily commoditized. And it turns out luckily for us, taste is not easily commoditized because it's not a fact, it's an opinion. It differs between people, it differs between regions, it differs between people in those regions and use cases. And on top of that, it changes weekly, what is called right now and what is culture. So for this reason, we do invest quite a lot in something like our large personalization model, basically our own taste model. We use a bunch of third-party services, but not with our core data. We're turning proprietary models for that. So I think that will give us a lot of well-earned advantage in terms of serving our users better. And I think it's a very durable one. Because if you theoretically said that someone could somehow snapshot all our user data, all 700 million-plus users, that -- they could train a model on that and then that model is pretty useless after about maybe 2, 3 weeks as culture moved on. So we actually think it's very sustainable, and you need to be at scale to keep these models valuable. So I feel pretty good about that. Then to get to your second and maybe third question, stand-alone low-cost, free AI music alternatives. I think you may be thinking about what's happening in China with services like soda. And I think it's important to remember that it's a different market in a fundamental sense. The Chinese market basically gated on content between free and paid. And what happened was because of AI, that paid gate got challenged. Spotify has never gated on content. And in most of the Western markets, the services are not gated on content. So we just don't have that same risk. That doesn't mean that we don't think we could actually benefit from AI, as I've said during this call, both in terms of size of the catalog, but also in terms of serving existing creators. Bryan Goldberg: All right. Great. Thanks, everyone, for the questions. I'd like to turn the call back over to Gustav for some closing remarks. Gustav Söderström: All right. Thanks, Bryan. So this month marked our 20th anniversary actually, 20 years of building what once seemed impossible, innovating for the greatest artists, creators and authors, and shipping the best and most valuable experience for the world's most passionate and engaged fans. And there is still a lot more to come from us. So we hope that you'll join us for upcoming Investor Day on May 21 in New York. We can wait to show you what it all means for the next chapter of Spotify's growth. So we hope to see you there. Thank you, everyone, for joining. Bryan Goldberg: Okay. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks, everyone, for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Celestica Q1 2026 Financial Results and Conference Call. [Operator Instructions] I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Matthew, please go ahead. Matthew Pallotta: Good morning, and thank you for joining us on Celestica's Q1 2026 Financial Results Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the second quarter of 2026, our 2026 annual outlook and anticipated trends in our industry and their anticipated impact on our business. These are based on management's current expectations, forecasts and assumptions as of April 27. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expected stations and their potential impact as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release found in the Investor Relations section of our website. a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars all per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We kicked off the year with solid results in the first quarter as revenue surpassed $4 billion with adjusted operating margin of 8%, a new high for Celestica. This performance drove adjusted EPS of $2.16 for the quarter, which exceeded the high end of our guidance range. Our awarded backlog and the opportunity pipeline with both existing and new customers are the strongest they have ever been during my tenure as CEO. We continue to see exceptionally strong and accelerating demand from our hyperscaler customer base complemented by a steadily strengthening outlook in our ATS segment. This momentum underpins our expectation for sustained growth in both revenue and adjusted EPS throughout 2026, while our outlook for 2027 has strengthened compared to just 90 days ago. I'll discuss our latest 2026 outlook in a moment, but first, I'll hand it over to Mandeep to walk through the Q1 details and our Q2 guidance. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. Revenue in the first quarter was $4.05 billion, up 53%, just above the midpoint of our guidance range, driven by very strong demand in our CCS segment. Our non-GAAP operating margin was 8.0%, up 90 basis points, driven by solid margin improvement in both of our segments. Our adjusted earnings per share was $2.16 in the first quarter, exceeding the high end of our guidance range and an increase of $0.96 or 80%. Moving on to some additional metrics. Adjusted gross margin was 11.3%, up 30 basis points driven by improved mix and strong productivity. Our adjusted effective tax rate for the quarter was 19%. And finally, strong profitability and disciplined working capital management led to an adjusted ROIC of approximately 50%, up more than 18 percentage points versus the prior year. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $806 million, flat year-over-year and higher than our guidance of a low single-digit percentage decline. The performance was driven by higher revenue in HealthTech offset by tougher comps due to previously communicated portfolio reshaping in our A&D business and softness in capital equipment. Our ATS segment accounted for 20% of total company revenue in the first quarter. Revenue in our CCS segment was $3.24 billion, up 76%, driven by very strong growth in both our communications and enterprise end markets. The CCS segment accounted for 80% of total company revenue in the first quarter. Revenue in our communications end market increased by 69%, better than our outlook of low 60s percentage growth primarily driven by strong demand and ramping programs for our 800G networking switches across our largest hyperscaler customers. Our enterprise end market revenue was higher by 101% and driven by the planned ramping of a next-generation AI ML compute program with the hyperscaler customer. This result was modestly lower than our outlook of 100 high-teens percentage increase as the timing of the planned ramp was partially gated by select component constraints. Our HPS business generated revenue of $1.7 billion, representing growth of 63% and accounted for 42% of total company revenue. The growth was driven by ramping 800G switch programs with multiple hyperscaler customers. Moving on to segment margins. ATS segment margin was 6.0%, up 100 basis points, driven by improved mix and higher profitability as a result of our portfolio optimization activities. CCS segment margin in the first quarter was 8.6%, an improvement of 60 basis points, driven by strong mix and operating leverage from higher volumes. During the first quarter, we had three customers that each accounted for at least 10% of total revenue, representing 35%, 15% and 15% of revenue, respectively. Moving on to working capital. At the end of the first quarter, our inventory balance was $2.67 billion, a sequential increase of $485 million and higher by $885 million compared to the prior year as we support significant growth in our CCS segment. Cash cycle days during the first quarter were 55, representing an improvement of 14 days versus the prior year and 6 days better sequentially. Turning to cash flows. We generated $138 million of free cash flow in the first quarter. Our capital expenditures were $230 million or 5.7% of revenue, an increase of $135 million sequentially and $193 million versus the prior year. Consistent with our prior communication, our full year 2026 capital expenditure guidance remains unchanged at approximately $1 billion to enable significant growth in our CCS segment. This investment is supported by awarded programs and our increased level of visibility to a multiyear capacity alignment with our key customers. At the end of the quarter, our cash balance was $378 million, while our gross debt was $719 million, resulting in a net debt position of $341 million. We had no draw outstanding on our revolver at the end of the quarter. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.6 turns an improvement of 0.1 turn sequentially and 0.5 turns versus the prior year period. As of March 31, we were in compliance with all financial covenants under our credit agreement. Subsequent to the end of the quarter, we amended our credit facility, increasing our revolver by $1 billion to $1.75 billion. In addition, we received more favorable terms regarding certain covenants and interest rates and the maturities of both the Term Loan A and revolver were extended to 2031. The upsize revolver on the amended facility, along with our cash balance, provides us with more than $2 billion of available liquidity and which we believe is sufficient to meet our current operating needs. During the quarter, we repurchased approximately 73,000 shares for cancellation under our normal course issuer bid at a cost of $20 million. We continue to be opportunistic with respect to share repurchases. Now moving on to our guidance for the second quarter of 2026. Second quarter revenue is projected to be between $4.15 billion and $4.45 billion, representing growth of 49% at the midpoint. Adjusted earnings per share are anticipated to be between $2.14 and $2.34, representing an increase of $0.85 at the midpoint or 61% growth compared to the prior year. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin is expected to be 8.0%, which would represent an increase of 60 basis points. We anticipate our adjusted effective tax rate for the second quarter to be approximately 21%. Finally, let's review our revenue outlook for each of our end markets. In our ATS segment, we anticipate revenue to be up in the mid-single-digit percentage range, fueled by program ramps across our HealthTech and industrial businesses alongside strengthening market demand driving a return to growth in our capital equipment business. In our CCS segment, we expect revenue in our communications end market to grow by approximately 50% and driven by ongoing hyperscale ramps in multiple 800G programs, complemented by continued strength in 400G programs. In our enterprise end market, we expect growth of approximately 130%, supported by the continued ramp in an AI ML compute program with a hyperscaler customer as well as ramping volumes in storage. With that, I will now turn the call back over to Rob to provide an update on our 2026 annual financial outlook and additional color on the latest developments in our business. Robert Mionis: Thank you, Mandeep. Driven by the continued strengthening of our demand pipeline and enhanced visibility as we progress through the year, we are raising our full year 2026 annual financial outlook. We are raising our revenue outlook from $17 billion to $19 billion, representing very strong growth of 53%. This latest outlook reflects accelerating demand in the second half of 2026, fueled by production ramps for awarded programs. We are also raising our outlook for adjusted EPS and from $8.75 to $10.15, which, if achieved, would represent growth of 68%. Included in our forecast is an adjusted operating margin outlook of 8.1% higher than our previous outlook of 7.8%. Finally, we are reaffirming our free cash flow outlook of $500 million which fully incorporates our $1 billion in planned capital investments in 2026. This outlook represents our high confidence view for 2026 and while the supply environment remains highly dynamic, our outlook is informed by a measured assessment of component availability. Building on my earlier remarks, our longer-term customer demand outlook has continued to solidify over the past 90 days, bolstered by additional new program wins and enhanced forecast visibility. We expect to grow revenue by over $6.5 billion in 2026 based on our latest outlook. And now we expect to grow revenue significantly more than this in 2027. As the year progresses, and our visibility continues to improve. We will continue to update our outlook. Now moving on to our businesses and beginning with our CCS segment. Based on our latest 2026 annual outlook, we now anticipate approximately 70% revenue growth in our CCS segment. Even as demand across our customer base remains exceptionally strong and continues to accelerate the unprecedented growth throughout the data center ecosystem has created a tighter supplier environment, effectively pacing our growth. As we navigate extended lead times and supply chain constraints for certain advanced components, we view our overall demand as durable and cumulative, underpinning our sustained growth runway as supply and capacity aligned through the second half of 2026 and into 2027. Moving on to our end markets. In communications, accelerating volumes from the ramping of multiple 800G Ethernet switch programs are driving very strong and sustained growth. In addition, we are expecting to begin mass production on 1.6T switch programs with two hyperscaler customers, which will contribute to additional growth in the second half of the year. During the quarter, we also secured two important new program wins, further bolstering our networking demand pipeline into 2027 and 2028. First, we announced in March, we are collaborating with AMD on the design and manufacturing of a scale-up networking switch for the Helios rack scale AI architecture. This collaboration leverages our leading-edge Ethernet networking expertise to support deployments of the Helios platform. Development is in progress, and we expect initial units to be available by year-end. Additionally, we have secured a landmark program award for the design and manufacturing of a 1.6T, co-packaged optics Ethernet switch with a hyperscaler customer. This win serves as a critical validation of our ability to execute complex next-generation networking designs at scale. We expect mass production to commence in 2027. Within our enterprise end market, the growth outlook remains very strong into 2027. As anticipated, volumes for our next-generation AI ML compute program with a hyperscaler customer continue to scale through 2026. We continue to expect a strong momentum to sustain in 2027, supported by the launch of mass production for our digital native rack scale program as well as higher demand from our hyperscaler programs driven by ramps in next-generation platforms. Moving on to our ATS segment. We are increasing our full year revenue outlook which now calls for mid- to high single-digit percentage growth. The strengthening growth outlook relative to prior quarters is bolstered by a reacceleration of customer demand in our capital equipment business, as the market forecast for wafer fab equipment spending is strengthening in the second half of 2026 and into 2027. We also continue to expect solid growth in both our Industrial and HealthTech businesses. supported by new program ramps. We are also very encouraged by the strengthening margin profile of our ATS segment portfolio as we see the benefits of our strategic portfolio reshaping activities. We expect that these dynamics, along with improving operating leverage will continue to lead to stronger segment margins as we progress throughout the year. The fundamentals and visibility supporting our long-term demand outlook through 2026 and into next year are stronger than ever. The intensifying need for leading-edge AI compute and networking infrastructure is driving an unprecedented level of customer demand. Today, as we scale our global operations to meet this accelerating demand, our primary focus remains on execution. We are confident that we are incredibly well positioned to execute and deliver on the growth opportunity in front of us. With that, I will now turn the call back over to the operator to begin with the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe for the first question, you did mention the next-generation programs that you have with your enterprise customer on AI ML compute programs and there's been a lot of discussion around share. So maybe if you can just dive a bit into what you're seeing relative to your market share with your customer on that front, particularly on these next-generation program. And what level of visibility are they providing you, particularly as the demand sort of increases on that front? Are they looking for additional vendors or suppliers to help them with that ramp? And I have a follow-up. Robert Mionis: Samik, yes, based on the long lead times that there is for silicon these days, the visibility that we have into next-generation programs is quite long. And we are supporting that customer on all the future generation programs, ones in production now and [ Savola ] in the pipeline to start ramping in subsequent periods. We haven't seen a significant change in market share shifts or things along those lines, and we continue to execute well. In the first quarter, by the way, it met that you asked, we did have a little bit of a component issue relative to our AI ML compute issue. It wasn't a demand issue. It was actually a material supply issue. That has been resolved and will be catching up in subsequent quarters and the program remains on track. Samik Chatterjee: Got it. Got it. Interesting. And maybe for my follow-up, the announcement of the win around the CPO Ethernet switch. Just trying to get a bit more visibility in terms of what it means in terms of your content related to maybe a sort of a typical 1.6T switch, what does the content for Celestica look like? And what would be the margin profile? And what are you seeing in terms of engagement beyond this one hyperscaler that you won in terms of CPO ethernet switches? Robert Mionis: Yes. Good question. So this is not just another switch award. We actually believe it's the first major production scale deployment of co-packaged optics using Broadcom Tomahawk [ 6 Davidson ] module and designing that directly into our system. And winning this award validates our multiyear investment in developing this capability ahead of the market. We talked about that in the last call. . The transition to 1.6 requires managing unprecedented dermal and signal integrity challenges. And the fact that we're able to do this further demonstrate that we've actually moved up the value chain and we are now a sophisticated codesign partner for the most advanced hyperscalers. It also sets us up well for the 3.2 adoption where we think this will kick in. So we think, at this stage, the game, we're a market leader in terms of margin profile, because of the high value add, this will be on the higher end of what we typically do. Samik Chatterjee: And are you seeing more hyperscalers interested beyond this one hyperscaler that you won? Robert Mionis: I think each of the hyperscalers will have their own adoption for CPO. Some are choosing to do CPX before CPO. But at the end of the day, we'll think the major adoption will be at the 3.2, that T note. Operator: [Operator Instructions] Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: You talked about the CCS revenue growth of 70% for 2026 and the 2027 outlook getting better relative to the last 90 days. I was wondering if you could talk a little bit about your 2027 CCS revenue growth expectations relative to where you guided us last time? And any way to size or help think about the order contributions from some of the key programs that you mentioned between scale [ Helio ], CPO and digital native. Mandeep Chawla: Yes. Mike, it's Mandeep here. Yes, thanks for the question. Look, we're very pleased with the accelerated growth that we're seeing across the business. And we have no indications right now that it's slowing down. When we're looking at that we shared. We're growing by about $6.5 billion this year, and we think we're going to grow significantly more than that, which means the floor would be somewhere around [ 25.5 ], but we do see revenue higher than that. And that's on programs that we've won. As you know, we're seeing really great networking dynamics this year. 400G continues to be strong. 800G is accelerating materially and we're ramping -- we're seeing some contribution towards the back end of the year from the 1.6T programs. When you start looking at 2027, 800G demand continues to be strong. 1.6T now ramping across the programs that we've already started plus additional programs that will be coming online. And then we have the very large program, the rack scale system that we're doing for the digital native customer. And then in addition to that, as Rob talked about, on the AI ML compute programs, we're continuing to see strong growth, including next-generation programs. And I could go on with other things as well. But with the programs that we've won with the material that we are in line to secure with the capacity that is coming online, we have strong confidence in 2027, and we'll give more specificity around the number as we go through the year. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: Yes, I was hoping you could talk a little bit about the HPS business off to a pretty good start, about $7 billion in the quarter. I'm curious if you can talk about kind of the progression of the [ HPS ] business. I know that's been part of the CapEx increased investment is more [ HPS ] as well. and particularly into next year, I think some of the -- I think all three of these large programs the digital native AMD and CPO should be HPS as well. So if you could just give us a little color on how you see the glide path for that piece of business and the mix . Mandeep Chawla: Great. Tim. Look, the HPS business and specifically, the design work that we're doing with our customers is really underpinning the majority of the growth that we're seeing, a significant portion of it. You've already mentioned a few of them. We're seeing very good traction on the switching side, the CPO program that Rob just talked about is an HPS program. 1.6T programs are predominantly HPS as well as our [ 800G ] and 400G programs. And so we have a very strong competitive position when it comes to networking. As we grow this digital native program into next year, it really starts to extend ourselves into compute as well. And all of this is underpinned by investments that we're making. You'll notice that our R&D spend is up materially, and it's where we want it to be. We have about 1,350 design engineers right now that's much higher than we had this time last year. And by the time we end this year, we're going to have even more. And the benefit of that is that they're working on not this year's program, so they're really working on programs for next year and the year after. And so because of the programs that we've been winning in the pipeline that we have, we're very comfortable making the investments that we are in R&D, which is specifically HPS. Operator: Your next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: Two questions for me please. First, as you think about the drivers for upwardly-revised outlook for 2026 and 2027, I was hoping you could bucket the relative growth drivers between some of the new switch programs versus the AI servers. And how that might influence your margin trajectory throughout the balance of '26 and '27. Mandeep Chawla: Karl, I'll get started and Rob can feel free to add on for anything that I may miss. Look, as we look into 2027, what we are seeing right now is very strong growth coming in particular from CCS, although ATS will also be growing. I'll just quickly touch on ATS because often we missed it on the call. It's a very nice performance that's underway right now in ATS, which is a return to growth and strong margins, and that's really being underpinned by capital equipment. Capital equipment, we believe now is turning into a very nice cycle where there is a very strong order book from our major customers, and that will take us through this year and next year. So ATS will be contributing to the growth, but the growth is overwhelmingly been driven by CCS. And it is being driven by both communications and enterprise. We're not going to put the details yet. Again, more to come. But yes, just to talk about the specifics a little more. On the enterprise side, we are growing a new storage program that we've just launched and is in ramp. We have the AI ML compute program that is going strong through this year and then the next-generation program, two programs to be specific, are going to be ramping in '27. And then on the networking side, as we talked about, we have a couple of 1.6T programs that are coming online towards the end of this year, and then we have a lot more that are coming online next year. And then we never want to look excited this digital native win, which is a completely integrated RAC system, which has compute and networking in it, highly complex, not easy to do. at scale, and that will be entering production next year as well. And so those are really driving the growth across CCS. Robert Mionis: And I would just add, Karl, that in terms of 1.6T we have 10 active programs. They'll be ramping heavily in 2027. On top of that, 800G remains strong. And as Mandeep mentioned, we have the digital native. We have the [ Helios ] lots of new programs. and also our AML compute program that has very strong end customer demand for those programs that will end up ramping very nicely into 2027 as well. So overall, a very strong demand environment in 2027. Operator: [Operator Instructions] Your next question comes from the line of Mehdi Hosseini with Susquehanna Financial Group. Mehdi Hosseini: One follow-up on [indiscernible] project. To what extent -- actually, can you size the opportunities associated with [ Helios ] over the next 18 months? And to what extent some of those opportunities are now embedded into your kind of year 2026 revenue target? Robert Mionis: Yes. With respect to [ Helios ], the program is in development right now, and we'll be shipping samples this year. We view the overall market as a multibillion-dollar market. And as we get into next year, I think revenue will probably be based more by silicon availability than by end market demand. At this stage of the game, things are on track with the development and it has a lot of market interest . Operator: Your next question comes from the line of David Vogt with UBS. Please go ahead. David Vogt: So just maybe, Mandeep, have a question regarding the revenue ramp versus the trade-off on gross margin. So obviously, TPU sounds like it was capacity constrained this quarter, and that's going to ramp stronger as we go into Q2 and the second half of this year, and it certainly sounds like strength in calendar '27. How should we think about the gross margin progression of the business, particularly with TPU ramping? And also the -- what sounds like a really strong start to the D&C relationship potentially in the second half of this year into next year? Mandeep Chawla: Yes, David. Look, we're pleased that we saw gross margin expansion in the quarter on a year-over-year basis. We think that the gross margin dynamics that we're seeing are a play in a similar way. there are going to be mix impacts along the way. But we definitely are looking to maintain, if not grow our gross margins as we go forward. Two things I'll talk about. The first one is that longer term, there are some headwinds on the gross margin side, and it really has nothing to do with pricing because we're not -- we have capacity is at a premium. Our execution is a real differentiator. And so we have choice on where we apply our focus. And so we're not giving up price in the marketplace. But the reality is, is that there's some input costs that are going up materially, whether it be memory or whether it be silicon. And so those are some headwinds that we're working through on the gross market side. But more specifically, what I'll talk about is the operating profit we're seeing very nice operating leverage right now in the company, and we think that there's more opportunity in front of us as well. We're pleased to be able to raise the full year to 8.1%. That's up from the [ 7, 8 ] that we had just 90 days ago. It's a reflection of mix, but it's a reflection of operating leverage because we've been very disciplined on the operating expenditure side. And although we are very pleased to make investments along the way to fund growth. And so as you look into 2027, there will continue to be an opportunity on, I would say, operating leverage, and we are very focused on ultimately translating that to EPS growth. We are a management team that is very focused on long-term sustainable growth in EPS. And so the levers that are being pulled are driving that outcome. Operator: Your next question comes from the line of George Notter with Wolfe Research. Your line is open. George Notter: I guess I wanted to come back to the CPO when the [indiscernible] announced here, is that an existing customer for networking infrastructure? Or is that a brand new customer? And then also, I'm wondering if it's an existing customer, is it likely that, that cannibalizes an existing revenue run rate for you? And then anything you could say about the potential size of that deal would be great. And then also, you said 2027 would be the ramp. Is it any more specifics there? Is it early '27? Is it late '27? Any help would be great. Robert Mionis: George, yes, it's an existing customer. We have multiple 1.6T that's going up. And with respect to timing, this will be second half of 2027. Operator: Your next question comes from the line of John Shao with TD Cowen. John Shao: So regarding Google's new border fly architecture for TPU [ VA ], could you maybe talk about implication to your business? Do you see an ongoing trend towards more complex data center interconnect. And as a result, you're going to be there to benefit as ODM. Robert Mionis: Yes. As the architecture becomes more critical and as our hyperscale customers continue to innovate, what's becoming more and more evident is that systems levels, manufacturing, design is becoming more and more important for these customers, especially in liquid cooling, advanced rack scale infrastructure, thermal management, so these customers are looking for us to continue to innovate with them and design with them on multiple nodes moving forward. So we're pleased to be able to continue to support them as they continue to innovate and advance their architecture through all the versions that you mentioned. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Rob, I wanted to come back to the supply commentary. You characterized the environment is highly dynamic, and it sounded like there was a specific issue around AI ML in Q1. So I'm just wondering if you could maybe expand on how you're thinking about supply relative to the guidance and the demand dynamic as you think about both Q2 and the second half of the year, are there caps on sort of what you're able to see is a broader base than the AI ML program that you talked about for Q1. Any detail on that would be helpful. Robert Mionis: Good question. We are experiencing more component shortages now than 90 days ago, two main factors. One is the demand really continues to grow. -- as a result of the suppliers are a little bit behind on adding capacity. The good news is that all of our key suppliers are currently in the works of adding capacity, and we expect the situation to improve the constrained commodities right now on allocation are custom silicon and memory. That's probably not a news flash view. We are seeing challenges in and PCBs, the 40-plus layer ones, power components, optical components. The positive news is that we have commitment from all our applies to secure the outlook that we just gave. So we think the outlook that we just gave factors always in, we think it's prudent, we think it's conservative. And that's why we marked it as high confidence. We have capacity in '26 coming online ourselves also in 2027. So if things continue to improve in the back half of the year. We'll have the opportunity to get it out the door and also into next year. But we think we factored it all in, but it is more constrained now than it was 90 days ago. and the lead times are extending. And one last positive thing is, with the extent of lead times, we are getting unprecedented visibility from our customers and item demand. So that's actually a very positive thing for us as we do long-term planning. Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Rob Mandeep, you're projecting strong growth for next year. I think you said significantly more than $6.5 billion year-over-year in fiscal '27. How should we think about free cash flow in that context? Looks like you did not take up the free cash flow guide for fiscal '26. What are some of the puts and takes impacting free cash flow for fiscal '26 and '27, and how should we think about the working capital as you see this strong growth? And just another clarification, I think, Rob, the AMD opportunity as the scale-up opportunity, but as the one you announced in the press release that the switch CPO switch is a scale-out opportunity, can you help us size how much of that $6.5 billion plus growth next year is from scale up and scale out and which is a longer-term opportunity. Mandeep Chawla: Ruplu, I love you because you find a way to find two questions in one. That experience talking there. . Planning to let Rob talk about some of the program specifics that you brought up. So Look, we're very happy that we were able to raise the revenue outlook for 2026 by $2 billion and yet maintain our free cash flow outlook of $500 million. And then just as a reminder, that's including funding $1 million of CapEx. The balance sheet is incredibly strong. But we are -- we believe we are very disciplined when it comes to capital allocation we'll assess our needs as we go through -- as we get closer to '27 and as the forecast starts to solidify. But I'll say just a few things. Again, the balance sheet is very, very strong. We have ample capacity to target to use it as we need to. We're very comfortable investing to support customer growth. But one thing you'll know is that we will always remain very disciplined. And so we are a free cash flow focused management team. But at the same time, the growth is really unprecedented right now. And so if that requires additional funding, we have no hesitation to do that. Robert Mionis: And regarding scale up versus scale out, correct, the CPO win is scale out and the heliostat or a scale-up opportunity. We are have been very strong on scale-out as you noted. So we view scale up as a huge opportunity. But frankly, we're supporting both very strongly in our system-level architectures. Operator: Your next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: Back to the component constraints. I think if we look back to the supply constraints of the pandemic, [indiscernible] took a lot of share because of its execution, its relationships. And so I'm curious if you'd see the current issues as strengthening your hand competitively? And then I was wondering if you could talk about relative impact on compute and networking or if it's relatively a similar supply chain impact? Robert Mionis: Yes. One of our key strengths is execution. So once we get the parts and securing the parts, wherever it happens to be in the quarter, we're able to execute that at scale very quickly. So in the land of a very dynamic supply constraints, we do advance planning very well. And typically, we gained share through that environment because we find that peers or competitors have a hard time executing through turbulent times. So that is an opportunity. We haven't necessarily seen that as yet as a result of the supply chain constraints. But frankly, the constraints are just starting the thick of things right now, I think it will get better or at least more dynamic as the year gets long. And with respect to compute versus networking, so on the networking side, it's not very memory-centric. So there the constraints are really around PCBs or silicon, but we think we have a good handle on that. On compute. It's all about memory, but our customers have very strong presence with the main memory suppliers, and we have secured at least in the near term, what we think we need to do to support our customers. Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead. [Operator Instructions] Your next question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Just you mentioned unprecedented visibility, long-term visibility? And then also you mentioned in the slide deck capacity alignment with customers. Can you elaborate on both of those? And specifically, what's fundamentally changed to give you far better long-term visibility in the past? And is there anything contractual that gives you better visibility than you may have had in the past? Robert Mionis: Yes. I would say a quarter or so ago, our key customers, the main hyperscalers had very, very strong demand. They loaded in the system just to try to figure out where the constraints would be. At this stage of the game, I think the entire supply chain knows where the constraints will be and we've aligned our physical capacity with our supply chain capacity with our CapEx plans. And that's the current state that we're in. And because the lead times are very long, specifically custom silicon lead times are so long, we've not just done this for '26 or '27. We're actually dipping into 2028 and actually booking awards right now that ship into 2028. So the unprecedented visibility is really just making sure that we're on in long-term material supply with long-term capacity agreements. And a lot of the orders that we're placing supported by our customers are NCNR. So there are contractual terms protecting us through ups and downs. So we feel very comfortable in our long-term growth trajectory at this stage of the game. It's all about execution, and that's what we do very well. Operator: Thank you for your question. Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: Thanks, and good morning, everyone. So I wanted to ask about the switch ramps in the second half of the year. I'm wondering if they are coming in as expected or have some of them been pushed into 2027, which gives you the higher confidence in that year. Can you just talk about the dynamics between '26 and '27? Robert Mionis: I would say the switch ramps that are coming in the back half of the year are going as planned. In the back half of the year, we have two customers ramping 1.6T and several more coming online in 2027. We've secured the silicon that is required to complete the development processes. And we also have commitments to support the ramps and 800G remains very strong throughout the year. So things are going as planned on the networking side. Operator: Thank you for your question. Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: I was just wondering if you could give us some updated thoughts on capital intensity and the outlook for CapEx beyond this year. Obviously, you've got a lot of new program awards and some new wins. Should we expect CapEx to ramp up beyond that $1 billion that you laid out for this year in 2027. How are you thinking about additional capacity that you need to put in to support these new wins? Mandeep Chawla: Mike, it's Mandeep here. So $1 billion of CapEx this year, as you're aware, we will be doing that or more next year. And I think the way to think about it right now would be I'm just going to give you a rough number of $1.5 billion as a placeholder for now. And we're very comfortable with that. The way that -- to build on the comments that Rob had shared just recently, we're having very long-term conversations with our customers, A, as it relates to supply because we need to get in line on their behalf and lead times have extended in some cases, beyond a year for certain types of materials, but then really around capacity. And the majority of our capacity investments right now are in Southeast Asia, Thailand specifically and in the United States, and I would say, Texas specifically. And we have a number that are going to come online this year. We have some that are coming online next year. And then there's other ones that we're evaluating still. But that's the support growth in 2028 and 2029. And so when we make our capacity decision, it's tied to a business case. The side to program level specifics. It's tied to programs that we are winning or we intend to win by the time we make that decision to go forward with the CapEx. And if the business cases are strong, strong ROI strong paybacks. And so when you when we continue to have business cases like that brought forward, we don't hesitate to invest. And so right now, I would say we will see an elevated level of CapEx spend into 2027. And we'll take 1 year at a time. Operator: [Operator Instructions] Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Sorry about that earlier. With respect to your large digital native customer, is that still on track to ramp in early 2027? Or has there been any change in the coming today? Robert Mionis: Yes, that's still on track where sample systems this year and production should start in the first quarter -- late in the first quarter next year, that is on track. We've been having very close meetings with all of our key suppliers at to make sure we've secured the material across the supply chain and things look very positive at this stage of the game. Operator: Thank you for your question. There are no further questions at this time. I will now turn the call back to Rob Mionis for closing remarks. Robert Mionis: Thank you all. Thank you for your support and for joining us this quarter. We have great momentum across our business, and we look forward to updating you on our progress next quarter. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.